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.