From Bloomberg:
Subprime Mess Produces Unqualified Victims
The story line of the newest American financial debacle is now clear:
President Bill Clinton eased lending standards to encourage the rich people who run the mortgage market to embrace poor people with low credit ratings. Then these horrible rich people — these unfeeling sharks — went to work exploiting the poor.
First, they talked poor people into borrowing money they should never have borrowed. Then they brought in some other sharks to package the loans as bonds, who in turn talked some other only slightly less poor people into buying the bonds. The rich middlemen took their fees and left the poor borrowers and slightly less poor lenders holding the bag.
The moral of the story is also clear: No matter how much the government might try to help the poor, the rich people who run financial markets will find a way to screw them.
At any rate, that’s how it reads to me in the many scandal- tinged accounts of the subprime loan-market collapse. And on its surface the moral is appealing: the story is always better, and easier to write, when the rich guys are the crooks. But this interpretation of current events does raise a few questions. To wit:
1) If the subprime home-loan market was a cynical conspiracy, why did so many of the putative conspirators wind up taking so much of the risk?
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The single biggest collapse in the market has been that of New Century Financial Corp., the second-biggest subprime mortgage lender. When New Century collapsed it owed money to many, but the single biggest creditor, according to the London Times, was…Goldman Sachs Group Inc., followed by Morgan Stanley, Lehman Brothers Holdings Inc., etc., etc.
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2) Why does the most financially obsessed and presumably well-informed character on earth, the American Investor, insist on playing the fool?
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Then they go to the media. From Bloomberg News we learn the sad story of a small investor named Buck Meyer who lost $300,000 when American Business Financial Services tanks. The man has two children! He planned to use the amazingly high interest rates he earned on his American Business Financial Services bonds to pay the mortgage on his own new house in Chattanooga, Tennessee! How could they possibly fail to pay off?No one suggests that Buck Meyer, in effect, gambled his savings away — that he might as well have grabbed the special offer of a free hotel room and flown to Las Vegas, groped his way to the roulette table, plopped his life savings down on 00, and then sued the casino for losing his money. Then again, the Vegas gambler can’t expect journalists and juries to take his case seriously.
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3) Why in this new drama is it so easy to imagine borrowers in a different role, other than the one in which they are currently cast: The Victim?
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Moving is never pleasant or cheap, but that is the main cost to the subprime defaulter: He hands back the house, whose value has presumably plummeted, to the people who lent the money to buy it, and walks away. He rents. (Shrewdly!) In effect he bought a very cheap call option on the U.S. housing market. While he waited to see if his call option made him richer, he lived in a much nicer house than he could otherwise afford and probably wondered why rich people had become so recklessly open- handed. His behavior was irresponsible, but the markets let him do it and so it’s hard to blame him for taking a flier.Am I the only one who wonders how a person who borrows money he can’t repay, buys a house he can’t afford, and then stiffs his creditors, is allowed to play the victim?
“Am I the only one who wonders how a person who borrows money he can’t repay, buys a house he can’t afford, and then stiffs his creditors, is allowed to play the victim?”
This writer should spend some time on this site. You are not the only one who has boarded this train. Let them all pack again and go back to an apartment. Let the cycle run its course. Why prolong the agony?
BC Bob,
“Am I the only one who wonders how a person who borrows money he can’t repay, buys a house he can’t afford, and then stiffs his creditors, is allowed to play the victim?”
That’s right it is a key quote… also, it’s about time the media is waking up… these borrowers were not duped… they were greedy… and they knew it… they just thought that they could always just Refi out of trouble… but not when the market goes down… tough lesson… but these people will learn…
Fast Facts:
1) According to the MBA, 9% of all subprime mortgage holders are first-time home-buyers.
2) According to the Center for Responsible Lenders, 11% of all subprime mortgage are first-time home-buyers.
Possible conclusion:
The subprimers were mostly either Refiers who took out a massive amount of cash… or people who bought an investment property with their home equity… or they traded up and just added to their debt… the bottom-line is… they took on such a large amount of debt, they couldn’t get anything but a subprime mortgage… because they’re debt to income was way too high!
We renters who are priced out are the real victims. Here is a letter I wrote to Senator Schumer:
“I have been trying to save for my 20% down payment for a home since the late 90s. The more I save, the higher homes prices go and the more I need to save to get to the 20%.
Now you want to use my tax dollars to bail out all those borrowers who took out all these toxic loans to get into a house they really couldn’t afford with traditional financing. This is insulting to me. These are the same folks who help drive home prices up, keeping me from my dreams. These borrowers have driven the home prices beyond the reach of the next generation of buyers. If you bail out all these financially irresponsible borrowers, are you going to bail out the financially responsible savers who got priced out by these fools?
I believe in market forces. The loosening of lending standards have led to people who shouldn’t own homes, be in these homes. Maybe home ownership should be back at 65% and not 69%. You need to let the free markets make the adjustments that are necessary.
Some of these borrowers were subjected to predatory lending. But if the deal is too good to be true, then it probably isn’t a good deal. If I am offered a deal to pay $1,000/month for a $500k mortgage, I would ask ‘what is the catch’ and read the fine print. It seems like these borrowers would just do anything to own a home or keep the home or cash out as much equity from their homes. Many of these “victims” lied about their incomes on their mortgage applications. But if they can’t afford the home without traditional financing, they shouldn’t be in it.
In addition, by bailing out these victims/liars, you are also bailing out realtors, mortgage brokers, banks, Wall Street, and mortgage investors who all created this mess in the first place. Some of these folks committed crimes such as fraud and should be prosecuted not bailed out.”
I think this article hits the nail in the head. The politicians should stop the nonsense about bailing them out. These borrowers should’ve known not to bite more than they can chew.
I was waiting for somebody to try to pin this on Clinton…
Of course it’s Clinton’s fault. It’s always Clinton’s fault…
Of course it is. After all–he had s-e-x.
There is plenty of blame to go around for all politicians. The problem with politicians is that their political life is short. After 4 years, it doesn’t matter what happens. Even if you’re reelected as a president, you’re not worried about reelection in your second term.
This tends to encourage short term thinking. Take credit for the housing boom, do nothing to stop it or even encourage its continued expansion, hope it doesn’t collapse until you are gone. Let the next guy pick up the pieces.
Can’t blame them too much I guess. Imagine someone handed you a credit card and told you that in four years, you simply hand the card and the bill over to the next person. Where is the incentive to be responsible?
Amen Mike!
Does anyone know how to file a complaint on a real estate listing agent for unethical behavior?
Here is my situation
About 10 days ago my agent called a listing agent regarding a house which was temporarily withdrawn from the market for couple of months as the owners were out of town. When we called the agent telling them we are interested and would like to make an offer, she said the owners are interested and would to take an offer. However, she said that the owner wanted to know beforehand the offer amount as to cut back on the back and fort paper trails. So we negotiated in good faith and settled on a price, the owners verbally accepted the offer and asked us (thru the listing agent) to formally submit the contract ASAP for their signature.
For 6-7 days I was waiting for the signed contract on the house to be faxed to my attorney, which was never materialized. The other day, my agent called me telling me that the owners of the house got a new listing agent and re-listed the house for a lower price. My agent found this from the “previous” agent and called me asking what I want to do as my supposedly accepted offer was never signed by the owner.
I instructed my agent to call the “new” agent telling her about the previously accepted offer, the “new” listing agent told my agent that he has to start anew and deal with her directly. My agent called me asking on what I want to do, I told him to send another contract to the new agent. So he calls the new agent again to find out where to send the papers, she tells him the owners are not accepting offers as they already have one, and they are happy with the new offer. All this happened in two or three days. Very fishy indeed.
Me and my agent tried to contact the owner with no avail, then finally my agent got hold of the “new “ listing agent who was not answering the calls and asked her if they are accepting offers, she said send them in but the owners accepted an offer already. Since I did not want to start all over I sent another formal offer on Friday over the full asking price with escalation clause up to predetermined amount. Our offer was not accepted today!
Very bizarre indeed. I can only speculate on the motives of the owners and the new listing agent. Seems to me the owner did not want the other listing agent to get a commission, but why on earth they negotiated our offer. I feel I have been used for some behind the scene shenginings.
Is this legal? If yes, is it ethical? What the real estate code of ethics say about a situation like this?
Any input will be appreciated.
Cliffy,
In this market, houses are like buses. There will be another one along in ten minutes. I’m sure another one will come along that you like even better.
Don’t waste your time fretting
Cliffy, no paperwork, no deal.