January 30, 2008

SO I’M WATCHING MCCAIN TALK ABOUT THE SUBPRIME CRISIS, and how there may be some “greedy people on Wall Street who need to go to jail.”

But I heard a typically sad-toned NPR story on subprimes tonight, and despite their best efforts to evoke the Joads it was a story of people who “used their houses like ATMs,” taking out home equity loan after home equity loan when they started with a subprime mortgage, only to wind up owing far more than their houses were worth and unable to make the payments. Boo hoo. Shouldn’t there be a price for being an idiot? And — despite not being on Wall Street — a greedy idiot? Why does McCain want to bail these people out? Why does he want to put Wall Street people in jail?

UPDATE: Reader John Mattaboni emails:

Speaking as a mortgage broker, I can assure you this is the case in the vast majority of instances. I spoke with a woman today who has a credit report that looks like a train wreck, including a bankruptcy fours years ago and numerous chargeoffs and collections since. Her gross income is less than $850 a week — but she drives a car with a $700 payment.

She called me up because her adjustable rate mortgage payment is going up. When I told her that the only way she could qualify for a loan is to pay off the car with her mortgage, she threw a fit. Apparently me saving her $500 a month isn’t good enough, she wanted to tap her ATM one last time for $30,000 to spend on “home improvements” rather than paying off the car. She then asked if anyone would really check to see if the money went into home upgrades.

He says there are a lot of “subprime deadbeats” out there and they shouldn’t be bailed out.

ANOTHER UPDATE: Reader Ben Skott emails:

I have a lot of credit card debt, and the much higher interest rates are killing me. I made a stupid mistake once years and didn’t read the fine print to notice that rates on cash advances are even higher than normal CC debt, and I’m still paying for it, but you won’t see me writing my newspaper talking about the greedy credit card companies and how I should get a bailout. What’s the difference between me and some “poor” person with an ARM they signed on to and can’t pay now?

Well, one difference is that MBNA bribed a lot of politicians to make the law tougher on people like you. . . .

MORE: A shocking solution to debt.

Meanwhile, reader Jim Bordelon emails:

This quote from Senator McCain, “greedy people on Wall Street who need to go to jail.” oozes with irony and/or hypocrisy (I don’t know which fits best).

Google “Charles Keating Five” and you’ll see why. Maybe more people (an army, maybe?) should start asking questions about what happened in the eighties. If McCain is “swiftboated” on this issue he has little defense, in my opinion.

Yes, I’m familiar with the Keating Five story. It led directly to McCain-Feingold, to ensure that no one would ever be corrupted that way again! It’s also discussed in this fascinating book.

STILL MORE: Reader Terrye Hugentober emails:

I had a real estate license for some time.{hated it} I was in the business when a lot of these loans first started coming out. Everyone knew that some of those people should not be getting loans, but the mortgage companies pushed the loans anyway. Building boomed, real estate took off and then the bottom fell out of the sub prime market. People let this go on as long as there was money to be made, it is not just about lazy people not paying their loans. And the truth is there will be a lot of innocent bystanders hurt if there is not some stability brought to that market. This could spread way beyond the people who got the loans or made the loans.

I think that just blowing it off and saying we should not bail out bad loans is over simplifying the situation.

I think it should cost everyone involved. But McCain was pandering here, with lame assaults on “greedy” Wall Streeters. And, as noted above, he’s not really in a position to talk.

Meanwhile Megan McArdle notes that Europeans can’t believe how easy we are on debtors who can’t pay.

MORE STILL: Reader Steven DiSciullo emails:

I had one of these folks as a prospective client in my real estate business. He owed $225k on his house, which was worth about $175k. About half the debt was a second mortgage taken out long after he bought the house. The money was spent on vacations and other lifestyle support. He kept complaining about not being able to sell the house for what he owed on it. I finally said, “Look, you already got your money out of the house, and you didn’t even have to sell it.” A light went off in his head. He quit making payments, and stayed in the house free for another 8 months until he was evicted.

There is no reason to feel sorry for him.

Indeed. And Prof. T. Daniel Crawford writes:

I’ve been enjoying your blog for a number of years now, but tonight for some reason I feel compelled to write, even though I admit I don’t have a dog in the mortgage crisis debate.

On the subject of sub-prime mortgages, I agree entirely that the debtors are fully responsible for their own terrible circumstances. But I don’t believe the lenders aren’t victims, either. Why in the world would a bank or automobile finance company give money to the woman described by your mortgage broker correspondent?

In my opinion, the feds shouldn’t be bailing out either the lenders or the debtors in this sad scenario.

I agree.

EVEN MORE: “Everything’s a 4.” And reader Charles Rutt emails:

According to many in congress and social commentators, one of the main causes of the subprime mess was mortgage brokers doing loans for people that we knew could not repay the loan.

As a mortgage broker if I had a customer sitting in front of me who qualified for a loan (according to lender guidelines in place at the time), I was supposed to tell them that I was not going to do a loan for them because I don’t think they will make their payments? Can you imagine the uproar if lenders and brokers did that to customers? Especially if the customer happened to be a minority. It comes down to a case of brokers being damned if they do, damned if they don’t.

Yes, you don’t want to be accused of “redlining,” but on the other hand you don’t want to be accused of loaning money to people who might not pay it back. It’s the “Flounder Principle” rearing its ugly head again!

ALL RIGHT, ONE MORE: Some further thoughts here:

It wasn’t really that hard to see this subprime mortgage mess coming. A couple years back, when we were in the process of purchasing a new home and just as the housing market was beginning to come off its peak, I noticed some of these mortgage offers. I actually thought no one would be stupid enough to actually take them up on the offers. I was wrong. . . .

Yes, people can be complete idiots. And they should take responsibility for their idiocy. On the other hand, let’s be honest: many people do not really understand how these things work. And when you sit down with a mortgage broker, most times its the broker with the knowledge and power. And they can be good salesmen, particularly when a young couple (for instance) really wants that big beautiful house they saw, that’s just barely out of reach financially for them. And the broker says, hey, look, here’s what we can do….

Not all these people really understood what they were getting into. And brokers deserve their share of the ire. But right in the middle of an election, obviously the populists are out in full force. And it’s not popular to blame (even in part) the voters for their financial screw ups. There’s enough blame to go around. That most of it is being lobbed at financial institutions is more about politics than reality.

The question of a bail-out, though, has more to do with practicality than with fairness. Is it good for the economy as a whole to let these people take a bath? Probably not. Is it fair to the rest of us who weren’t stupid enough to overstretch our financial means? Probably not. It seems to me that fixing the problem sooner rather than later is best. The long-term question (whether or not a bail-out will simply encourage more financial idiocy in the future) is a good one, and one which I have no answer to.

But I’m disappointed in McCain on this. Support a bail-out if you like. But be honest about the problem.

Yeah. And don’t act like a government paycheck makes you morally superior to people in business. Where do you think the money for that paycheck comes from?