Adventures in sub-prime borrowing. Granny gets evicted.
Published on November 25, 2007 By greywar In Current Events

Casual Interest Section


  • Where is the line drawn for personal responsibility?

  • What factors free you from it? Age? IQ? Education level? Race? Gender?

      While most people will probably agree that a 1 year old with an IQ of 30 and a kindergarten level of education isn't capable of understanding the terms of a home mortgage, the same folks would probably agree that once you are an adult you have to have some responsibility for the things you do. After all, that is why we are calling you an "adult" at that point. 

      Let's use an example from another area of personal responsibility:

      I buy a car but don't know about traffic laws, don't have insurance, and am ignorant of the most basic laws of physics. Consequently I crash into your house after turning onto a clearly marked one-way street. Thankfully I don't kill anyone but since I don't have insurance your only recourse is to sue for recompense. The judge tells you : "No, he shouldn't have to pay you because he was unsophisticated in the ways of cars and traffic." Case dismissed?

      Most folks would think it reasonable to hold me accountable for things like learning traffic laws, getting a license, buying liability insurance, and grasping basic motion physics as necessary knowledge for operating a vehicle in our society. It is odd how many of those same people don't apply even half of that standard to buying a home.

      That is the attitude of some (NYT's Bob Herbert) towards people who took out loans they couldn't afford in the "sub-prime" market. Interestingly the very term "sub-prime" comes from the fact that the recipients of these loans wouldn't qualify for higher quality (read: with better terms) loans. These debtors were, are, and will continue to be credit risks. People like me frankly. I have horrible credit.

      Herbert and the like think that the defaulting holders of sub-prime loans shouldn't pay and either the lenders should take the loss (without foreclosing) or that the taxpayers should foot the bill in a bailout. I think not.


 

Moderate Interest Section


      As a younger man I allowed myself to get way over my head in credit card debt. I lived beyond my means. I saved nothing. I have been late on payments and had default settlements of credit card balances.

      Anyone looking at giving my money on credit has to weigh that into their risk calculations and for most of them it doesn't make sense to give me any money at all. For the lenders who are willing to lend me money, they hedge their risks by charging me higher interest rates or by attaching other terms to the loan to maximize payoff for their risk. I would be a fool to take them up on these offers.

      I lived like an economic moron when I was younger with only one exception : nothing I did was backed by collateral. No mortgage, no car loans, no deal with Vinny (collateralized by threat of pain). Nothing of the sort. I could have taken out numerous loans secured by my car title. I could be living in a big house with a whopping adjustable rate mortgage and a 90 inch plasma screen no problem. Lenders are available to make it happen. Not doing this saved my ass.

     If I had done that and it all came crashing down on me because I had no ability to pay my debts then all of those things could be taken from me. My house and property seized, sold, and liquidated to pay the principal of my loan to my creditors. Very few people would even feel sympathy for me and fewer still would argue that I shouldn't have to bear the consequences of my actions. I certainly wouldn't expect them to.

     Of course I am not a little old lady like Dorothy Levey, a "79-year-old widow who sits alone inside the small house she has lived in for 41 years, afraid to answer the telephone or the door." 

     Now one thing in that quote should immediately leap out at you : "the small house she has lived in for 41 years". She should own this house by most accounts. In fact she used to own it. Then in 2002 she and her husband (combined life experience in excess of a century) "were persuaded to take out a new loan, ostensibly for debt consolidation" (emphasis mine -GW).

    Note the "persuaded" used as though someone broke into their home, held a gun to their heads, and forced them to take a loan for the value of their home (and of course also forced them to spend every dime of it). Also note that according to the poorly followed-up article the money was "ostensibly for debt consolidation".

    Ostensibly? It only seemed like it was for debt consolidation? What was it really for... ostrich wrangling? Mime genocide? The reporter doesn't explain and basically abandons her story once it veers into waters that don't fit his narrative thrust. The inclusion of the word is telling in a Freudian way however.

    The story continues to lament predatory and misleading lending practices even though nothing in the story says that widow Levey's loan was actually predatory or misleading. Not a single word of that, not one.

    According to the NYT's Bob Herbert she is part of a "largely bewildered, frightened  group" of people who shouldn't be held responsible for her obligations because she is part of a class of "unsophisticated home buyers and homeowners". I would point out here that their lack of sophistication and general bewilderment certainly didn't stand in the way when it came time to cash those re-fi checks and spend the money.

 


Serious Interest Section


     Even Herbert recognizes that most of the time these loans weren't fraudulent : "I heard the same story again and again — decent people enticed, sometimes fraudulently, into loans they never understood and couldn’t afford." (Empahasis added again -GW) 

     Ok, I have no problem relieving truly fraudulent loans... If a company forged your signature or altered documents then by all means that should have no obligation to pay.

     Of course if "fraudulent" means that at some point a sales rep said that your payment would be $400 a month "forever" and then you signed a mortgage that only guaranteed that rate for one year, well don't come bitching to me about your payment when you couldn't be bothered to check out the contract. If you won't read or have a lawyer/real estate agent look over the most expensive thing most people will ever sign then what exactly will you perform due diligence on?

     Even if the money was for debt consolidation it was a horrible financial maneuver and now widow Levey is paying the price. She is flat broke and likely to face eviction. The lesson here? Don't ever under any circumstances enter into collateralized debt if you can possibly avoid it. If you owe $5,000 to Mastercard and can't pay well... your creditors can't come and throw you into the snow. Roll that $5,000 up with a "debt consolidation" loan secured by your home and suddenly your creditors are the new owners of the place you spent 41 years in and you agreed to it in writing.

     The fact is that there is a massive market of willing home owners in their 60's and 70's (and at younger ages too) who are extremely willing to gamble with their homes. The airwaves are rife with lenders who want to help them do so.

     The gamble of the venture is that in these "reverse mortgage" or outright equity loans the elderly homeowner is banking on not living long enough for the loan to go full term (or the creditors give terms that guarantee the home owner the right to live there until death) and the creditor is actually banking on the same thing.

     Either way the creditors win. The loan gets paid off or the house ends up being theirs when the owner dies. This can lead to some amazingly shortsighted mortgages followed by even more shortsighted spending binges or debt consolidations late in life. The town we live in has a lot of home owning retirees and there is a thriving business dedicated to helping them undo all the work they did in buying their homes in the first place.

     Sell back your house to pay off some credit cards? Sure, it is nice to be debt free, but it is far nicer to have a guaranteed place of residence.

     As for the lenders deserving a bailout? Well, the reasoning will wait for another article but in a nutshell: No, they also knew what they were getting into. To hell with them too.


Summary Points

 


 

  • If you can't pay the monthly payment, don't get the loan.
  • If you can't read the loan have someone else do it for you or don't get the loan.
  • If "interest rate" is simply beyond your ability to grasp, don't get the loan (there is a pattern emerging here).
  • If you ignore all of the above and get the loan anyway, it isn't the taxpayer's responsibility to pay it off for you. Same goes for the guy who did the lending.

Addendum

 


 

     Additionally, much is made about these cases being "part of the sub-prime" crisis as though the reason they can't pay was somehow due to the sub-prime market collapse. Not so, these people are half the cause of the sub-prime problem (the other half will get it's own article later). Their defaults on these loans are what caused the collapse, not the other way around.

 

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Comments (Page 3)
on Dec 07, 2007
However, making statements about the "overall economy" depersonalizes the problem. "If it doesn't make an impact on my life, it's not a problem" is an awfully selfish attitude to have. Do you care at all that children are going hungry and families are being torn apart over this non-catastrophe that doesn't affect you? If not, that is exactly what is wrong with this society. People are supposed to care about each other and help each other, not sneer when someone else screws up.


The discussion is specifically about the government and personal responsibility and nothing to do with whether or not it impacts me directly. As a matter of fact, as a trucker, a part of my own business does depend upon the housing and construction market, but that's irrelevant to this discussion.
on Dec 07, 2007
My point was that I see a lot of callous comments about how other people's problems don't matter as long as they don't infringe on our own happiness. I'm not saying that the government should be a charity. Rather, I'm saying that the only reason these problems exist is because people have an attitude that they shouldn't care about others.


Ummm, no.

People are making comments on whether or not the government should be bailing these people out of their own mistakes. You seem to have some problem making that connection.

The only reason these problems exist is because of people stupidly making very poor choices and getting themselves in over their heads. How does other people's attitudes about it have any bearing at all on the choices these people made?

It has nothing to do with being callous and everything to do with how the government spends tax dollars, and whether or not the government should be in the business of bailing people out when they make very poor personal choices.

One can have empathy for these people's plight and still not believe it's the government's responsibility to pat them on the head and tell them that Uncle Sam understands they are stupid and will bail them out from their own stupid choices.

That's what charities are for.
on Dec 07, 2007
However, making statements about the "overall economy" depersonalizes the problem. "If it doesn't make an impact on my life, it's not a problem" is an awfully selfish attitude to have. Do you care at all that children are going hungry and families are being torn apart over this non-catastrophe that doesn't affect you? If not, that is exactly what is wrong with this society. People are supposed to care about each other and help each other, not sneer when someone else screws up.


The discussion is specifically about the government and personal responsibility and nothing to do with whether or not it impacts me directly. As a matter of fact, as a trucker, a part of my own business does depend upon the housing and construction market, but that's irrelevant to this discussion.


This does impact me directly. Because of the subprime lending it allowed for inflated housing prices in my area. By allowing people to buy houses they had NO business buying in the first place forced pricing to go up (yes basic economics). Sure I could have joined the subprime lending fad but why? As LW said it is only driven by greed and makes little sense on paper. It's called a high risk loan for a REASON!

Caelia, how about those like me who can't afford a house because of this problematic lending? This subprime lending also aided in the drastic increase in rent as well. How come I don't hear any hollerin for us? The way I see it the subprime lending was an unjustified inflation and it is now beginning to normalize. Yeah it sucks for those who gambled and are losing alot of money and children that are effected. Hopefully they learn a valuable lesson from this as well.

BTW, I haven't seen ANY reports saying that the Soup Kitchens are being flooded as a result of this fluctuation of 'hungry children.' And if this tears families apart then I'm sorry that just suggests that there may not have been much in that marriage in the first place (although divorce is already above 50%). I don't see the homeless shelters beyond max capacity.

JMO
on Dec 10, 2007
There is no doubt that blame for the current mortgage problems can be properly placed at the door step of both the consumer and companies trying to make a profit. The issue is should something be done to moderate the impact in the overall economy?

I believe we need to first make sure that all mortgages in the future clearly state the worst case possibility. We need to do a lot more to make sure people understand the terms of their borrowing.

As to the current problem we can say too bad to those people that did not pay attention or acted inappropriately- they can just suffer the consequences. The problem is that there are so many such problem mortgages that that may spill over into the overall economy and impact those of us that have not caused the problem. The more prudent action given the enormity of the problem might be to provide funding to refinance existing mortgages that have gone into default or are about to go into default with fixed rate loans at reasonable rates. That would help millions keep their homes and be more able to pay the loans forward. To finance this conversion we may need to ask both the financial institutions and taxpayers to help fund these mortgage conversions.

If we take too hard a line we may shoot ourselves in the foot if this problem were to trigger a much broader recession.
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