Sub-prime mortgages still plague the housing market. Real estate watch-dog Housing Wire, citing statistics compiled by Realty Trak, recently reported that "Lenders filed a record 3.8 million foreclosures in 2010, up 2% from 2009 and an increase of 23% from 2008." But 2011, they said, "could be even worse."
As the government ponders penalties, the banks and lenders continue to seek a scapegoat. In a twist of logic comparable to the man who kills his parents and then pleads for mercy as an orphan, the big banks, whose greed and reckless lending brought us the crash of 2008-2009, are now attempting to wiggle out of responsibility by casting themselves as the victims, not the home buyers who were duped.
On March 3, 2011 the New York Times reported that attorneys for the banks claim that helping homeowners facing default is "like taking money that should be paid to the Treasury and using it for an unappropriated social program." And the Bank of America, the nation's largest mortgage servicer, "is already readying what will be among the industry's main arguments: that it is unfair to reward homeowners who are delinquent or underwater but cannot point to specific errors in their case" These statements echo the rant of financial commentator Rick Santelli who blamed the victims. Back in 2009 on CNBC' he charged that bailing out sub-prime mortgage holders was "...promoting bad behavior." He added, "reward those who can carry the water not those who drink the water." Other critics of homebuyers have likened a bailout to raising taxes on the whole population to cover the losses of gamblers in Las Vegas.
Shouldn't home buyers have known, say the accusers, that they couldn't afford a $400,000 home on a family income of $50,000 -- $60,000? Some did know. A predatory bank tried to convince Alex and his wife that they could afford a $330,000 home on their graduate student stipends. They resisted and purchased a starter home for $120,000. But the vast majority of sub-prime buyers were persuaded to make purchases well beyond their means by unscrupulous lenders who would stop at nothing to close a deal. These buyers were putty in the hands of the "tin men" (and women). "Tin men" is a nickname, for fast-talking unethical salesmen known for their skill at selling ice cubes to Eskimos. At one time they confined their activities mostly to selling home items door to door or through seductive cold-call sales pitches, but now they can be found in many industries -- including real estate sales and mortgage lending. The original tin men sold aluminum siding -- thus the moniker -- and they are brilliantly portrayed in the 1987 film Tin Men starring Danny DeVito and Richard Dreyfuss
"Tin men," as we shall soon see, played a major role in the sub-prime mortgage debacle. First, the back story.
I initially met real-life tin men when I worked as an encyclopedia salesman during my college years. Tin men from different industries drifted in and out of the office where I worked. Their pitches and "cons" were hilarious. A number of the classic examples are in the film. Here's a simple one that I love: A salesman is selling aluminum siding to a couple. He surreptitiously drops a ten dollar bill on the floor out of the couple's sight. Then he says, "Excuse me a second," reaches down to the floor, and comes up with the bill. "Oh, this must be yours," he says to the couple, handing it to them. Since they know he could just as well have slipped it into his pocket, the salesman's act of "honesty" inspires the customers' confidence -- a message of trust that gives a big boost to closing the deal
The tin men loved to exchange stories of their stings. Like vaudevillians, they had names for their routines. In "Inside-Outside Man" a salesman shows up for an appointment; he could be selling siding, a raised dormer, or any home product. He arrives at the family's house in a stretch limo. When the husband and wife open the door they look surprised to see the limo. The salesman explains: "The Vice President of the company is in town for a sales conference and wanted to sit in on my presentation. Would you mind?" Of course, they don't mind at all; they're flattered. The "Vice President" emerges from the limo. He is dressed to perfection and casts an imposing presence -- a central casting senior executive. At one point in the "pitch" the salesman shows the family a much more expensive product than they had originally looked at, and says "This is very expensive and the other product is almost as good." The "Vice President" jumps in and says: "Give it to them for the same price." The salesman shoots back, "But we'll lose money on the deal." The Vice President responds, "That's all right. 'Faker' Industries will pay for it as part of our promotion. Give it to them" The salesman looks stunned. Are you surprised that this quickly becomes a done deal?
Frank, the manager of the encyclopedia office, told me the premier tin man story "My People." Frank once worked for a carpet company that advertised "two rooms of carpeting for $79." There was no such product. The "bait and switch men," who got easy entry into homes with the advertised offer, were supposed to switch-sell to higher priced carpeting. But one time, the company got stuck with lots of the ad-priced orders. So they sent in the next tier of tin men -- the "conversion salesmen" -- to convert the $79 contracts to higher ones. The best conversion man in the business was known as "Harry the Snake." He closed a more expensive contract every time. Frank couldn't figure out how he did it. He asked the Snake if he could go out with him on one of his pitches. The Snake agreed. "Meet me on Church Avenue and Ocean Parkway tomorrow morning at 9 AM. Wear overalls and bring some tools and a tape measure. When we get into the home just start measuring the floors. Oh, and by the way, I'm Tony and you're Vito." (The family they were visiting was Italian. On other days they might be Morris and Abe or Juan and Jose.)
Frank and the Snake had no trouble getting into the home in Bensonhurst Brooklyn the next morning. The lady of the house was thrilled that the carpet installers were actually there so soon after the incredible sale. Once inside, "Tony" and "Vito" started measuring. Then at one point "Tony" (Harry the Snake) headed for the door and said, "C'mon, Vito, let's get outta here. I can't do this to a nice Italian family." The puzzled woman asked, "What's the matter?" Tony answered, "When they sold you this carpeting, they showed you the junk; they didn't show you the good stuff." He then pulled out a swatch of carpeting from his pocket. "This is the junk they sold you." He pulled on it and it disintegrated. Then he showed her a swatch of the "good stuff." Again, no surprise that the higher priced deal was soon closed.
Let's fast forward to the sub-prime mortgage orgy. "Harry the Snake" must have felt that he died and woke up in tin man's heaven. Now he's a mortgage broker at a respected bank -- one of the icons of corporate America. And he's the inside man -- suit, tie, and title: VP, Director of Finance.
Let's listen in as the Snake talks to Mr. and Mrs. Jones. The Joneses neighbors, the Smiths, whose income is the same as theirs, about $52,000 a year, just bought a house financed by Harry the Snake's bank. They were surprised; The Joneses didn't think their neighbors could afford a house, but there were the Smiths packing and getting ready to move.
Can Mr. and Mrs. Jones afford to do the same thing? The Snake assures them they can. "Yes, indeed, you can afford to buy this $380, 000 house." (The finance industry's rule of thumb is that the price you can afford is about 2.5-3 times gross income). He tells them that home values will surely keep going up and that the word "down" will soon be gone from our vocabulary. And he assures them that his distinguished bank will put its money where its exuberance is and finance the deal. The Snake shows them that the figures work -- with virtually no down payment and just interest only payments for the first three years: "And in three years when payments on the principle kick in and the adjustable rate mortgage (ARM) will be recalibrated to interest rates at that time [and as much as two percentage points higher for buyers like the Joneses with credit scores below 620], that won't be a problem. The value of the house will rise so much, and probably your income as well, that you will be able to raise money from the increased equity to cover all the costs." How could they resist this opportunity to latch on to the American dream, especially when it is backed by the full faith and credit of one of America's great banks -- and Harry the Snake?
When you are tempted to point the "j'accuse" finger at "irresponsible" sub-prime homebuyers think about all the Joneses across America and how they were shamelessly victimized by the army of Harry the Snakes -- and their banks and lenders who cheered them on.
NOTE: This is a revision and update of a blog that I wrote in 2009 at UPI's R&S section.
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And he's right.
Record High Foreclosures=CHECK
Record Low Sales=CHECK
Record Price Declines=CHECK
Folks,
DO NOT buy any housing right now.
There is no stabilization in housing until we get back to early 1990's prices, possibly even early 1980's.
Let housing prices and rents collapse and don't get in the way.
I had been doing some number crunching, and had figured out pretty much what it is that we could afford to pay for in mortgage/taxes/insurance each month and had back-calculated (via an internet amortization resource) what that would cover. Short answer - in our market for a fixed-rate 30 year loan it was ~$300K as a top what we could afford.
Loan pre-aproval came back - with all the same numbers and after honest disclosure of those numbers to the bank's underwriters,... We were pre-approved for up to $450K.
And this was after the slow-motion housing crash was well underway and should have been obvious to anybody doing their due dilligence on us.
Greed & stupidity are a potent mix.
At least in my case I had done enough background work to know that they were nuts to offer us up to a $450K mortgage. We ended up with a wonderful place,a refurbished & updated 110-year old 'brownstone' that we can afford, on a fixed rate mortgage, for ~$270K. Real estate values have taken a further beating here since then, but I wasn't planning on selling anyway for some time to come.
Does stink to be underwater - but can work with it, and didn't plan on needing equity right off anyway.
Now they are trying again.
There was in place what should have been the last line of defense for such borrowers--the escrow officer or attorney who did their loan closing. (These are also the people who are responsible for filing all the paperwork correctly.)
Unfortunately, except in a meager handfull of states, these closers work for the lender, not the borrower. South Carolina is one of the few states which require an attorney who represents the borrower to close all loans. As a result, we have not seen the kind of egregious behavior many other states experienced.
This is not to say we did not have a few notorious "closing mills", but they were the well-known exception not the rule.
I am still waiting for the rest of the states to get behind the idea that the borrower, not the lender, should be the closer's client.
They may NOT give either party advice regarding the terms of the contract.
They may NOT express opinions regarding the sale price that the Buyer & Seller have agreed upon.
They may NOT advise a Buyer as to what kind of a loan they should be getting.
They are certainly NOT in the capacity to be a "last line of defense" for either Buyer or Seller.
Don't try to blame anyone else but the Banks themselves for the scam, please.
Yet we see that today in other fields!
Take education. The graduation rates from school is only 50% and the same is for colleges. So what are the teachers and other educators doing? Defending the system. Yet like in home-ownership, it is high costs for the consumer while those working the system are living the upper-middle income and rich life.
What is the difference between the banker and the college president? The former gets a one or two extra zero(s) in the pay check for the added burden of achieving profit and satisfying share-holders. But it is just a matter of time before the house of cards cannot sustain itself. We are seeing that in public education.
The packaging of mortgages into CDOs and CDO^2 created demand, but only about 5 firms were really in that market. So why blame "banks", most of the 11,000 banks that existed at the begining of this crisis had nothing to do with it at all. It may be a good sound bite, but it sure is hollow when you think about it.
I don't know why everybody is missing this point - only the banks could have made the bad loans. Only them. They were making a fortune booking crap loans that they did not underwrite into CDO's tha they then had rated AAA so they could unload them to everyone around the world and the GSE's. It is against the law for the banks to make bad loans. Why? Because it puts our financial stability at risk. But hey, taxpayers will cover the losses and the banks get to double down on loans they've already been paid for through securitization, by foreclosing - on homes they no longer own. Double profits, continued bailouts and our money from the Fed at 0%. They all belong in jail.
That is your defense of an individual who has a fiduciary responsibility to provide advice to a client? Wow, I guess you would have no problem with your lawyer or accountant providing you crappy advice and you getting screwed by it. Same level of responsibility.
You were an appraiser who did not sell out their morals and give high valuations to the mortgage and real estate brokers who asked for them? Great. You are a seriously principled person. As for a cartel, that is a good description of an industry with only one price, 6% of the total value of sale. Real estate brokers are a big part of the equation and to give them a pass is unjust.
"... only the banks could have made the bad loans. Only them." How do you figure? Most of the securitized loans were originated by mortgage brokers firms, sold directly to warehouses (funded by short term borrowings from the big investment banks, again, only a few were in this business) and then sold to the trusts that did the securitizations. Banks did not hold this stuff on balance sheets because they were not profitable at the rates of the loans. All the community banks and credit unions are being lumped in with the 5 big banks that are left over, it is unfair.
The behavior Santelli called "bad behavior" it would be more appropriate to call "bad judgment", or "credulity". It is product of naiveté. It is naiveté that differentiates it from financial irresponsibility.
Without the advertising and promotion snow-storms outfits like Countrywide unleashed to promote "buying up", refinancing, "using-your-equity-investment" and so on the consumer credulity that carried so many in over their heads in the housing bubble could be called over-credulity. But the hard-selling that went on, and its effectiveness, need to be recognized.
Also needing recognition is the effect living on continuous credit had, in fact, has, on consumers' fiscal thinking: A consumer population trained to refinancing, to rolling debt from one purchase to a next, e.g., trading the family car, not yet paid for, for another, adjusting and continuing the payments, learns to measure its finances to payment-flow, without regard for their purchases total costs.
Adjustable rate mortgages were sold by promising "roll-over": Sure the loan would balloon, but just before, you come in and refi, get another ARM, pay the balloon and carry on, again and again...
The naive believed.
The real bad behavior was that of the mortgage industry "experts", who suckered the naive. Who knew, or, being "expert", had reason to know.
Who among us doesn't believe that tomorrow will be better than today?
Who among us doesn't believe that, by dint of hard work and even - yes! - sacrifice we have the opportunity to do better than our parents, and do better for our children than was done for us?
Optimism is part of the fabric of our culture. Hard work, sacrifice, and a belief that those two things will combine to create success is hardwired into our very genes.
No one should apologize for trusting their banker.
Right now, bankers should be doing the perp walk. Lawyers - without whom this entire fraud could not have been perpetrated - need to be disbarred and the most complicit need to go to jail.
Heck, the banks got paid for the mortgages almost as soon as they were written through securitization - which explains why they were so sloppy with the notes and assignments leading to fraudclosures.
All you have to do is follow the money to see who all these crimes benefited and it isn't the homeowner. They knew they were taking chances and they knew they were going to be bailed out by the taxpayers. And this chit still goes on with the GSE's and a continued bailout where the banks don't have to make a real market - one that worldwide investors would want to invest in.
This wasn't a fiscal crisis or an economic crisis, it was and remains a moral crisis that benefitted the perps. The banks love to talk about not helping anyone because there might be "moral hazard" but when it comes to them no one speaks those same words. The CTFC had to strike out the word "fraud" from their investigations! Why?
Such an implosion will impact even those who played by the rules and led a conservative economic life style. This is what we are seeing in the severe downward pressures on valid home prices owned by honest home owners who now cannot sell their home for what it is / should be worth.
The housing-con-scheme was a win-win-situation for everyone - home buyer, home builder or home seller, real estate agent, mortgage broker, bank, and the chain up where these mortgages were packaged as bundled porfolios. This was the economic dogma of the Clinton-Bush 2 Presidency. The "ownership society" and the follow-up "subprime mortage" failure is estimated to cost 2.8 Trillion.
Unemployment is here to stay. Technolgy (robots and computers) eliminated assembly line (blue collar) workers and mid-level managers (white collar). After WW II, women have doubled the work-force. Yet there is no new technology on the horizon. We thought nuclear-power / clean energy is the answer. With Fukushima, the world is thinking again.
Yes, let's talk about the gamblers in Las Vegas. It wasn't the homebuyers who came up with CDOs and synthetic CDO squared, nor did they come up with the bogus ratings to peddle this BBB junk as AAA. Nor did the homeowners get bailed out...unlike Wall Street.
The we can stop calling this a sub-prime issue and begin to call it Insurance Fraud..Via Naked Mortgage Backed Security Credit Default Swaps with 30,60 and 100 times Insurance contract against the original contracting interest..
Fraud--Breach--AntiTrust--Malfeasance...
Sub Primes Borrowing May Be Responsible For 00.000021% of this Securitization Fraud issue...
http://www.sec.gov/edgar.shtml