`irresponsible lending' vs `irresponsible borrowing'

[Andy R]

So I was reading this article:
Bloomberg.com: Worldwide

and saw Paulson's quote:

Paulson said that, while the bill should also include ``mortgage relief components,'' legislation needs to be passed soon. ``We want this to be clean, we want this to be quick,'' he told Fox News. He said on ABC that most foreclosures are due to homeowners who either ``don't want to stay in their home and live up to their obligations,'' or can't afford to remain because of ``irresponsible lending practices.''

I love the way they spin things. `irresponsible lending' vs `irresponsible borrowing', who is to blame?

I'd like handout too if I am going to pay the taxes for them for others. Where can I get some?

[Want2retire]

That is so true!!

It really irks me, because the information on how to buy responsibly was available everywhere at the time. It was all over the news. It wasn't some kind of mysterious secret. I wondered why people continued to do it rather than wait until they could afford to buy a home responsibly (which I did, and which meant living in a cheap apartment for years to do it). I guess it is becoming more obvious, now, why they borrowed irresponsibly.

[crazy connie]

Many of the ones who were not resposible borrowers for the most part worked right along side of many of us. They did not want to pay their dues and save up a real down payment and felt entitled to get what everyone else seemed to have. They forgot to ask how long did the 40 year old do without to get the 1st home. They saw others jumping in and like a bunch of lemmings borrowed the old SNL line "And by gosh, I'm worth it!" Then they had the false security from paper gains on the home and borrowed more to be like everyone else with nice cars, trips, and dining out. Prices began to drop and POOF they are upside down. Any negative blip in income and they are outta there.

Heard mentality is a dangerous thing.

[bright eyed]

I definitely agree the borrowers were irresponsible and took on loans they had no idea how they would be able to afford.

However, the banks and regulators were in charge of how far spread this got across the market. The special loans were supposed to be for a small segment of the population to make home ownership possible for a population that formerly did not have the opportunity - perhaps it should have been more like a small experiment to see if it would work or not.

Instead, the financial institutions saw an opportunity to make profits on an "untapped" market of people who wouldn't or couldn't formerly access traditional mortgages and it became more the norm than the exception. LOTS of well off people who could have afforded a traditional mortgage on a normal house, got an exotic mortgage for a mcmansion far bigger, fancier than they needed or could afford traditionally. My age group in particular was squeezed out because of the inflated prices, and my SO and I refused to take on a $600k mortgage for a regular house, so we stayed out, wondering how everyone was affording or paying for these homes around us (aside from moving further out to the inland empire - sure glad we didn't do that too!)

The housing appraisals were hugely inflated, which drove up the prices, then more exotic mortgages made it possible to purchase the homes. The appraisal's were not the borrower's fault. The extent of this type of lending is not the borrower's fault.

Everyone was bitten by the "everyone's doing it" bug, where sketchy mortgages became normalized and not questioned by both parties. Regulators were asleep at the wheel and told to keep their hands off and let the market rule...

[Gardnr]

Originally Posted by bright eyed

I definitely agree the borrowers were irresponsible and took on loans they had no idea how they would be able to afford.

However, the banks and regulators were in charge of how far spread this got across the market. The special loans were supposed to be for a small segment of the population to make home ownership possible for a population that formerly did not have the opportunity - perhaps it should have been more like a small experiment to see if it would work or not.

Instead, the financial institutions saw an opportunity to make profits on an "untapped" market of people who wouldn't or couldn't formerly access traditional mortgages and it became more the norm than the exception. LOTS of well off people who could have afforded a traditional mortgage on a normal house, got an exotic mortgage for a mcmansion far bigger, fancier than they needed or could afford traditionally. My age group in particular was squeezed out because of the inflated prices, and my SO and I refused to take on a $600k mortgage for a regular house, so we stayed out, wondering how everyone was affording or paying for these homes around us (aside from moving further out to the inland empire - sure glad we didn't do that too!)

The housing appraisals were hugely inflated, which drove up the prices, then more exotic mortgages made it possible to purchase the homes. The appraisal's were not the borrower's fault. The extent of this type of lending is not the borrower's fault.

Everyone was bitten by the "everyone's doing it" bug, where sketchy mortgages became normalized and not questioned by both parties. Regulators were asleep at the wheel and told to keep their hands off and let the market rule...

Yep, it's been very aggravating and frustrating to watch the complete lack of integrity and responsibility that's been rampant in recent years.

This storm has been brewing and many have been sounding the alarm (the list of blogs addressing this nonsense is long and started years ago), even in the main stream press at times. You can find articles from several years back pointing out some of the ridiculous practices, and yet our leadership has been asleep at the switch.

I knew the house of cards would collapse, I just wasn't smart enough to know just exactly what that would mean. I probably should have heeded my gut and pulled back from the market more than I did, but I didn't want to start trying to time the market. Maybe next time! (and yes, there will be a next time; probably within my lifetime, unfortunately)

[Andy R]

I had a long post but it's just putting me in a bad mood thinking about these "spend beyond your means" idiots, rich politicians, and greedy bankers people. It makes me feel like we are heading more and more towards an Idiocracy (link). Idiocracy is quite possibly one of the dumbest movies ever but it's actually funny now looking back because I see so many similarities.

Let's see how many people will get great rates on their refinance when their ARM notes reset in the next couple years. We'll probably see people with traditional mortgages not be able to refi because of fees (not cost effective) but if you can prove you were an idiot maybe they will put in place a "save your butt" provision to allow refi at lower rates. I am sure it won't be fair, but as they say "life is not fair".

I'll stop my whining now and readjust the spreadsheet for higher inflation, higher taxes which will lead to more years of wo*k...

[bright eyed]

Just to give an example of this nuttiness - the house next to mine most recently sold for $580k - it has 2500 sq ft, 2 story house built in the 70's. 2 years ago at the peak of the bubble, it sold for $975k, well over $100k+ what other houses in the neighborhood were selling for, even with the bubble.

That is simply ridiculous - of course you can say the idiot borrower bidding on a house for that much was a fool - but who approved that loan? The $975k people moved in, stayed for about a month, then the house stood vacant for a few months. I couldn't tell what was going on. Once in a while you'd see people stay there for a few weeks, clean it up, put up a sale sign, take it down, put it back up - and only recently it sold for the low ball price.

[Beryl]

The blame is shared between both the borrower and the lender.

Last year, I purchased a second larger house valued 30% less than my current house which is now rented. The lender "encouraged" me to purchase a more expensive home in the subdivision and asked me multiple times to reconsider the lower priced home. They just couldn't understand why I would purchase a house valued lower than what I could afford.

It occurred to me that this must be happening all over the country. Buyers are more easily swayed to purchase higher priced homes.

[OAG]

Originally Posted by Beryl

The blame is shared between both the borrower and the lender.

Last year, I purchased a second larger house valued 30% less than my current house which is now rented. The lender "encouraged" me to purchase a more expensive home in the subdivision and asked me multiple times to reconsider the lower priced home. They just couldn't understand why I would purchase a house valued lower than what I could afford.

Wonder where this "lender" is now (the company) and what level of bonus (individual) was paid for "steering". But this sort of crap has been going on for about 40 years that I am aware of - and it has always takes responsible people to resist it. Home sales people and lenders just took the key from car dealers and "improved" on it.

[ladelfina]

I'm constantly amazed at the blame placed on the "marks" in this scam.
To have an 'irresponsible borrower' you must A PRIORI have an irresponsible lender. No one FORCED these lenders to issue zero-down payment negative amortization loans. They dreamed this stuff up on their own.

The major thing driving the US economy is and was DEBT. For financial 'services' to make money means expanding debt. Once your pool of 'good' prospects is maxed out, it is necessary to start looking at more marginal customers and invent even wackier products.. otherwise you would not be writing new loans to supply the demand for securitize-able instruments.

The uneducated, unsophisticated 'rabble' is not the power here, any more than the power in your household to not buy junk food rests with a three-year-old. Will a three-year-old choose a Ring Ding over spinach if it is offered? Of course.

The power, and the responsibility to maintain the health and stability of the system rested entirely with financial institutions, and they were derelict in their fiduciary duties and made out like bandits in the meantime. Every time this happens, rules are put in place, and then people forget why the rules were in place, and people like Phil Gramm spend lots of money tearing down the rules, and then we're back where we started.


An good post is here:
Three Times is Enemy Action.

James Bond's wealthy nemesis may have had an obsession with gold, but he judged, quite correctly, that if people keep putting your plans awry, that was likely their intent.

In 1982, the same year John McCain entered the Senate, a bill was put forward that would substantially deregulate the Savings and Loan industry. The Garn-St. Germain Depository Institutions Act was an initiative of the Reagan administration, and was largely authored by lobbyists for the S&L industry -- including John McCain's warm-up speaker at the convention, Fred Thompson. The official description of the bill was "An act to revitalize the housing industry by strengthening the financial stability of home mortgage lending institutions and ensuring the availability of home mortgage loans." Considering where things stand in 2008, that may sound dubious. It should.

Seven years later, the S&L industry was collapsing. What was the cause? Garn-St. Germain handed the S&Ls a greatly expanded range of capabilities, allowing them to go head to head with full service banks, but it didn't give them the bank's regulations. Left to operate in an anarchistic gray area, S&Ls chased profits, indulged in amazing extravagances, and cranked out enough cheap mortgages to fuel a real estate boom. They also experimented with lots of complex, creative -- and risky -- investments, even though they didn't have the economic models to really determine the worth of the things they were buying. The result was a mountain of bad debts and worthless "assets." Does any of that sound eerily (or nauseatingly) familiar?

It wasn't a foregone conclusion. In 1985, three years after the deregulation of the S&Ls, the chairman of the Federal Home Loan Bank Board saw that the situation was already looking shaky, with the potential to become much worse. He instituted a rule to limit the amounts and types of investments S&Ls could carry on their books in an effort to head off disaster. However, many savings and loans -- among them Lincoln Savings & Loan Association of Irvine, CA, which was headed by a fellow named Charles Keating -- promptly ignored these rules.

Now enters a familiar cast of characters. ...

(long post continues but it is important reading as it seems people have forgotten the past)

[armor99]

Originally Posted by ladelfina

The uneducated, unsophisticated 'rabble' is not the power here, any more than the power in your household to not buy junk food rests with a three-year-old. Will a three-year-old choose a Ring Ding over spinach if it is offered? Of course.

Ok.... your point is well taken. But if these folks are in fact mentally "children" as you are implying, then they should not be allowed to drive, or vote, or raise their own children for that matter. Children are not allowed to do any of those things either.

[FinanceDude]

Originally Posted by Beryl

Last year, I purchased a second larger house valued 30% less than my current house which is now rented. The lender "encouraged" me to purchase a more expensive home in the subdivision and asked me multiple times to reconsider the lower priced home. They just couldn't understand why I would purchase a house valued lower than what I could afford.

That happened to me in 1995, so it's not it was a new phenomenon, maybe the chickens finally came to roost..........

[ladelfina]

armor99, the vast majority of people are unequipped to understand legal and economic fine points, yes. The mortgage brokers opted for the Ring Ding; the bankers opted for the Ring Ding, and the hedge funds, municipalities, foreign investors and pension funds wanted Ring Dings too. Now Paulson wants his 827th Ring Ding, Barney Frank wants his 34th Ring Ding, etc., etc.

I read somewhere that 60% of the loans that make up this mess are second mortgages or HELOCs, and I read somewhere else that most adjustable mortgages are on the most expensive of homes.. so we really should stop focusing solely on the 'poor' sub-prime first-time homebuyers. I'll try to post where I read these assertions if I come across them in the future.

[Andy R]

OK, so we can all agree that all the actors involved were at fault in some way? I so then maybe the question should be about a irresponsible society. Look around at how large many of our citizens our. They are making the same irresponsible choices with their health as they are with their pocket books. Are we sliding into an Idiocracy?

Once the "other" 95% of the world no longer respect us and our Dollar, that's when the hammer will really fall. The bailout is already putting pressure on the dollar to go back down which will then lead to commodities priced in Dollars to rise again (aka this last summer) which leads to inflation.

Inflation is actually good in the eyes of our valiant leaders because it prevents deflation which was a big cause of the Depression. When it's cheaper to save and buy tomorrow why spend today. The country is desperately trying to get us to spend more to save the economy. The only way to get people to spend more is to give them more debt so we gotta get the financial system back on track!

I think as a culture we need to think more on a sustainable level. I think it's our societies fault which leads us back to the
Why is America not angry?

It's going to be hard to change society when it's the blind leading the blind. Maybe we need more LBYM folks from E-R.org in office!!! LBYM for President!

[ladelfina]

Andy R, LBYM does not play well politically (see one James Earl Carter with sweater).

As long as certain ideologues are able to convince the public that debt = growth = good LBYM will not happen. LBYM = the opposite of growth as it seeks to moderate consumption, not overstimulate it.

John McCain, yesterday:

Q: In 1999, you were one of the senators who helped pass deregulation of Wall Street. Do you regret that now?

McCAIN: No. I think the deregulation was probably helpful to the growth of our economy.

Think Progress » McCain: I’m glad I deregulated Wall Street.


Here is a chart that compares housing values to GDP:
Is The Housing Bubble Fuelling GDP Growth?

As far as I can tell, there is no adjustment to GDP to account for the debt incurred to fuel the consumption of houses or any other consumption. Only the consumption figure appears to matter.

http://www.nahb.org/fileUpload_detai...ontentID=31539
a 2000 PDF from the NAHB about housing and GDP; no reference to 'debt', 'financing' or 'mortgage'. Not on the radar screen.

Maybe I am wrong, but it seems to me the ENTIRE discussion on the economy circulates around GDP, which is only 1/2 of the story. Is this willful?

Of course it is willful, but it's like doing your household budget by looking at the amount you spent and calling it "positive", without looking at your cc balance. It's like doing a net worth calculation including the price of your home, but not subtracting the outstanding mortgage. No sane householder would do this, yet our government does, apparently, and no one bats an eyelash. In fact, this one-sided calculation is the only basis for discussion on offer, generally speaking.

An LBYM person does not look at each year and say "yay! I spent 4% more than last year.. let's borrow more so next year we can get that up to 5%".


Personal debt compared to GDP seems to be something that isn't talked about much in the US.. ("national" or public debt is, occasionally). I found nothing on it in the first few pages of Googling, although there are some articles about the UK in this regard:

The total amount of UK personal debt has exceeded the country's entire GDP for the second year running.
... Mr Gifford pointed out that any wider move to reduce debt would affect the speed at which the UK economy grows.

Personal Debt Tops GDP in Britain—Again

Note that this is ONLY consumer debt.. not gov. debt or deficit spending.


If people do not choose to question the entire STRUCTURE of the economy (in fact they are actively dissuaded from doing so) and do not demand and obtain a COMPLETE overhaul.. not band-aids.. a COMPLETE overhaul.. an LBYM society is really a pipe dream.

[MasterBlaster]

The lender "encouraged" me to purchase a more expensive home in the subdivision and asked me multiple times to reconsider the lower priced home. They just couldn't understand why I would purchase a house valued lower than what I could afford.

Realtors and lenders get fees based on the value of the transaction(s). This is just another aspect of where your personal interests and their business interests may diverge.

Of course they want you to buy the bigger house. That way they get a bigger cut. They cast their interests in a favorable light that they hope will appeal to you.

They are salespeople and they do what any salespeople do. Keep in mind (always) what they are and keep in mind their interests in the deal. They don't have to make those mortgage payments for the next 30 years. Nor do they have to cut the grass on that big lawn or pay for all that heating and cooling and extra maintenance on a larger house. Having too much home is one great way to delay your retirement.

[Beryl]

Neal Cavuto says that minorities are to blame.

"I'm just saying, I don't remember a clarion call that said, 'Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster.'"

He could have just said "risky folks" but to use "minorities" as a qualifier says that minorities should not be given loans no matter how responsible they are with money.

I am an African-American female with a FICO score of 830. My $450K home carries a mortgage of $40K and just 1 year ago, I obtained another $350K home with a mortgage of $250K. I had no problems getting the second house loan - no thanks to racists like Cavuto. Both Wells Fargo and Providence fought over my business.

All ethnic groups have their share of risky borrowers. My neighbor lost his house because he was unable to pay his mortgage and similarly my brother-in-law is on the verge of losing his home. Both of these individuals are white.

(Maybe I should have posted this in the "Soap Box" area but it applied to this thread.)

[FinanceDude]

Originally Posted by MasterBlaster

They are salespeople and they do what any salespeople do. Keep in mind (always) what they are and keep in mind their interests in the deal.

So, if we got rid of all realtors this would never have happened? Wow............