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The problem with the 'blame the people who bought the houses' argument

posted 14 years ago by disco-spider
19 replies | jump to latest

This argument is utter crap and it's plain to see why

1. If people are so ignorant and impulsive, then why wasn't this a problem before these subprime mortgages got popular, before the bubble? What makes more sense: that it just suddenly became a problem for the entire country or that there was systematic predatory lending because Wall Street turned into an oligarchy of a handful of firms with enormous wealth and power that got the laws to change for benefit?

2. If it's all about "personal responsibility", then shouldn't the cases of mortgage failures show a bias to uneducated people? If it's about the conservative values and "spending within your means" or whatever BS they delude themselves about, shouldn't there be a divide along political lines? NO! Every kind of home buyer saw their mortgage fail. The housing crisis did not discriminate along any kind of social or political lines. It affected everyone! So the personal responsibility crap is nonsense used by ideologues to advance their delusions.

3. Home buyers take out mortgages under the assumption that the banks were doing their due diligence to protect *themselves* in case of default. That had been the basic architecture of any kind of loan for centuries. But now we have the mortgage lenders passing the loans on the investment banks that slice them up and take bets on them to FAIL. How do people not see the glaring problem there?

4. The public were being assured by the ratings agencies that the mortgages were safe because the investment banks PAID for those bogus ratings. The public was told by so-called financial experts and business networks that buying a home was completely safe and a win-win situation. The gov't also pitched in and made the case for home buying.

5. If the investment banks were actually interested in reducing their risk, they would have bundled various kinds of mortgages with different risk levels and what not. But NO, they were actually only interested in slapping a AAA rating on everything AND betting against them. Again, this is glaringly obvious. They weren't interesting in reducing risk or looking out for their investors at all. They were in it for the high stakes. It was practically a casino where they were playing with everyone else's money and carried no risk of their own.

[–] elimc184 14 years ago

1. If people are so ignorant and impulsive, then why wasn't this a problem before these subprime mortgages got popular, before the bubble? What makes more sense: that it just suddenly became a problem for the entire country or that there was systematic predatory lending because Wall Street turned into an oligarchy of a handful of firms with enormous wealth and power that got the laws to change for benefit?

The necessary factors weren't in place. You had to have the government housing programs, the invention of computers, the development of Gaussian-copula formulas, repeal of Glass-Steagal, etc . . . In the past, no bank would have given HELOC loans to idiots. The crisis did not happen because Wall Street asked the government to change laws (even if the government did). Read up on your real estate history.

2. If it's all about "personal responsibility", then shouldn't the cases of mortgage failures show a bias to uneducated people?

Probably. I know at least one person who correctly predicted the housing crisis and saved money. But he is very smart. There are a number of other people who are smart and predicted the crisis. Some of them made millions or even billions.

Then you have people like this:
http://www.vcstar.com/news/2010/oct/15/court-orders-simi-family-to-vacate-foreclosed/

If I was to buy a house, I would put at least 20% down. I also have Excel spreadsheets that can calculate my payments so I know how not to get in over my head. But it turns out that many Americans care more about "So you think you can dance" than the economy.

It was practically a casino where they were playing with everyone else's money and carried no risk of their own.

And you have hit the nail on the head. Banks carried little risk, because loans were partially, or fully, insured by the government. If the loans were not partially, or fully insured, the crisis would not have happened.

Also, Wall Street is not practically a casino. It is a casino.

[–] disco-spider 14 years ago

You didn't answer the question. Show me the bias in the cases of mortgage failures along education and political lines. "One person" and "if I was" doesn't cut it.

[–] elimc184 14 years ago

You didn't answer the question. Show me the bias in the cases of mortgage failures along education and political lines. "One person" and "if I was" doesn't cut it.

I don't think I'm arguing against that point. I'm just saying a number of people that predicted the boom made out ok and they were pretty smart dudes. It was the guys at the bottom of ponzi scheme that had trouble. Some of them were pretty smart too (Lehman Bros), but they failed.

I think there is a tendency in life for dumb or unlucky or lazy people to lose money, no matter the situation. The link I gave was an example of one such family.

[–] LLOwens 14 years ago

A good example to look at when discussing which segments of the population were affected is by observing what happened in the city of Chicago. Chicago has the largest number of home buyers of any metropolitan area in the nation. In 2008, foreclosures affected middle and upper-middle class home owners across the greater Chicago region.

If you were to examine this from a statewide perspective, in the state of California foreclosures were up 51% in 2008 from a year earlier and the concentration of foreclosures were mostly located in middle class and upper-middle class white suburban neighborhoods. In Florida, foreclosures were up 68% in 2008 compared to a year ago--and again the demographic most affected were middle class/upper-middle class home owners.

And here are some statistics which gauge the condition of the housing market on a nationwide scale: The U.S. has experienced a housing recession for nearly 58 consecutive months. 28.4% of all single-family homes with a mortgage are currently under water. U.S. home prices have fallen approximately 33% from where they were at the peak of the housing market bubble and as a result home values have lost $6.3 trillion since the start of the housing meltdown. New home sales are down over 80% from the peak in mid-2005. Nearly 13% of all homes in the U.S. are currently unoccupied. And there appears to be no light at the end of the tunnel as home values have plummeted during Q1 of 2011 at the fastest rate since Q4 of 2008 and have been reflected in the all-time high rate of sales of foreclosed homes which currently stands at 23.7% of the entire housing market.

And finally we must keep in mind that these mortgage failures weren't even limited to education and political lines across the U.S. Apparently, it crossed over national border lines as well. 30 other countries experienced corresponding housing market bubbles and housing market corrections(in year-on-year 2008 and/or 2009)proving that blame cannot and should not be placed on the shoulders of lower-income home buyers who were deemed eligible to purchase homes under the provisions of the Community Reinvestment Act. Heck, the CRA doesn't apply to any of these other countries, so the problem is obviously a systemic one--or in this case--a globalized one.

[–] deeveed 14 years ago

I just got back from Toronto Canada. In discussion on home prices, I was told things were doing very well over there...prices were up and people are buying and selling. Just wondering how they'll fare in the next few years and how the Canadian real estate "soul" matches ours.

[–] LLOwens 14 years ago

And to illustrate how Canada has thus far been immune to the woes of America's housing crisis, Canada's luxury home market has picked up in most major Canadian cities. This can be greatly attributed to the wealth effect driven by rise in value of Canadian stocks, home equity gains and improved overall economic performance of this country. However, inflated home prices coupled with higher interest rates will eventually lead to a market correction. So I believe it's not so much a matter of if it will happen--but when it will happen and how much of an impact it will have on Canada's housing market. Some Canadian economists have predicted that a 25 percent housing market correction may be just a few interest hikes away. So further tightening measures could quite possibly lead to the bursting of the Canadian Housing Bubble.

[–] deeveed 14 years ago

Let's keep an eye on 'em and see what's what in a few years....;-)....

[–] paloma54 14 years ago

The 28.4% of single-family homes with underwater mortgages do not mean those are "failed" mortgages, just that their homes have dropped in value enough to mean that the owners owe more than the home is worth. That means plenty of people are in homes which they can actually afford to live in, as long as they maintain their employment, but that they cannot afford to sell them. This has retarded the entire real estate industry. There are buyers who can't find anything to buy.

And although the house values falling could potentially also be a helpful thing for those who can then enter the housing market themselves, our government, via the FDIC, makes it attractive for banks to refuse the short-sale option, offer a home for auction as a foreclosure with an artificially high starting price, then claim it as a loss, and then receive reimbursement from the U.S. taxpayer. After this process is cleared, they can then sell the home on the open market and get even more money. Here's another example of government incentivizing the wrong behavior. The banks are being permitted to create artificial housing scarcity by sitting on houses instead of selling them. It is prolonging the process of disposing of bad debt and getting us into an actual recovery. There should be people who could benefit from lower home prices, but they are not being permitted to do so. This also has the effect of placing upward pressure on rents, which jeopardizes those who cannot afford to buy homes of any sort at all. Another undesirable side effect.

Having been in the mortgage and real estate business, I have watched all of this unravel in great frustration. The mortgages which first failed were those which were entirely understandable: 2nd homes or investment property, mortgages with almost no equity, and those made to non-credit-worthy buyers. Most of them were in 4 states with overheated real estate markets: Nevada, Florida, California, and Michigan. What greatly enlarged the pain was the fact that so many people lost their jobs. The best, most sensible mortgage on the planet will fail if Americans suddenly have no income. Any attempt to address the housing issues which do not look mainly at jobs and income will be fruitless. Monthly income is the solid pillar on which all housing is based. Without jobs, no one will keep a home.

Economic policy for the past 40 years has set up the scenario where American labor costs too much, and in a global economy, the higher cost of labor combined with the employer-provided health insurance leviathan basically eliminates the need for American workers. Instead of facing these realities, our politicians have chosen to line their own pockets by promising ever-increasing government assistance to an ignorant public eager to believe that someone else will be paying for them. To ask the U.S. taxpayer to bail out GM, AIG, financial institutions, and the like was an outrage. Can you imagine what this sounds like to Americans who cannot afford to buy a condo or a house at all?

[–] Citizenright1 14 years ago

Who is doing that?

[–] LLOwens 14 years ago

Every kind of home buyer saw their mortgage fail. The housing market did not discriminate along any kind of social or political lines. It affected everyone!

On Tuesday the Wall Street Journal reported that home values have continued an eight month decline back to their lowest levels since the start of the recession. This is a primary cause for our double-dip recession.

.... Wall Street turned into an oligarchy of a handful of firms with enormous wealth and power that got the laws to change for benefit?

One example that sticks out like a sore thumb is Goldman Sachs. Goldman isn't even a bank and should not have been eligible for receiving massive taxpayer funded bailout money back in 2008. However, Timothy Geithner who was the president of the New York Fed at the time made an exception for Goldman. According to a recent Freedom Of Information Act release, Goldman was given a $30 billion .01 percent interest loan in addition to approximately $43.5 billion in other federal loans. Geithner, as many of us know, is currently the U.S. treasury secretary.

[–] sd45-1 14 years ago

If you remember the securitization graphics, the people who took the first hit when the home buyers defaulted were investors who bought the securities backed by the mortgages, and not the banks. The banks only took a hit in the second, more costlier wave when the securities buyers who were holding the Credit Default Swap "insurance" policies came to collect on the insurance, and there were no proceeds there to pay (it had gone out as bonuses, instead). The unregulated insurance aspect, and not the mortgage aspect, is what drove the bulk of the cost of this crisis. The right of investors to get reimbursed by unregulated insurance proceeds were the "toxic assets" that the bulk of the taxpayer's TARP dollars purchased up, to remove those liabilities from the banking system.

And does anyone actually think that Wall Street, when selling this ponzi insurance, limited their business scope for this "product" only to mortgages? Or do we really know that they sold this crap into other areas of the economy? Buying up the ponzi insurance liabilities were what consumed the bulk of GM bailout dollars, too. There were only $60 trillion worth of housing derivatives on the books, compared to $430 trillion of interest rate derivatives out there. We have only seen less than 10% of the bomb explode.

This movie is great at examining CDS involvement in mortgages, but does not even broach the subject of these financial WMD's as they exist, unexploded, in other areas of the economy. And when they ultimately go off some day, only the igits will try to pin that on housing buyers, too.

[–] LLOwens 14 years ago

And does anyone actually think that Wall Street, when selling this ponzi insurance, limited their business scope for this "product" only to mortgages? Or do we really know that they sold this crap into other areas of the economy? Buying up the ponzi insurance liabilities were what consumed the bulk of GM bailout dollars, too. There were only $60 trillion worth of housing derivatives on the books, compared to $430 trillion of interest rate derivatives out there. We have only seen less than 10% of the bomb explode.

I posted this link a few months back, but thought I should post it again for those who have just joined in on the conversation: http://theeconomiccollapseblog.com/archives/the-horrific-derivatives-b ubble-that-could-one-day-destroy-the-entire-world-financial-system According to this article, the total value of derivatives worldwide is estimated to be at least $600 trillion and as great as $1.5 quadrillion--which dwarfs the $30 trillion(2010) in total market cap of all major global markets. So in the grand scheme of things--the housing market meltdown of 2008 could very well be just the tip of the iceberg. So this should serve as a precedent to strictly regulate the derivatives market. For example, there should be more transparency in the $300 trillion over-the-counter derivatives market, and of course, regulation of derivatives dealers. There should also be strict regulation of commodities speculation outside of regulated clearinghouses and exchanges.

So when proponents of neoliberalism preach that deregulation of the financial sector is in the best interest of Main Street, the expression, "Fool me once, shame on you, fool me twice, shame on me," comes to mind. The derivatives market in the U.S. and abroad, remains mostly unregulated. The potential financial devastation is so great that all the money in the world--literally speaking--won't be able to bail us out. Yet despite this potential threat, lobbyist continue to fight regulatory reform viscerally--out of ignorance--because of greed--or as a means to an end--the end being hefty executive pay and bonuses. For example, in the early '70s, the average CEO salary was 26 times the median income. Today, it is over 300 times the median income.

[–] paloma54 14 years ago

The level of CEO income is not nearly as egregious as the fact that it is not coupled to performance. I don't have a problem with high compensation, if it is a reward for actual performance. Inside Job makes it obvious that there should be some sort of mechanism for linking rewards to results, and results that benefit the company as a whole. This are is where something is totally off.

Also, I think it would be much more helpful if people calling for regulation or deregulation would start being more specific. I'm a conservative, and so, in general, I'm against a lot of regulation, but none of the conservative people I know are for a completely anarchic society--there's a continuum of regulation called for. It might be more productive for us to make concrete suggestions. That was one of my objections to the movie, especially in the initial segment on Iceland. They simply told us Iceland was a great place, then it deregulated, then all hell broke loose, then the nation went broke. Thanks, but no thanks. What specifically was deregulated, and what did that have to do with foreign companies coming into Iceland such as Alcoa, and why did jobs suddenly disappear. This scenario was unconvincing, and seemed manipulative.

Most of our institutions have regulations and regulators. However, as we saw, they failed to operate. I've seen this over and over in different areas of U.S. life. Those who are brought in to government to ensure appropriate regulation are usually those who come from the industries which they then are overseeing. They will go back into those industries later in their careers. Knowing this fact, do you think that the regulators are actually motivated to be fair and even-handed in enforcing regulations? Hell no! They're going to go after the small businesses which cannot afford the costs of regulating, or the costs of pay-offs, while the large businesses will simply pay off regulators, smiling in the knowledge that it will stifle those small competitors.

[–] Citizenright1 14 years ago

Your post is utter crap.

1. Before the subprime mortgage lending began, the borrowers had good credit and put a down payment. Hence, no subprime.

2. It's about personal responsibility when a borrower takes a loan he cannot repay, or keeps refinancing to take equity money out.

3. your statement makes no sense, that borrows think banks do due diligence.

4. The public was unaware of the ratings agencies because it didn't concern them. The Agencies were rating the CDOs not individual mortgages.

5. Only partially correct. Only a small number of investors were betting against them that the bubble would burst. If the big investment houses were betting against them the would not have collapse, you dunce.

[–] metaphysicalclub 14 years ago

Personal responsibility, a $10 calculator and a First Time Homeowner class (many times offered in several languages) would have prevented a lot of this.

~ metaphysical

[–] Citizenright1 14 years ago

True. But, if you want a house and somebody wants to loan you the money to get it, why not? If you are not credit worthy, why would they lend to you.

Many people where thinking the old way. And, most subprime mortgages didn't default.

However, at the end, when people got loans that they couldn't even make the first payment on, yes that is the height of personal irresponsibility. Now they want to claim they were preyed upon.

[–] Citizenright1 14 years ago

Still waiting to hear who is putting the blame on homeowners.

Don't all speak at once.

<<crickets>>

[–] There_Is_No_Sayid 14 years ago

I agree. I mean ideally people should have been aware that they were biting off more than they could chew but a lot of them were relying on the advise of so called experts who assured them that these loans would be no problem.

There's another problem here that I think the movie doesn't touch on. For sixty years or so we've been promoting the idea of home ownership as the be all and end all of American life. This has gotten to the point that outside of a few enclaves such as New York you're considered somewhat of a failure if you don't own a house. But the fact is that homeownership isn't for everyone. We should never have embarked down this cultural path where everyone is supposed to own a home. Why can't we have a more varied housing landscape where some people own houses, some rent house, some own condos or apartments and some rent apartments?

"Unless Alpert's covered in bacon grease, I don't think Hugo can track anything."

[–] deeveed 13 years ago

We should never have embarked down this cultural path where everyone is supposed to own a home.

Well I think here in the US of A it's kind of a family goal to get that "house". I mean it is better in some ways than an apartment or tenement (I don't know, do they use this word anymore?) or shack. It's too bad we messed it all up by tying the home up well you guessed it with money moolah dinero. Now a "house is not a home" it's a "bank" (bankrupt mostly now). Unfortunately, a mistake in hindsight but I guess it couldn't have been helped since the appreciation sucked everybody into a false kind of affluence. Now it's not affluence but flatulence coming out of that "house" for homeowners.