And They Call It Ponzi Love

The not-so-reputable mortgage broker thought he had a sympathetic listener on the other end of the phone. Actually, my skin was crawling as he blathered on about his solution to our current real estate woes: "The feds have to lay off with all these rules against lenders and the banks have to start taking on risky loans again--otherwise, we can't pump up the numbers of buyers qualifying for mortgages. If buyers can't buy, the real estate market stays in a sinkhole. Can't the assholes in Washington understand that they really, really need us to save the market?"

This seedy mortgage salesman succeeded as a bit player in the national, semi-officially sanctioned, quasi-legitimate real estate Ponzi scheme for years. At the top were the mortgage brokers and lenders who winked, nodded, then looked the other way while financing anyone in a pre-corpse state. Alongside were the bundlers ensconced on Wall Street, exchanging secret handshakes with mortgage originators before selling dicey derivatives and other cuts of mystery mortgage meat to greedy and/or ignorant investors.

Buyers and sellers were the lifeblood of this national, semi-officially sanctioned, quasi-legitimate real estate Ponzi scheme. Home sellers didn't care about the source of funds paid by precarious purchasers provided they received their asking price. They cashed the checks; then flush with tens (or hundreds) of thousands of dollars, they soon voraciously devoured other homes. These sellers-turned-buyers, often aided by nothing more than their ability to produce a pulse, procured mortgages from lenders so preoccupied with counting profits that the probability of repayment was never seriously considered. Builders kept building and home flippers found funding, all while fattening the bank accounts of real estate brokers and mortgage principals.

To be sure, there were buyers with at least 20% down and verifiable income, and lenders that truly evaluated risks before lending. There just weren't enough for the revelers atop the summit of Mt. Ponzi to keep the party going! Eventually, deceived debtors stopped paying loans they never could afford, and the inventory of unsold/foreclosed homes far exceeded demand. The drumbeats of dissatisfaction reached politicians enjoying low interest rate mortgages and high campaign contributions, who shifted the blame to lax regulators. Those gatekeepers, who had been smugly congratulating themselves for how well the animals were behaving without any need for cage-rattling, found themselves trampled by the crushing herds of cascading mortgage defaults and broadening neighborhood blight.

While this national, semi-officially sanctioned, quasi-legitimate real estate Ponzi scheme fell apart in the past few years, there's more than just the one seamy salesman pushing to revive the ruse. These pro-Ponzi pushers preach about saving all our souls by permitting the few to profit off of many: We've got so much inventory! Let's push buyers out there by making it easy to get new loans again with little or no money down! Let's convince underfunded buyers that they can't be living the dream without owning a home! Neighborhoods will thrive again, businesses will gain customers! We who know how to manipulate the system will get rich again!

I concluded my conversation with the sleazy salesman by asking why he didn't seem concerned that pushing a fatally flawed system would eventually come back to bite the nation in our collective rear ends. His intense retort disturbed me: "Why would you worry about that? The future is far away and we all have to make money now!"

 

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Comments

[keepyourheaddown*]

capitalism is doomed... greed will cause it to fail...

[Desmo]

Lita,

May I ask, where did all these loanable funds come from? A reasonable lender will lend his funds out to the most creditworthy persons first. then if he has more available loanable funds, he will lend to those slighly less creditworthy. This is only logical because lenders do not benefit from defaults. However when you have a central bank/regulator constantly printing more money to be lended, eventually, uncreditworthy persons will recieve loans. This is what caused the housing bubble and then the eventual collapse. You cannot blame dim witted mortgage lenders for this entire mess, they only lended out all the money that the central bank was handing them.

[Lita Smith-Mines - Huffpost Blogger]

I don't blame any one group: I think there's quite enough blame to go around!

[JohnSawyer]

But under the system the article describes, which still exists, lenders DO benefit from defaults, more than they do from a debtor that doesn't default. That's the whole problem. Lenders get their losses covered by government bailouts, and they can even hedge against their losses for yet another crooked source of income.

[Lita Smith-Mines - Huffpost Blogger]

Individual borrowers have griped to me countless times: "why did XYZ Bank turn down my request for a modification [or a short sale] after it got so much money from the government?" My answer, boiled down to its most simple element is "there's no benefit to them giving you a break."

Taxpayers support financial institutions allegedly in need but those same institutions won't support borrowers demonstrably in need...

[marinara]

"Why would you worry about that? The future is far away and we all have to make money now!"

So sad, it's funny. Why would anyone be responsible for his own behavior?

On a related note: I think I know what went wrong with our system of capitalism.

[Lita Smith-Mines - Huffpost Blogger]

You ask : "Why would anyone be responsible for his own behavior?" Isn't that what Chairman Greenspan based his whole relationship with the financial industry on? That they'd all do the right things for themselves and the nation as a whole? :-(

[JohnSawyer]

Ayn Rand taught Greenspan, and a lot of other people, to believe few people on Wall Street would do anything not in their own self-interest, so that the supposed few who might, wouldn't be enough to destroy the very system they used to make money. But inherent in that naive thinking is the seed of its own destruction--far more people than they realized, especially crooks, think that it's against their self-interest to not grab everything they can get their hands on, and against their self-interest to do or allow anything that would moderate that, like trying to maintain a system with long-term sustainability. The only long-term thinking they do, if any, is to dream about how to spend all the money they steal. They see things they want, and take them--short-term self-interest, with any damage to the future, even their own, and anyone else's self-interest be damned. Because, after all, they're satisfying their immediate self-interest to the satisfying max. Rand said people "shouldn't" harm others in their pursuit of their own self-interest; she didn't take into account the fact that so many people pick and choose which of their religion's tenets that they wish to follow.

A slight twist on bank robber Willie Sutton's famous statement applies: crooks will insinuate themselves into financial institutions, because that's where the money is.