The Blind Leading the Stupid

I see that the mortgagepocalypse continues apace. Perhaps it’s easy for me to point fingers, burdened with only a sensible mortgage and in a housing market that isn’t in free fall, but I feel little sympathy for either the home owners who are losing their houses or the bankers who are losing their jobs. (Though I admit I do feel more sympathy for the former than the latter.) They have combined to create a fairly major economic disaster that is going to put a drag on the whole US economy and which will probably take five years to recover from.

The whole mess was easily preventable; people just had to not act like dumbasses. But history tells us that that is too much to expect. For anyone not familiar with how we got into this mess, it breaks down like this.

The mortgage companies figured out a way to make a pile of money selling loans to people who couldn’t actually afford to buy a house. They pushed these interest-only adjustable-rate mortgages to overly optimistic people who wanted a house but who didn’t have any, you know, money. Then, and this is key, the lender sold most of those loans to other financial institutions. The people making the loan, in other words, were not the people trying to collect on it. They had no incentive to make sure that the borrower would actually be able to make the payments. They just took their cut and dumped it on someone else. Like most businessmen, they were short-sighted, focusing only on the quarterly bottom line.

The home buyers thought they finally had a chance to buy their own house. With home values rising, they could make relatively small interest-only payments on their mortgage–never reducing the amount they owed–and still build equity. If they wanted, they could sell the house at a profit.

Here’s an example. A few years ago we sold our old house. Nearly all of the offers we got for it were identical. The prospective buyer wanted to pay about $5000 over our asking prices, but wanted us to pay the closing costs. This was just a way of rolling the closing costs into the loan (further increasing their payments). They were trying to buy a house without money. That was when I realized just how badly the mortgage industry had stepped in it.

These are people who were not able to save up enough money to buy a house through more traditional loan programs. Either their income was too small, or their financial management too poor. Neither of those things changed for the better after they became home owners. Now an unfortunate number of them realized too late just how expensive it can be to own a house, and that they couldn’t make their payments (particularly as property taxes and interest rates climbed and their payments went up accordingly) and the number of homes being foreclosed on began to climb dramatically.

The glut of houses on the market began to drive prices down, putting even more pressure on the marginal home owners–not to mention builders, and the finance companies. (Here’s a secret for you: Your mortgage company doesn’t want your house. They want your money.) More foreclosures. Lather, rinse, repeat.

The later Robert Heinlein once said, talking about writers, “We’re professional gamblers. Make sure your house is paid for and your car is paid for. Don’t go into debt.” Today that isn’t just true of writers, or even the other self-employed. Just about everyone is a professional gambler these days. You never know when your company may hit some hard times and start laying people off, or merge with another company, or relocate, or offshore your job, or just decide to dump a bunch of people off the payroll to make the quarterly bottom line look better so the executives can get bigger bonuses. Your income may drop to nothing at any time.

People have been gambling with their houses. They bet that home values would keep going up forever, and interest rates would stay low. They lost, and continue to lose. The bankers bet right alongside them and the rest of the country is going to have to pay the price, one way or another, because these two bunches of overly-optimistic dumbasses never thought about the implications of what they were doing.

Buying something you can’t afford is bad enough. Buying something you can’t even start to pay for is just pure folly.

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