Monday, 18 October 2010
Fitting Punishment For the Housing Debacle
(Today's post has nothing to do with elders or aging except insofar as the housing crisis affects people of all ages. Over the weekend, I got hung up thinking about this stuff, so you're stuck with it.)
In the face of revelations about robo-signing, foreclosure moratoriums and possible mortgage document fraud, all you need to know about how corrupt, dishonest and, especially, smug high-paid Wall Streeters are is contained in a story last week in The New York Observer. Listen to this from an anonymous “veteran member of a bank restructuring and advisory team”:
"'You had people putting zero down to get massive houses they couldn't afford to be in, but now they want to stay. And the government wants to let them stay, because they're voters...
"'A consumer borrows money to buy a house, doesn't make the mortgage payments and then loses the house in foreclosure - only to learn that the wrong guy at the bank signed the foreclosure paperwork. Can you imagine?
"'The problem is they don't deserve to be in that place. They probably deserve to be there less than they used to,' the source continued, referring to incomes [being] lower now than they'd been when the loans were made in the first place.“
Of course, none of that is new – bankers have been blaming borrowers for the housing crisis since it began, as though it is not they who approved the loans. All they had to do was say no to prospective borrowers who were overreaching.
What mystifies me is that no financial writers in the media nor economists nor legislators in all their Congressional hearings have confronted the bankers with the obvious, which is this:
No one is – or should not be – given a loan just because they want one. However, anyone is free to apply for a loan be it to buy a car, a house or anything else. Then, by definition, it is the bank's job to check employment records, credit ratings, assets and other financial obligations of the prospective borrower to determine his or her ability to pay back the loan so that it – the bank – doesn't lose its money.
The banks owe that due diligence to their stockholders and, with the invention of CBOs, credit default swaps and other derivatives, to the investors to whom they intend to sell their loans in bulk.
Included in that due diligence is the bank's obligation (again, to stockholders and investors) to refuse loans to people who cannot afford to repay them.
None of this is rocket science; it is arithmetic. It is so simple to determine a loan applicant's ability to pay that at my first, full-time job, at a large mortgage loan company, it was up to me – age 17 with a high school diploma - to accept or reject applications when the loan officers delivered all the papers and reports to my desk.
It was the quintessential “paper pusher” job. I had a checklist of all the required documents – slightly different for FHA, VA and conventional loans - and was given a formula for determining eligibility which I did in those days – the late 1950s – with a hand-operated adding machine. When an occasional borderline case turned up (there was an established window within which a loan might go either way), my supervisor took over that loan application.
I'm pretty sure mine was the lowest paid job in the office; that's how easy it is. And boring. I kept my sanity, for the year I stayed with that company, by inventing stories for myself about the loan applicants. It's amazing what you can glean about how people live from the information in those papers.
In all the economic pain and horror that has ensued since 2008, let's not forget that all but one or two economists along with just about every bank CEO and other so-called financial expert said no one could have foreseen the housing market collapse.
Oh yeah? Little old me with my high school education knew, when the market value of my apartment fell during the 1990/91 recession to below what I had paid for it in 1983, that the housing market goes up and the housing market goes down – over and over again.
That's why I was worried when I listed my New York City apartment for sale in 2005. People who are supposed to know such things were saying real estate prices would increase indefinitely, but in doing my own due diligence to determine an asking price, it was obvious that prices on comparables in my neighborhood had declined by about five or six percent during the preceding year.
So my conclusion about our current housing/mortgage/foreclosure debacle is that all those Wall Streeters with their MBAs from the finest colleges in the land are either monumentally unqualified for their jobs or they knew exactly what they were doing and didn't mind sinking the economy to rake in their millions before the roof caved in.
Even though financial types anthropomorphize "the market" all the time as if it has a human-like will of its own, our housing predicament did not just happen by some mysterious force. Someone, a real, live person in a position of authority at each bank, had to decide to hand out bad loans. No borrowers broke into the banks to steal mortgages at gunpoint and our financial records are secret from no one.
It cannot be argued otherwise: it is the bankers who created no-down-payment loans and willingly gave them to those “people putting zero down to get massive houses they couldn't afford to be in.” It is the bankers who gave million-dollar loans to people earning $50,000 a year with shaky or no credit records.
And, it is the bankers again - through that negligence and their subsequent refusal to renegotiate underwater mortgages - who must shoulder the blame for other kinds of borrowers now in foreclosure, the ones who bought homes within their means and then got caught in long-term unemployment and couldn't keep up payments due only to the wrecked economy.
Also, let's not hear any more about how difficult all those mortgage CDOs, derivatives and swaps are to understand; at this point in the unraveling, it is not necessary.
What is necessary is to find the mortgage notes and their assignments to other financial institutions to decipher who owns what and owes what to whom.
Undoubtedly, in all the bundling and moving around from bank to bank, notes and assignments got lost, trashed or were never executed properly to begin with, and that's the only complicated part now - finding them – because if they are not found, no foreclosed property in the U.S. can sell because there will be no clear title.
(According to The New York Times, 4.2 million home loans are now in or near foreclosure, a number that is in addition to 6.2 million homes lost to foreclosure already.)
The cause is simple to anyone who isn't as blind and self-serving as a rich Wall Street banker. The banks started the ball rolling downhill catastrophically when they abdicated their fiduciary responsibility to lend money only to borrowers who can afford to pay it back.
(By the way, just in passing, all you banking regulators: an easy way to prevent anything like this debacle in the future is to require banks to hold on to the residential mortgages they write. No selling to other banks. No bundling into arcane financial instruments. Christmas is coming up and I'm not being sentimental to say that a good way for you and Wall Streeters to remind yourselves of this is to watch the annual television screening of It's a Wonderful Life.)
It is stupendously dumb to lend money to unqualified borrowers and someone needs to be held accountable for bringing down the economy. Since it has become apparent that no one in authority will or can do that, I have a suggestion: a fitting punishment - well, the only fitting one I have that is mentionable in public - would be to require the bankers involved, from the CEOs to the entire executive suite, to help sort out the mess by personally mucking about in the zillions of pieces of paper to find the mortgage notes.
And because the basics of mortgage lending are so simple even a caveman – oops, I mean a 17-year-old - can do it, fitting payment for this work would be whatever salary is today's equivalent of what I was paid in 1958: $55 a week with no year-end bonus.
Granting mortgages to qualified borrowers is not worth any more than that.
At The Elder Storytelling Place today, Marcia Mayo: It's Happened