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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.

Adding machine 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


Posted by Ronni Bennett at 05:31 AM | Permalink | Email this post

Comments

Lenders who write junk loans also bungle foreclosures. What a surprise. It's striking, however, that the "veteran member" blithely dismisses borrowers' rights to due process. I can't help but wonder if he would be so expansive in embracing the sacrifice of his own rights in a court action against him when "the problem is that [he] didn't deserve" to make all that money from bad loans.

Clear and emphatic. Everyone who is connected to the banking and mortgage industries should be required to read and reproduce this in his or her own words and defend any reason to stray from the basics.

Well done! Your recommendation that banks have to retain ownership of the mortgages they lend is excellent.

I prefer to think you were an exceptionally bright 17-year-old. :)

One of your best posts! And I agree that everyone on Wall Street & in congress should read this! You sure put some "fire" into my Monday morning! Thanks. Dee

You said it all. Very well done. Commonsense doesn't seem to be high on the list for government today but too bad more don't read and apply this.

I don't know about recommending "It's a Wonderful Life" to the bankers. Remember: Mr. Potter got away with stealing Uncle Billy's deposit.

It's not only the mortgage bankers that got us where we are today.

Builders who build junk homes are also to blame. My builder, Centex Homes, used the cheapest materials and fixtures they could find and made no effort to supervise or inspect the work of their sub-contractors and then, when I discovered that the central drainage pipe (under the slab) was bowed,Centex refused to accept responsibility for their misdeeds. It will now cost me more than $20,000 to repair Centex's sloppy work. Our house is now 11 years old and 90% paid for but if it were 5 years old with a big mortgage and if things got tight I would probably walk out and leave it to the bank or who ever "won" my mortgage in the last deal.
The crisis we are facing today is not about deficits and unemployment as much as it is about the loss of integrity and responsibility, the disappearance of the work ethic and the get rich quick fever that has gripped the world

I worked in the mortgage business for five years and it's ugly. The stories I heard were truly sad.

I agree with you mostly but I also think the bankers are out of control with their selling of mortgages which raises payments to levels that the owners simply can't afford. .

I'm sorry but if a body puts down $40,000 on a $140,000 house that should not (and wasn't until greed set in) be a subprime mortgage and when your house payment goes from $800 a month to $1500 a month in a year because your mortgage keeps being sold via the banks' greedy machinations, that is plain damn wrong. Most people buy as much house as they can afford -- no more no less.

I just blogged about this recently and here's the video I posted: http://www.youtube.com/watch?v=VF_vU7WZpUE&feature=player_embedded

Congresswoman Marci Kaptur of Toledo is, as always, working to help her constituents. God bless her.

Now that I've ranted, I don't think there are any easy answers as there's enough blame to go around on both sides of this mess. As long as there are greedy, sleazy bankers and buyers with delusions of grandeur, this will continue.

Guess what--$55/week in 1958 is $415.71 today, according to the Bureau of Labor Statistics.

Let's see--that's $21,617 per year. Well, it may have felt like peanuts at the time, but it's more than the average Social Security--or unemployment--recipient gets.

Now THAT is sobering.

Perfectly said.

Removing the banking regualtions (Glass Siegel) during the Clinton administration certainly made a lot of this possible.

It is not going to get better until the U.S. is on it's knees begging for mercy. We are rapidy approaching that state.

I'm curious abut the statements that mortgage payments were increased as the mortgage was resold. That never happened to us, and I'd not heard of it before.

Did that happen? Can someone involved in the morgage industry comment?

Gabby:

Mortgage payments can increase under these conditions:

1. You have an adjustable rate mortgage. At given intervals, the payment can increase in an amount depending on what index it is tied to.

2. If the bank collects money in an escrow account to pay property taxes and/or homeowners insurance, your payment can go up when property taxes or insurance premiums increase.

3. If you refinance, your monthly payment, depending on the new interest rate and new amount of the loan, can increase.

4. If a payment is late, your monthly payment will increase temporarily to cover the late charge.

5. If you have an interest-only loan, your payment will increase when the interest-only period expires and you then are paying interest and principal.

Mortgage payments cannot increase when a mortgage is sold to another bank. A sale has no effect on the original terms of the loan.

Thanks for clearing that up, Ronni

What you've outlined is what I thought. None of those situations are caused by resale of mortgages.

Of course, that does not excuse the reprehensible conduct of the financial institutions. I think your solution of a legal requirement that the issuing institution be required to retain the mortgages (or at least a reasonable percentage of them) is excellent.

How can this get transmitted to everyone who needs to read it? Great analysis of what the problem is, who's to blame, and how to fix it.

Anyone can read and understand this analysis. Well done!

Great post! I'm in total agreement. All it takes is common sense and perhaps some rudimentary guidance to figure out that someone earning $45K/year can't afford a million dollar house! I don't think the housing meltdown was due to lack of knowledge. I think it was pure and simple GREED (it just keeps coming back to that!) on the part of mortgage companies and big banks--some builders and borrowers, as well.

Is there a cure for greed? If so, I don't think it's been discovered yet, but greed can be significantly mitigated by transparency and ethical business practices. A strong middle class and an involved, informed citizenry can also hold it in check. Unfortunately, the middle class today is splintered and struggling. The citizenry is politically polarized, many beyond the point of rational thought. How else could a movement so extreme as the tea party get a foothold? In that respect I think mythster is spot-on.

This should be reprinted in the Wall Street Journal and the New York Times.

As good or better than Paul Krugman.

Bravo Ronni!

All so sadly true, and it is mystifying why no one reported what was so obvious. Mortgage lenders have attended the P.T. Barnum school of marketing, and there have been a lot of suckers.

As for the media who should have been reporting the problems they were and still are sucked in.

This weekend a regular financial advisor/contributor on a national morning show looked at the camera with a straight face and said those who have been in their home for a year or two without making payments (because their foreclosures have not been enforced), and didn't really know the current mortgage holder, should just go online to their county's property website and the owner of record would be listed. It is stunning to me, that she could not comment on all the things wrong with the entire statement and situation. She was too pleased with herself for her "ah ha!" solution.

Somewhat surprising that the banking business and the developers were doing so well, yet consumers were without jobs . . .

Perhaps you heard this same NPR interview wherein a young (20-ish) mortgage broker in SoCal was easily making $30,000 a day initiating mortgages!

Her story goes on as she moans about her own losses in the real estate market, and her new autos, etc.

All the time time knowing what she was doing - and the impending fate of all those loans.

Who would ever know . . . ?

Great post. The lizards in banking were just doing what lizards do. It was deregulation that opened the floodgates allowing every shady and underhanded deal to occur. Why would anyone think that bankers etc would restrain themselves when left on their own? Greed. Greed. Greed.

You summed it up better than anything I've read elsewhere.

One of my early jobs in the mid-fifties was in a commrcial bank's loan dept. Anybody can go in and ask for a loan, just as we can go to the auto dealer and say we want to buy a car or other items for which a loan might be needed in order to take immediate possession. Enter the loan provider whose responsibiity is to do exactly what you described.

I've heard more than one loan seeker told they couldn't qualify for a loan, or one as large as they wanted. I've witnessed the anger some felt and also been the recipient of that mis-directed anger when I later provided them other routine banking services. So...they still weren't candidates for the loan they wanted.

I certainly agree the fancy slicing and dicing of loans so no one knew who owned what was reprehensible. I cannot accept they cannot track all that back to the source.

I like your idea they need to hire some high school graduates who need jobs, get themselves an old-fashioned adding machine and let these young people figure it out. They're probably more trustworthy than too many of those creating bank policies today.

Perhaps those of us who would welcome seeing your piece receive wider distribution should make copies to distribute to our local bank managers with the request they forward them to their institutional execs -- wonder if they would? Why not share them with our congressiohal officials while we're at it!

Good Idea, Joared! I'm about to do that right now. Plus, I will put a link on Facebook, so my friends and family can spread the word.

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