Housing Policy

The Real Mortgage Fraud

How Congress takes a problem and makes it worse

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Nothing is more fun than doing noble deeds with someone else's money, and right now, Democrats are getting ready for a rollicking good time. Contemplating the subprime mortgage problem, with numerous borrowers unable to pay their debts, the party's presidential candidates and congressional leaders have a simple solution: Fleece the lenders.

The troubles arose because banks and finance companies offered mortgages to millions of people who, despite their imperfect credit histories, yearned to buy homes. The loans generally start out with a low interest rate that, after a couple of years, rises substantially. Some homebuyers now discover that the reset payments are more than they can handle. On top of that, falling real estate prices mean some can't recoup by selling, because the home is now worth less than the mortgage.

This spectacle has brought forth recriminations from politicians who picture the lenders as James Bond villains, cackling at the chance to toss hard-working families out on the street. In fact, this course is almost as bad a deal for lenders as it is for borrowers. They typically lose up to half the value of the mortgage on foreclosures.

From listening to the critics, you'd never guess that. Barack Obama denounces "predatory lenders" for "driving low-income families into financial ruin." Barney Frank (D-Mass.), who chairs the House Financial Services Committee, blames everything on an epidemic of "abusive lending."

But lenders who made bad decisions are already paying the price. Many mortgage companies have gone bankrupt. And if these loans are so unconscionable, the question is not why the foreclosure rate is so high but why it's so low.

According to the Mortgage Bankers Association, less than 5 percent of subprime adjustable-rate mortgages are in the process of foreclosure. The vast majority of borrowers are making their payments, keeping their homes and asking no one for a bailout.

Nor is it clear that soaring payments are the chief culprit. Foreclosures are most common in places where home prices are falling-such as California, Florida, Michigan and Ohio, which account for half of all foreclosures this year. Apparently many borrowers, seeing no point in paying off a $200,000 debt for the privilege of owning a $170,000 home, have elected to walk away from their obligations.

The remedies urged by Hillary Clinton, John Edwards and the like include placing a moratorium on foreclosures, freezing teaser rates for five years or more, and forcing lenders to reduce loan amounts to reflect deflated home values. These options are conspicuous for a couple major defects.

The first is that they punish lenders for the failings of borrowers. Why should someone who has kept the terms of a contract be penalized for the benefit of the party that didn't? A lot of people took a calculated gamble on interest rates and home prices. Had they bet right, they'd be reaping the rewards. Since they bet wrong, they are entitled to bear the consequences.

It's true that if lenders have committed fraud with phony information about their loans, they deserve to be separated from their ill-gotten gains. At the same time, honest ones shouldn't be punished for offering creative terms just because the loans sometimes go bad.

When we're talking about faceless institutions, it may sound reasonable to confiscate a share of their assets. But there's no reason to stop with these greedy usurers.

Say I sell my home at a handsome premium to someone who, we now learn, has been victimized by a "predatory" loan. Why should I benefit from the lending abuse? If the mortgage company has to sacrifice some of its profit so the buyer can avert eviction, why shouldn't I have to turn over a portion of mine? Most of us would fail to see the justice in this humane act of redistribution.

If the government imposes the punitive option, another problem will arise down the road: Lenders will be far less willing to offer credit to people with flawed credit records. Even the Bush administration's plan for mortgage companies to freeze rates on a small number of loans effectively warns lenders to steer clear of all but the soundest borrowers. As Yogi Berra might put it, if mortgage companies don't want to do business with certain customers, nobody is going to stop them.

The consequence of this approach is clear. We'd be robbing tomorrow's subprime borrowers for the benefit of today's. Of course, when it comes to proposed solutions, robbery seems to be the order of the day.

COPYRIGHT 2007 CREATORS SYNDICATE, INC.

NEXT: Speak No Evil

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  1. Here’s a bright idea: Let the market correct itself rather than artificially prop the mortgage sector up.

    Government intervention will prolong and deepen the quasi-problem.

    Regardless of whomever wins next year’s election, I pray to Zeus we have divided government. It’s our only hope to stem the slide into socialism.

  2. I seem to recall listening to a discussion on NPR a number of years ago (while driving down the highway) extolling the virtues of banks willing to go into impoverished areas and make loans that others were not willing to risk. Are these the same banks that are now being castigated for luring unsuspecting poor loan prospects into mortgages?

    On the other hand, while a number of the companies that made these loans are suffering major losses and, in some cases, dissolution, the CEOs who precided at the debacles are being “punished” with severance packages of only 50 to 100 million. Somehow, the market does not seem to be doing a good job of allocating “punishment” for bad performance.

  3. What I want to know is when people will start to consider the silent victims: the prudent non-homeowners.

    My wife and I could have taken the opportunity to buy a home we couldn’t afford with a loan that would have broken us, but instead we decided to wait until we could get together a proper down payment, make the mortgage without going hungry, etc. Meanwhile, the price of homes kept going up and up.

    Now that the bubble has burst and the risk takers are supposed to be facing the music, which would drive the price of housing down further so those of us who waited would be rewarded for taking the rental hit the last several years, what are we getting? Proposals to dig into our pockets to save those who made the risky choices.

    Every non-homeowner, as well as those who made the sacrifices necessary to get a home on their own nickel, should be outraged by these cheap attempts at populist fearmongering and socialistic finger pointing, and the politicians should be ashamed. Too bad they don’t understand the concept.

  4. The Gaunt Man –
    I feel your pain. I am also a non-homeowner. As a friend of mine put it
    “If they’re going to get help with their mortgages, my parents should get help with their mortgage. Or, you know, everyone could just pay their mortgage themselves…”

  5. Because there’s no downside to unrelated third parties using a monopoly of force to arbitrarily chang the terms of a financial agreement, yeah? It’s not like there’ll be any unintended consequences, like the lenders adding a whopping risk premium on all mortgages and shutting down lending to all but the most solvent risks?

    This has the eery ring of the meddling FDR did to solve a recession, thus turning it into a nearly decade-long depression. Nothing like injecting uncertainty into property rights and contracts to freeze up business investment and hiring.

    Has any of the presidential candidates besides RP spoken out against this terrible idea?

  6. I rather like this crisis. It serves as good moron detector.

    When a politician uses the term, “predatory lending” it’s serves as a useful flag for, “hi, I’m a national office holder who doesn’t understand the fundamentals of banking and finance.”

    I find it incredible that anyone who graduated college seriously believes that banks expect to make profits on failed loans. I mean, how dumb does someone have to be understand that if foreclosed property was such a gold mine that the banks would just buy the valuable property outright in the first place?

    The crisis also handily reveals which politicians have a intrinsically elitist view towards their fellow citizens. What else can on ascribe to the idea that the final moral responsibility for determining whether an individual should take a loan rest not with the individual borrow but with the institutional lender?

    This crises lets us determine which politician believe the electorate to be idiots and who also lack a fundamental understanding of the core financial institutions upon which the economy is based.

  7. Edward Harris,

    Somehow, the market does not seem to be doing a good job of allocating “punishment” for bad performance.

    The market doesn’t punish the CEO, who is an employee. It punishes the stockholders, the owners who hired the CEO.

    I really do not understand this strange fixation with the compensation of corporate executives. It displays an apparent complete lack of understanding of how corporations actually work and of who decides what.

  8. Shannon,

    I agree. However, as a shareholder, I have serious problems with the way Board of Directors are determined and how CEOs are hired/compensated. But that is for me to work out internally, not the business of government.

  9. Somehow, the market does not seem to be doing a good job of allocating “punishment” for bad performance.

    You might ask the good folks at Countrywide. Many of them are now ex-employees, and I bet the rest aren’t too thrilled with their stock and retirement plans right now.

  10. Gaunt Man,

    well said. I recently bought my first home, at a lower rate compared to years past, but still extremely expensive.

    It took me years to put together a 20% down payment and clean up my credit (I now have a 700+ score). All the while, home prices were skyrocketing due to irresponsible borrowing and people playing the market.

    My daughter and I spent those years living with my parents. I dealt with all the social pariah status that comes with that. Needless to say, I’m not one to feel sorry for anyone who is now finding themselves in hot water over an ARM.

  11. If the mortgage company has to sacrifice some of its profit so the buyer can avert eviction, why shouldn’t I have to turn over a portion of mine?

    Excellent! Those deals can all be “unwound” and title returned to the original seller. That should fix everything. What would the stock market look like after everybody returned their deeds to Kaufman and Broad, or Centex, for a refund?

    “Predatory lending” indeed. To echo Shannon Love, the last thing the bank wants to do is foreclose. They may want to bleed you *nearly* dry, but they do not actually want to own your house.

    Meanwhile, Greenspan now says the government should provide a(nother) cash infusion to help buyers service their loans. I am beginning to seriously want to see that doddering imbecile go to prison.

  12. robc,

    I have serious problems with the way Board of Directors are determined and how CEOs are hired/compensated. But that is for me to work out internally, not the business of government.

    I agree as well but my point was that the final decision rest with the investors, who first choose to own a particular stock and stockholders, who lack the will and consensus to clean up corporate governance to their own satisfaction.

    If I hire someone to manage my mom and pop store and they screw up, then the financial loses fall upon me. It works the same for big business as well.

  13. What lobbying group press release did you copy this from?

  14. What a set of “cut off my nose to spite my face” bunch of idiots.

    The reason there’s talk about trying to provide some support for people at the moment is that a house in foreclosure drags down the value of the properties around it, capisce? Increase in crime, etc.

    May all those of you who whine about “why should THEY get bailed out?!” live in neighborhoods where you are surrounded by houses just about to go into foreclosure. May they all go into foreclosure, lie vacant, and YOU have to deal with increased trash in the neighborhood, use of said vacant houses by vagrants, drop in local security, drop in local business, and all the rest. Then you might understand what this is getting at.

  15. You want to talk about people who don’t know anything about mortgage financing? Find somebody who thinks that these sleazy ARM pushers are doing what the anti-redlining groups were calling for.

    As a matter of fact, the same groups calling for banks to do business in poor neighborhoods are usually the same groups that run the “Don’t Borrow Trouble” seminars for low-income homeowners.

  16. You can’t cheat an honest man.

  17. May all those of you who whine about “why should THEY get bailed out?!” live in neighborhoods where you are surrounded by houses just about to go into foreclosure.

    That would be sweet, actually. Foreclosed houses are typically a great deal, and an excellent way to kickstart a real estate portfolio.

  18. P Brooks You can’t cheat an honest man.

    Sure you can. You devalue his currency so that the idiots that made the loans can paper over their losses.
    The Fed has made 3 cuts and has pumped I can’t count how many billions into the market via repos. It’s be nice to see Reason take a stand against this as well.

  19. …the “Don’t Borrow Trouble” seminars…

    I’m not familiar with these. Could you explain?

  20. Reinmoose,

    Financial 101 for people who’ve spent their lives too poor to learn about banking, mortgages, and the like.

  21. toshiro_mifune-

    I was actually thinking about that old “If it sounds too good to be true, it probably is” chestnut. But, if you can get the government to help you out, there’s no limit to what you can do.

  22. I think part of the problem is that we have an entire segment of government (and advocacy groups, etc.) who talk about the economy as though it’s some spooky mythical creature that only “those financial people” participate in. We don’t expect the common person to consider themselves as making lots of market decisions all the time (even though they do), and as a consequence, they have the mentality that they exist outside of markets. The average person in the U.S. has probably never really bartered for a normal, everyday good or service (there are few exceptions. A car (which, at a dealership, is something of a fixed process anyway because buyers are so bad at bargaining), for example)

  23. drags down the value of the properties around it, capisce?

    Which lowers my basis for property tax!

    I just bought my house in October, Im not planning on moving again this generation. Yeah for lower property values!!!!

  24. Financial 101 for people who’ve spent their lives too poor to learn about banking, mortgages, and the like.

    Its sorta off-topic and way off my normal commenting since I oppose state schools somewhat (despite attending them from 1 thru grad school), but shouldnt this be the kind of thing you shouldnt be able to graduate high school without knowing?

  25. I’m sorry, robc, but they don’t have a standardized test for financial knowledge.

    So, no.

  26. But seriously, robc, where you did learn about how to be a smart consumer in the financial industry? In high school?

    It was probably from your parents. Now, imagine if your parents had never owned their own house, never had enough savings to open a bank account, cashed their paychecks and tried to fiver in the shoebox every two weeks, etc etc etc.

  27. joe,

    Yeah that is where I learned. Just like the “sex ed” people I suggested public schools as the replacement for being taught properly by parents. If you dont learn at school or from your parents you learn on the streets, and apparently the streets think arms and interest-only loans are a good idea.

    The funny thing is, my parents kept asking me odd questions about the mortgage process. Then I realized it was because they knew nothing about it because they never had one. When they bought their house in 1962 they got a 10 year loan, but it wasnt a mortgage, it was just a 10 year (unsecured) bank note. They had it paid off before I was born in 1969. My dad was telling me once about making quarterly payments and how the bank didnt send him any info so he had to calculate the payment schedule himself.

  28. robc,

    That makes a lot of sense.

  29. I reiterate –

    J sub D | September 6, 2007, 10:53am | #

    Who am I supposed to bail out? People who took mortages out on houses they couldn’t afford, or those who gave them the mortages? To both groups my response is “You made your bed, now lie in it.”

    Oh yeah, “And quit whingeing.”

  30. And let’s not forget, this same cast of political characters used to complain that financial institutions were NOT lending to the subprime market. They were evil “redliners” who refused to loan to lower income people. Now they are evil preditors. Yikes.

  31. *sigh*….

    1) there are sufficient articles out there that have shown a link between increased foreclosures in an area and an increase in crime. But I guess that this will just feed into libertarians’ fantasies of living in a Mad Max society.

    2) For those who think that purchasing all the foreclosed houses around you is automatically a good deal, good luck. Especially when the crime rate increases.

    3) Not automatically true that your real estate taxes will go down. First of all, there is a stickiness between the actual value of your property and what the local property tax authorities think it’s worth. They don’t go around and automatically reassess your property, y’know. Expect months to years time lag before your cheaper property prices show up in your property tax.

    Second, who says that the local rates of property tax won’t go up? Remember, the local government (city, town, whatever) was in charge of putting in all the roads, water supply, phone and electricity infrastructure to service all these new buildings. Usually this gets funded by cities and towns selling municipal bonds. These bonds still have to be paid back, done out of property taxes. Now, if the value of the local property goes down, the percentage of property tax will have to increase simply to bring in the same amount of $$. Or are you expecting the local gov’t to default on its munis in order to save you from paying more property tax? Yeah, that’s going to go over well at the next town meeting.

    I’m not happy with the bail-out myself. I just realize that the reason this is being done is because all other options probably have even worse consequences.

  32. joe,

    If people are to uneducated to make reasonable decisions about assuming loans and the consequences thereof, why do we grant them the legal authority to make such decisions in the first place?

    You’re arguing that two classes of adults exist: those who can contract for a loan and those who cannot. If you want to establish such a two tiered society you’ll need to create some kind of licensing system with all the externalities that implies.

    Given that 90%+ of those who used ARMs will not default and will not lose there investment is it really worth raising yet another barrier of entry to home ownership?

  33. People are hving trouble paying thier mortgage. Hmm… If only there was some way they could free up some cash. Hey, how about a tax cut for everyone who makes less than double the median income (aprox 85% of tax payers). I’m thinking of a nice round number for the tax rate. We’ll need to cut some spending to make up for lost revenue. I heard that there is something going on in the Middle East that’s burning through a lot of cash.

  34. grumpy realist,
    That is a very good point. My local real estate market is in the crapper having lost a total of ~15-20% of value over the past 4 years (totally unrelated to the so called “housing bubble” ours values were going down while everyone else’s were going up), but my property taxes have only gone up for those 4 years. Like most taxes, property taxes tend to “ratchet up” never back down.

  35. Financial 101 for people who’ve spent their lives too poor to learn about banking, mortgages, and the like.

    I’ve long thought that financial management and personal finances should be mandatory classes in high school. Although Allah only knows what kind of botch the state schools would make of it.

    Sure, gr, I’ll grant their are externalities to living in a neighborhood with lots of abandoned houses. Since when is it the state’s job to prevent the externalities that arise from bad decisions by individuals?

  36. NAL-

    Sounds like Indianapolis.

  37. As someone on the political left I am often enamored of Libertarians because we tend to agree on so many issues when it comes to civil liberties, the military, the silly drug war, the pervasive religious nonsense in this country etc…unfortunately I am always electro-shocked back into reality when certain economic issues come into play and they really bear their indifference (and dare I say, secret enjoyment) at the suffering of others both domestically and abroad.

  38. And let’s not forget, this same cast of political characters used to complain that financial institutions were NOT lending to the subprime market. They were evil “redliners” who refused to loan to lower income people. Now they are evil preditors. Yikes.

    Imagine that, they dislike both redlining and fraud. What a bunch of hyprcrites!

  39. Shannon,

    Because they’re adults. Duh. I haven’t the foggiest idea how your silly idea about “two tiers” applies to anything I’ve written or thought.

    And before you start lecturing about homeownership opportunities, why don’t you do a bit more reading about the number of people losing their homes and the down payments they put on them.

  40. Ok joe, grumpy realist et al.-

    What do y’all think of situations like this?

    These people are shocked – shocked, I tell you – that not having clear title to their property has consequences. They all thought “oh we can get a discount from the market rate now, and the nice ol’ landowner will just turn over the ground rights when it time. After all, we’re nice folks just tryin’ to get a piece of paradise.”

    Should the gov’t demand the leashold conversion to fee simple? Pressure the owners to convert? Provide incentives to convert?

    Or should people see that lessons learned hard are lessons learned best?

  41. Ack, bad html

    Here’s the link I was trying for:

    hier.

  42. I’m sorry, robc, but they don’t have a standardized test for financial knowledge.

    This much is true. The state of mathematical education in this country is abyssmal.

    In theory, the structure of the business model of the state lotto should put itself out of business within a generation. I don’t see that happening, however.

  43. Shannon Love, joe’s position is that it is all the evil lenders fault. They deliberately made loans to poor, gullible, ignorant people so they could foreclose later. Or something. Others, including myself, think that people who sign contracts are responsible for knowing what they are signing and living up to their part of the bargain, if possible. If not, you face the consequences. It’s not that radical of a position, is it?

  44. Kolohe,

    Hawaii is weird. You don’t often seen the term “land reform” applied to the United States, but I make an exception. We can’t have a quasi-feuedal system of land ownership like that and expect good outcomes.

  45. Deliberate ignorance of the world makes up such a large part of so much libertarian economic theory.

    I’m talking to you, J sub.

  46. joe,

    Land reform in Hawaii has already been done. One of the cases that Kelo cited (I forget the name) was because of the mid 20th century Hawaii land reform.

  47. To Kolohe and others–

    Actually, the one thing that Hillary said that I really agree with is the “6-month freeze on foreclosures.” Not because I think it’s going to help out more than a minute number of the people involved, but we’re going to need at least that amount of time to track down who actually has a legitimate claim to the lien. Wall Street did so much chopping and dicing with the financial engineering (and was so sloppy at keeping track of it) that in a lot of cases who actually might have legal rights has been totally confused. There’s been some wonderful posting over at Calculated Risk showing exactly how sloppy the transfers got….and how now the banks’ attempts to run around and cover their asses has pissed off some judges, big time.

    About the only thing good to come out of this is that we’re going to see any value left at all in the foreclosed properties be eaten up in the legal fees of a plethora of lawsuits between banks, hedge funds, mortgage lenders, and states who invested their employees’ pension funds in this stuff. Have fun, people!

  48. Why don’t we just just apply price controls on interest rates on a five year plan? At the end of five years, we can revisit those price controls, right?

  49. Oh, I know…I know.

    We can force lenders to provide a bunch of “disclosure statements” by hading forms to the lender who should read them and sign them so they know what’s going on.

    Oh wait…

  50. Sorry, the above should have read “handing forms to the borrower”

    my bad.

  51. Deliberate ignorance of the world makes up such a large part of so much libertarian economic theory.

    Compassionate bigotry makes up a large part of the liberal social theory.

  52. There won’t be any real progress in fixing the problem until the mortgage interest deduction is repealed. Why is there an incentive in the tax code to purchase an expensive home, sell exotic barely-understood products?

  53. robc,

    I was thinking of Midkiff when I wrote that.

    Apparently, it hasn’t been “done” enough.

  54. Wall Street did so much chopping and dicing with the financial engineering (and was so sloppy at keeping track of it) that in a lot of cases who actually might have legal rights has been totally confused.

    This is a big part of the reason when the “let the market discipline the bad actors” and “lenders are hurt by foreclosures” arguments are inadequate.

    A lot of these lousy mortgages were broken up and sold off as “mortgage-backed securities,” like bonds based on the assumed income from thousands of mortgages. The lenders have made their money already, and aren’t on the hook for foreclosures.

    Looking at a situation, learning the facts, and concluding that a laissez-faire approach is one thing. Being completely ignorant of the facts surrounding an issue but deciding you know all the answers anyway, because of your unerring and universally political ideology, is quite another.

  55. Er, on the first sentence is a quote.

  56. Quick question, where does the 95/5% number come from? When I looked on the Mortgagebankers.org site, I found slightly different numbers:

    http://www.mortgagebankers.org/NewsandMedia/PressCenter/58758.htm

    “The seriously delinquent rate, the non-seasonally adjusted (NSA) percentage of loans that are 90 days or more delinquent, or in the process of foreclosure, was up from both last quarter and from last year. This measure is designed to account for inter-company differences on when a loan enters the foreclosure process. During the third quarter, the seriously delinquent rate increased for prime, subprime, FHA, and VA loans. The rate increased 33 basis points for prime loans (from 0.98 percent to 1.31 percent), 211 basis points for subprime loans (from 9.27 percent to 11.38 percent), 36 basis points for FHA loans (from 5.18 percent to 5.54 percent) and 21 basis points for VA loans (from 2.35 percent to 2.56 percent).”

  57. joe,

    I dont know if Midkiff hasnt been “done enough”, 72 people owned HI pre-Midkiff, how many now?

    But, I dont see how people choosing to lease instead of selling property is any business of ours. Didnt these people know they were just leasing?

    As an aside, I generally will criticize SCOTUS decisions if there is any 1 dissenter, but have to assume that unanimous decisions are correct. Midkiff is my exception, it was a horrible ruling.

  58. My comment was not on the merits of breaking up the latifundias of Oahu and the neighbor islands (which I actually agree with joe as public policy net benefit; and esp the way it’s been done, over the course of decades, rather than as a prompt jump)

    And it’s not the specific choices that these people made; it’s rather the front page picture that potrays them with a pensive look at at uncertain future, when the result was entirely predictable. The same is true for so many variable rate borrowers, what part of ‘variable’ was so difficult to understand?

    And as a last comment, most of the leaseholds these days are held by the decendents of those original landowners in the form of charitable trusts, not (necessarily) fat cats sitting on their lanais sipping mai-tais and lighting cigars with 100 dollar bills (or more precisely 10,000 yen notes). The Bishop Estate, for instance, uses their 10 billion dolar portfolio to fund the Kamehameha schools for children of Native Hawaiian hertitage (which is of course a whole different bowl of poi of legal and moral appropriateness)

  59. Isn’t the Hawaii setup very similar to a lot of real estate practice in the U.K.? There’s a lot of fine distinctions made about “free-holding”, “100-year lease with building privileges”, etc.

  60. There was also a lot of mess with the ARMs (a lot of which did come down to “trust us! We know what you should be doing!”)

    Also the amount of stuff shoved out by the banks on home lines of equity and the other stuff on how in the future when you needed more money, you could just re-fi to take advantage of the constantly appreciating real estate prices.

    Look–a lot of the purchasers were stupid, over-optimistic, and unrealistic about future income streams. But we also have to admit that the banks and mortgage brokers were selling financial crack.

  61. I think a “100-year lease” is actually very, very short for the UK style stuff. Ive seen things like 499 years.
    Very weird.

    Personally, on a 499-year lease I would treat it as a purchase and let my descendents take their chances. 🙂

  62. Austrian economics based comentators (For example: Kurt Richebacher, William Seidman, Bill Fleckenstein and Peter Schiff) have been writing for several years that this credit bubble is going to pop. It’s not lack of compassion that makes these same people (except Richebacher RIP) write that there is no fixing this mess. Any bailout scheme you can think of won’t help and will probably make things worse. They have been right for years and they are still right.

  63. so have others (written about that) – not unique to that group.

  64. I’m sorry, robc, but they don’t have a standardized test for financial knowledge.

    So, no.

    I see joe is still having problems with reading comprehension. The point of robc’s comment wasn’t that this is what schools currently do, but what they should do. Could they have a standardized test on basic financial principles? Sure. Do they? No.

    I do find it funny that most people accept the following principle:

    Ignorance of the law is no excuse when breaking the law.

    However, the following principle is just wrong headed for some people:

    Ignorance of financial principles is an excuse for making bad financial decisions.

    And never mind that the corrolary to the latter principle is:

    People who are shielded from the full negative impact of bad financial decisions will likely make more and/or bigger financially unsound decisions.

    The law of unintended consequences and all that.

  65. Isn’t the Hawaii setup very similar to a lot of real estate practice in the U.K.? There’s a lot of fine distinctions made about “free-holding”, “100-year lease with building privileges”, etc.

    I heard, years ago, that next to HI, Maryland had the highest number of these kinds of land leases. Apparently they go back to colonial times and todays owners are the heirs of the original grantees. I wonder if that has changed.

    The Bishop Estate, for instance, uses their 10 billion dolar portfolio to fund the Kamehameha schools for children of Native Hawaiian hertitage (which is of course a whole different bowl of poi of legal and moral appropriateness)

    I read somewhere that there is a dispute (even among the Bishop trustees) as to whether Princess Bernice Pauahi Bishop intended them to be quite so exclusive. While the bequest is definite about giving preference to Native Hawaiians it does not specifically exclude orphans and the disadvantaged of other races. In fact non-Hawaiians have been admitted.

    But in the end there are actually so few spaces available each year that all the spaces end up getting filled by natives.

  66. Mr Bartram (to continue the threadjack)

    The court challenges have been whether the preference itself is unconstutional. The most recent suit was dismissed earlier this year without a definite ruling either way. Other cases have ruled that, despite the state appointment of trustees, the school is sufficiently private, and there is sufficient compelling need, that the school be allowed to implement its preference policy.

    Now politically, this particular fight is small beer against (but is only able to get traction because of) the larger backdrop of the Akaka bill and more importantly, the huge scandal the trustees got mired in a few years ago that is responsible for a Republican Gov in a solid blue state.

  67. Austrian economics based comentators (For example: Kurt Richebacher, William Seidman, Bill Fleckenstein and Peter Schiff) have been writing for several years that this credit bubble is going to pop. It’s not lack of compassion that makes these same people (except Richebacher RIP) write that there is no fixing this mess. Any bailout scheme you can think of won’t help and will probably make things worse. They have been right for years and they are still right.

    Bingo. Between the recommendation to avoid real estate and to purchase precious metals, these commentators have singlehandedly saved me tens of thousands of dollars as I have started to accumulate savings.. It’s a nice kind of empirical confirmation of the validity of Austrian economics.

    Furthermore, it’s exactly grumpy realist’s line of thinking–allowing asset bubbles to deflate will have negative side effects too terrible to contemplate–that got us into the housing mess in the first place. Could we, for once, just let the bubble deflate, instead of trying to blow it up into again something even more monstrous and unsustainable?

    Freezing foreclosures and ARM resets won’t even succeed in propping up property values anyway.

  68. What lobbying group press release did you copy this from?

    Actually, many business interests, and Wall Street in particular, have been clamoring for exactly the kind of bailout Chapman’s article decries. This is not an issue that can be so easily shoehorned into the “libertarians are corporatists in free-marketeer’s clothing” worldview.

  69. People who are shielded from the full negative impact of bad financial decisions will likely make more and/or bigger financially unsound decisions.

    A very well-known economic principle known as “moral hazard.”

    A lot of these lousy mortgages were broken up and sold off as “mortgage-backed securities,” like bonds based on the assumed income from thousands of mortgages. The lenders have made their money already, and aren’t on the hook for foreclosures.

    This has been going on for twenty years or more, so it seems an inadequate explanation for the ARM bubble of the last few years.

    Plus, many of the big institutional lenders keep the servicing on their loans, so they do in fact stand to lose income if a loan goes belly-up.

    Its the nature of capital markets to allocate risk and transfer capital. That’s all mortgage-backed securities were – the lenders who sold off their loan portfolios to back bonds were liquidating assets (at a discount). The bond-holders paid a discount because, in every big portfolio, there is no question that some loans will go bad.

    So the bond-holders are holding the bag, not the lenders. Cry me a frickin’ river.

  70. The reason there’s talk about trying to provide some support for people at the moment is that a house in foreclosure drags down the value of the properties around it, capisce? Increase in crime, etc.

    this would be a great point if it wasn’t theoretical. In reality the neighborhoods with the highest foreclosure rates were already high-crime neighborhoods before the foreclosures. Low tide lowers all ships.

  71. Actually, there are two (entertwined) problems here:

    1) people having gotten mortgages that they can’t (now) pay, meaning that there’s going to be side-effects from it. (I’m surprised we haven’t heard anyone yowl about being a “good, upstanding prudent buyer” but having his property values being pulled down by all the foreclosures in the neighborhood. Hmmm.)

    2) Bundles of dodgy debt being packaged as CDOs, SIVs and the rest of the alphabet soup and used as “capital” for loans. Now banks are terrified of lending to each other, to businesses in general, etc. because nobody knows where the financial bombs are. This is why we have had a freezing up of the financial system. TOTALLY. Banks aren’t lending out $$ for more than 1 week at a time and businesses are tearing their hair out.

    Now, given that part of the financial insecurity of the latter problem is due to the defaults in the former problem, at least part of the reasoning behind these “ARM extension plans” has been to try to give everyone a little more breathing space. It used to be that if you were having problems with your mortgage, you’d go back to your friendly neighborhood bank, talk things over, and maybe you’d be able to renegotiate stuff because foreclosure == definite loss of 40% and much hassle while if you could stretch things out or refi, maybe you could salvage the whole process. The bank might not get paid back as soon, or it might have to take a bit of a haircut, but on the whole, it was better than going for the “let things crash and burn.”

    Now, of course, since no one knows who owns the debt in the first place, plus the fact that it’s been divvied up into tiny tiny pieces, renegotiating the mortgage is now a thousand times more difficult.

    So you guys can go along and say “moral hazard, don’t help the mortgage payers out”, but you’re still stuck with problem number 2. That’s why the Fed and others have been stepping in. They’re not so much worried about the real estate aspect–they’re worried that nobody’s lending money.

    Unless you libertarians think that bringing down the entire capital lending network will be a Good Thing right now?

  72. Actually, the one thing that Hillary said that I really agree with is the “6-month freeze on foreclosures.”

    This idea was first proposed by the LaRouche wing of the Democratic Party.

  73. Imagine that, they dislike both redlining and fraud. What a bunch of hyprcrites!

    joe,

    There are already laws against fraud, and if there is evidence of that happening in specific instances then it should be prosecuted, and the lender should lose the lent money.

    If there’s no evidence of fraud, then you’re just throwing red herrings around to win an argument, aren’t you?

  74. But seriously, robc, where you did learn about how to be a smart consumer in the financial industry? In high school?

    Maybe they can take some class time from the K-12 sex ed that you Dems are so hot for, and have some consumer economics education.

    Of course, then we’d have to worry about cleaning up messes made by people who don’t understand that sex can cause pregnancy…but “luckily” we already have abortion clinics to take care of that, right?

  75. >In fact, this course is almost as bad a deal for lenders as it is
    >for borrowers. They typically lose up to half the value of the
    >mortgage on foreclosures.

    I just don’t buy tit: if a lender loans $150,000 on a $175,000 house, the house drops to $150,000 (a 15% loss), the lender forecloses, sells for $140,000, how have they lost 50%? The numbers don’t add up. 20% tops…

  76. I just don’t buy tit:

    Me either, I get it for free.

  77. I just don’t buy tit: if a lender loans $150,000 on a $175,000 house, the house drops to $150,000 (a 15% loss), the lender forecloses, sells for $140,000, how have they lost 50%? The numbers don’t add up. 20% tops…

    And court costs. And realtor fees. And repair work to property that you just threw people out of. And taxes till the house is sold. And utilities, lawn maintenance, administrative overhead, and other shit that I didn’t think of.

  78. crimethink,

    If part of the consumer economics education is “kids are expensive, a condom is cheap and abstinence is cheaper” then we have all bases covered.

  79. robc,

    Unfortunately, despite K-12 sex ed, we still have unexpected fathers and mothers bleating about how they didn’t know any better, so they need to take the life of an innocent to avoid having their own lives ruined.

    Thus, I don’t think 12 years of consumer economics would keep foolish people from biting off more than they can chew and then blaming the lender for “deceitful lending practices” or even “fraud” — apparently fraud of the variety that can’t be prosecuted.

  80. James,

    can we agree that, if libertarians are indifferent to suffering, the “political left” condones robbery and is indifferent to freedom?

  81. Stever Verdon,

    It was a joke about standardized tests and the high school curriculum.

    Try removing the pole from your ass, then see if you get it.

  82. robc,

    But, I dont see how people choosing to lease instead of selling property is any business of ours. Didnt these people know they were just leasing?

    It isn’t their lack of knowledge, but lack of choices. With so much land in that quasi-feudal system, the Jeffersonian ideal of widespread ownership as the foundation of society is not achievable.

    RC,

    So the bond-holders are holding the bag, not the lenders. Cry me a frickin’ river. My point is not that we should feel bad for the bondholders, but that the bad actors are not necessarily going to be disciplined by the market, because they worked out an Enron-esque scam.

    crimethink, if you think there is “no evidence of fraud,” you don’t shit about sub-prime mortgages.

  83. Graphite,

    My point was, this reads like it was written by a committee working to get its side’s talking points out, and not like a thoughtful person trying to consider the issue in a truthful manner.

  84. Hi everyone. I just found this thread and I am in the Mortgage Field Services Industry. What I am seeing and predicted 2 yrs ago is now a mess that keeps on going. Anyone care to hear what I’m seeing or ask me any questions?

  85. By the way I’m located in NJ and this state is a mess.

  86. Thus, I don’t think 12 years of consumer economics would keep foolish people from biting off more than they can chew and then blaming the lender for “deceitful lending practices” or even “fraud” — apparently fraud of the variety that can’t be prosecuted.

    I agree with this one. But there is alot more. What I am seeing is that infact the banks contracts and terms were ignored in the sub-prime loans. Then there are the Realtors selling these McMansions and other homes to buyers telling them that they are approved for an amount which down the road would become impossible. Then lastly the are the new buyers, mostly young first home buyers who didn’t take the time to think things through. They just saw a house they never dreamed they could have and were told they could and viola, now we have a mess. It’s a very sad state of affairs. Now my company is dealing with this situation daily and in most cases when I try to help these people out, there is nothing to be done to save them their homes.

  87. joey,

    That was a joke? Jesus, your sense of humor must be on life-support.

    Oh, and regarding this,

    crimethink, if you think there is “no evidence of fraud,” you don’t shit about sub-prime mortgages.

    Is this another of your “jokes”? Crimethink didn’t say that there was no fraud. He said there are already laws against fraud, and if there is evidence of fraud then prosecute under the existing laws. If there is no evidence of fraud then you are just being misleading.

    Serioiusly though, are you really this stupid?

  88. I’m back on here. Does anyone care to hear the scope of this that I deal with daily?

  89. Come on people. I have 22 yrs experience in the delinquency, foreclosure end of the banking industry, was an inspector and now run a crew who are out there daily, as well as owning a nationally known company. I know more than you may think. Fraud against the lenders is a tough one and frankly I believe that the federal banking commission is protecting these banks who made these loans.

  90. Actually, 3 weeks ago I dealt with a problem which never crossed my desk. One bank closed up shop in NJ and the new one taking over was refusing to take responsiblity for releasing funds due to a new homeowner. I solved that situation in 2 hrs flat. The story was unreal and it took the realtor involved in the sale in last deseperation to call me.

  91. Ok not interested in any input I have. Sorry.

  92. If anyone would like me to jump into this, please email me and let me know. I’d also be interested in joining in a discussion about the fix for this whole situation.

  93. In addition to the last post: if there is one.

  94. Anytime you hear one of these dispicable leftists railing against predatory lending you know that he/she is either too much of a moron to understand risk premiums and credit risk management or that they hold their constituents in utter contempt and are lying to them to earn their favor.

    There is a certain radio host who swears that ignorance is the most expensive commodity we pay for. I suppose there is at least some truth there.

  95. I’m on here again and waiting for any quesitons. I’d also like to add that the banks all have everything in writing on the mortgage contracts. This protects them to a degree. The problem comes in when the mortgagor doesn’t read or understand the terms of the mortgage. Most times it is the responsiblity of the mortgage producer, to explain these terms to the mortgagor. At this point the mortgagee is held harmless in a fraud case. At least this is the way in which I’m seeing it.

  96. This article ignores the basic problem–that is the headstrong rush to deregulation by the foxes who were supposed to be in charge of the hen house. Many of those supposed guardians of our economic system apparently subscribed to “The Titanic Mentality;” i.e., Get yours before the ship goes down.

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