We Are All “Schlubs” In This Financial Mess
As a lifelong political rebel, I appreciate a hard stance against the “powers that be”. So when I first heard about the 92 Percent Group, my initial reaction was “heck yeah!”. From the 92 Percent Group’s welcome page:
The 92 Percent Group is committed to the preservation of free-market economics in the United States, specifically in relation to the Obama Administration’s Homeowner Affordability and Stability Plan. We believe this plan is unjust to the vast majority of American taxpayers; in particular to the 92 percent of homeowners who are current on their mortgages.
Today’s economic crisis impacts all Americans, not just those who are behind on their mortgages. Everyone shares concerns over health care, job loss, and the decimation of their retirement savings. All Americans have made sacrifices over the past year. The American taxpayer is already on the hook for mismanaged banks, incompetently run auto companies and extravagant stimulus packages. We don’t need the additional burden of paying for our neighbor’s mortgage. The bottom line – we believe that being current on one’s mortgage should not be grounds for being put at a financial disadvantage.
But after reading that and exploring the site a bit further, I started to get a little peeved at them. Not for them making a stand, which is their right and I will defend that right, but for what the stand “stands” for. The 92 Percent Group, along with other blogs and pundits that agree, seem to more excited about beating up on the non-paying “schlubs” instead of the gatekeepers of loans, the banks. It seems like the “92 Percenters” are very eager to say, with much anger, that the Obama Administration’s Homeowner Affordability and Stability Plan rewards bad behavior of the individual (I’m not so sure) when the mortgage gatekeepers get the residual anger at being the “fat cats”.
My fellow Americans, my anger is squarely at the fat cats more than the individual, delinquent mortgage “schlub”. When you are a gatekeeper, you pick and choose. You hold the power. You hold the keys. You hold the way. If an individual walks up to you with some shadiness looking for a mortgage, it is your job to vet that individual to the very last compound before they cross those formerly hallowed gates of home ownership. But you didn’t do that mortgage gatekeepers. No sir! You set up a myriad of side hustles that paid you super well that needed one catalyst: the seeker of a mortgage. And it didn’t matter how solid or shady that person was, you gave them that mortgage. Because the side hustles paid TOO DAMN WELL! To heck with due diligence and rigorous verification. It was about getting paid because in America, that is what we do: GET P…A…I…D! If your not down with the free market than your free to leave this damn fine country, right? Right?? RIGHT?!?!?!?!?!
Come to think of it, why am I more angry at the fat cats? We are all “schlubs” in this financial mess. We all were SO squarely focused on consumerism, day trading, house flipping, financial vehicles, global economy opportunities, side hustles, etc, that we didn’t heed this timeless warning:
IF IT’S TOO GOOD TO BE TRUE, IT PROBABLY IS.
As one of our TMV commenters, Austin Roth, has said many times here, the financial day of reckoning is upon us. We are all going to suffer much longer. No amount of righteous indignation can save us from that suffering. So chin up Americans. Like it or not, we are all in this together. Schlubs United…
Good luck President Obama!
UPDATE
I received an e-mail from a friend that says banks were basically forced to lend to the less creditworthy individuals due to plans implemented by former Presidents Clinton and Bush. But I must ask this: who forced the financial industry to create lucrative financial vehicles that bought and sold debt (and other financial “stuff”) like a busy fish market for “easy” money? Who forced financial companies to become hyper leveraged? Well??
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25 Responses to “We Are All “Schlubs” In This Financial Mess”
“who forced the financial industry to create lucrative financial vehicles that bought and sold debt (and other financial “stuff”) like a busy fish market for “easy” money? Who forced financial companies to become hyper leveraged? Well??”
The CRA, Fannie, Freddie, Congress (ala Frank) and the 'bank terrorists' did. Some institutions tried to resist somewhat, but if you did not have the right lending metrics (enough sub-prime loans to the disadvantaged), just try to get past the regulatory authorities to buy another bank. Community Organizers like ACORN. LARaza, Greenlining.org and many others – some actually calling themselves 'bank terrorists” pressed institutions over a number of years to make these loans. Regulatory CRA oversight insured it. THEN the banks found out how profitable it could be. Don't forget, officers and execs can lose their poisitions if they do not pursure the profitable deals, and Congress made sure it would eventually be profitable for them.
I continue to have trouble understanding why this is such a divisive or partisan issue, because essentially everyone is right. The lenders were greedy, the credit rating agencies totally effed up, the government encouraged them to make bad loans, and many home buyers bought more house than they could afford or were trying to flip them for a profit. There is no need to prioritize who was the bigger idiot.
Now we have to bail them all out to save the country. OK I can accept that but let's not reward them any more than we have to. The point of the 92% club is well taken – they (we) played by the rules and are getting the shaft. We should do the bare minimum to save the country, but politicians need to stop encouraging bad loans, there are some banks and bank executives that need to go flip burgers, and some people should lose their homes. That sounds harsh but keeping somebody in a home they never could have afforded makes no sense.
DaGoat- same reason that people couldn't agree that the preparation and response to Katrina was a failure at all levels of government. People want to find evidence to support their preconceived biases.
My thinking on the corporate and the individual bailouts is that there should be a way to penalize those who made poor choices while still allowing for the needed assistance. That would mean some sort of bankruptcy for the auto industry players, and some sort of 'black mark' for homeowners who overextended themselves. This allows for their loans to be renegotiated and helps damper the effects on the housing market in general but still provides more fairness for those who've been more responsible. There could also be a method of appealing this since some people were truly victims of predatory lending.
The banks are a different story though and I don't think anyone knows what to do. Even nationalizing, if we could get past the political unpalatability of it, apparently is beyond the scope of what the FDIC could handle with these behemoths.
The CRA, Fannie, Freddie, Congress (ala Frank) and the 'bank terrorists' did. Some institutions tried to resist somewhat, but if you did not have the right lending metrics (enough sub-prime loans to the disadvantaged), just try to get past the regulatory authorities to buy another bank. Community Organizers like ACORN. LARaza, Greenlining.org and many others – some actually calling themselves 'bank terrorists” pressed institutions over a number of years to make these loans. Regulatory CRA oversight insured it. THEN the banks found out how profitable it could be. Don't forget, officers and execs can lose their poisitions if they do not pursure the profitable deals, and Congress made sure it would eventually be profitable for them.
But I thought ACORN was just a harmless group of community organizers that's being maligned for the occasional mistakes of some of its overly enthusiastic hirees in canvassing for voter registrations? /sarcasm
On a more serious note about how the process got so out of hand, CNBC has a pretty good documentary called House of Cards which will reair tomorrow night (Wednesday) at 8 pm. I caught a bit of it last week and intend to watch more tomorrow.
For some reason, I don't think the “bank terrorists” had to arm twist TOO hard in order to get the banks to lend. The fact is that all of this was motivated by the quick and easy dollar. I know all about ACORN's ways. My younger sister worked for them for 10 years in CIncinnati. They getting burned now since some of those they worked so hard for to get homes are now looking at them for help after being foreclosed on.
What I hate is too much focus on individual blame. Gatekeepers are gatekeepers. If ACORN and Greenlining.org was pressing a lender hard to make a loan and that lender had the raw numbers to show that a loan was DAMN risky, then those lenders should have shoved it up ACORN's and Greenlining.org's collective arses. But they saw the big money and ran with it.
Your right DaGoat. This shouldn't be a partisan issue. But it is with dollops of personal responsibility and “I'm not my brother's keeper” thrown. We may not think we're our brother's and sister's keeper but as this financial crisis has shown, we sure hurt together.
T, ACORN's involvement was much more than just advocating for individual homebuyers.
This article gives a good history, and if I may post a somewhat long excerpt, here's the salient parts:
It was a perfect storm, really, of bank deregulation triggering a succession of mergers and acquisitions, creating an atmosphere where these CRA ratings were all important for the survival and prosperity of these banks- and then the well intentioned but boneheaded policy of requiring quotas of loans even if there weren't enough worthy buyers.
Interesting information CStanley. But no one wanted to step on the brakes. Is there any information showing a major bank saying “NO” to unworthy buyers and then following through. Perfect storm, yes. But the “gatekeepers” rode with the storm, not against it.
I find it funny that the big CEOs sure not talking about ACORN these days. They just want to survive. Because just pointing the finger at community groups (not saying you are CStanley) won't cut it in light of the ridiculously weird, strange, and shady financial vehicles they came up with to make money on a global scale. It's those pesky credit default swaps and collateralized debt obligations (CDOs) along with hyper leveraging (among other things) that's eating them alive.
But the “gatekeepers” rode with the storm, not against it.
Oh, watch the documentary I mentioned and you'll see that this was true all the way to the top- Alan Greenspan admits that when he finally became aware of the housing situation (I think he said in 2003) he didn't feel he could do anything about it because of the political opposition to putting on the brakes. (Of course I wondered why he still thought that it was wise under those circumstances to continue lowering interest rates 14 consecutive times, but that's a separate issue.)
And then there were the few brave souls who did try to sound the alarms, like Congressman Baker from LA. Pat at Stubborn Facts has blogged quite a bit about his efforts, which of course were to no avail.
I have that documentary on my DVR. Will definitely check out. Anyone for converting some homeowners to renters??? LOL!
There may be a lot of that 'conversion' going on soon, but not necessarily voluntarily.
The Manhattan Institute is a biased organization and the column in their site, City Journal, is an example of their attitude. Here is what one of the governors of the Federal Reserve had to say about claims like the ones ElRonaldo and CStanley are pushing. He doesn't buy into them. It's hard, if not impossible, to find anyone outside of Republican circles who do buy into it.
There's nothing controversial or even deniable in what I posted, Jim. ACORN did in fact lobby hard for the changes to CRA, and they protested banks during the early 90s to ensure cooperation with these goals, which are incompatible with safe lending practices.
I'm not denying that other factors fed into the problem- I even mentioned the banking deregulation which was triggering the need for these banks to meet the CRA standards in order to facilitate their mergers.
NO ONE wanted to stop the flow of money because everyone on all ends felt they were getting what they wanted. Everyone thought there was a free lunch.
And look at the methodology that Kroszner uses there, Jim. Basically he's saying that CRA didn't play a significant role because their analysis showed that subprime loans performed just as poorly in higher income neighborhoods as they did in the neighborhoods covered by CRA.
OK, fine.
But most people who are pointing to the CRA are doing so because it was an instigating factor, not because the magnitude of the loan defaults primarily occurred with those loans. The subprime mortgage products would never have been created if it weren't for the political goals of expanding homeownership to lower income citizens who wouldn't qualify for conventional loans.
Basically, what came afterward dilutes out the defaults among the CRA loans, according to his data because those defaults were occurring across the spectrum. If you want to say that the crisis wouldn't have happened if the loans were restricted only to lower income individuals, OK, but the reason it didn't happen that way is because politicians didn't want to frame this as a class based affirmative action program and tried to pretend it was a public-private partnership which relied on market principles to work. Of course the built in toxic assumption was that all of this would be paid for by a perpetual rise in housing prices.
CS I've read dozens of posts by Barry Ritholtz at The Big Picture and CalculatedRisk (and the dearly departed Tanta) at his blog that have repeatedly shot down the role of the CRA, Fannie and Freddie in the creation and proliferation of subprime on both a statistical and historical basis. They showed it was a pittance, that the vast vast majority of subprime to lower income neighborhoods were by groups that weren't even banks and didn't even fall under CRA, that the CRA has never really factored into any merger deal (i think there was 1 in literally thousands) and that they only jumped in by the time the bubble was already blown. I can't assess those claims very well but I trust those people because a) they have been honest about everything else I've read and b) have never failed to point blame at anyone across the spectrum. They convinced me the whole thing is bull and post hoc rationalization even as they saved plenty of vitriol towards other government policies that led to the bubble.
Well, I'm not inclined toward perpetuating inaccurate information, so I'll look for some of those posts when I get a chance. The information I've seen indicated a timeline of the CRA instigating the lowered mortgage qualifying standards and setting off the creation of these new mortgage products to begin with, and then the subprime boom following when the brokers saw how profitable the whole scheme was (as long as the bubble continued to inflate, of course.)
Well it depends on what you refer to as “subprime” because the posts I refer to focused solely on the “problem” not the concept. For instance the last time I saw data (which admittedly was about 6-7 months ago) on “personal relationship subprime” or whatever they called it (which basically means the borrowers were below prime but they were rigorously screened, then given personal contacts and maintained close relationships) those actually had default rates slightly under prime. The moral of the story was that subprime the concept perhaps had a valid niche but it had to be done on a person by person (and very intensive) level.
So if the question is “Did the CRA lead the the development of subprime products?” I would say “yes.” If the question is “Did the CRA lead to the development of the subprime problem?” those people I cited argued no. They blamed the brokers, securitization firms and eventually the major banks.
A similar concept is with Section 8 housing. The original Section 8 programs relied on going into public housing, asking people to self screen based on their intent to work hard, etc. then gave them classes about how to integrate into a community and find jobs, kicking out the people that didn't take it seriously, then placed the people into communities and helped them establish some contacts to help with the transition. Those programs were so widely successful that they were deemed as being the solution to urban poverty. But the conclusion from the studies was that public housing itself was the problem and fostered all the generational poverty and lack of responsibility skills…so there was a push to disband public housing and disperse everyone. Well once they took off all the filters and dropped the support and just kicked out everyone, then those people didn't magically develop any skills or drive and crime spread and the whole thing was a disaster.
So I guess the question is how much did ACORN and those groups (which I admit did provide a lot of political pressure) factor into having it spread from a small targeted program that showed positive results like CRA intended, to a large system wide failure. That is a much more difficult question, but is one that those bloggers were adamant wasn't due to any government programs.
A quick scan of some of the articles I'm finding and my first impression is that the authors keep focusing on CRA as it was created in 1977, while the critics are actually pointing to the changes made during the 90s as the instigator of the problems.
Here's one article that was linked to by (I think) Barry Ritholz- and I think the commenters did a pretty good job of picking apart his arguments. A couple of comments that I thought were astute:
I've recently started reading some of the blogs you're pointing to and I don't see any reason to accuse them of partisan bias or anything, but maybe they're getting their information on topics like this one from other people who do have those biases?
So I guess the question is how much did ACORN and those groups (which I admit did provide a lot of political pressure, although it had little actual regulatory effect) factor into having it spread from a small targeted program that showed positive results like CRA intended, to a large system wide failure.
I think the point one of the commenters to that article I quoted made was that this enclave of protected (and perhaps, well regulated) higher risk loans was then thrown in with a market system where that protection created competition, which drove the subprime madness that followed. What you seem to be saying is that if things had remained isolated there wouldn't have been a problem, but it wasn't a closed system so of course the market forces of competition were going to come into play. People can get up in arms about the greed involved, but investors will seek the highest return that the system will allow and it's up to the regulators to see when that's getting out of hand and why.
A similar concept is with Section 8 housing. The original Section 8 programs relied on going into public housing, asking people to self screen based on their intent to work hard, etc. then gave them classes about how to integrate into a community and find jobs, kicking out the people that didn't take it seriously, then placing the people into communities and helping them establish some contacts to help with the transition. Those programs were so widely successful that they were deemed as being the solution to urban poverty. But the conclusion from the studies was that public housing itself was the problem and fostered all the generational poverty and lack of responsibility skills…so there was a push to disband public housing and disperse everyone. Well once they took off all the filters and dropped the support and just kicked out everyone, then those people didn't magically develop any skills or drive and crime spread and the whole thing was a disaster.
A good related point, because in both cases it seems to me that these unintended consequences were unleashed by well intentioned social programs.
Well like I said I have not done thorough research into this particular aspect because they presented it as such open and shut. I will point out this part: “A lending institution funded the loan or bought a package of these types of loans from the orginiation companies. Yes, they orgiginated a lot of crap, but as long as they were able to sell the crap to FNM and FRE they had no incentive to tighten standards.” which goes to something that CR and BR kept saying over and over again which is that a lot of the *standards* at FNM and FRE were good for most of the time (there were loosened I think it was 2004 or 2005) but their operational checks were not. Basically the originators were just putting in whatever they had to to get it approved. It was disgusting reading about the originating banks submitting a loan and getting it rejected and then reading the reason why and tweaking it and resubmitting…how did that not set off any red flags?! (They also pointed to memos from major banks and originators that encouraged this behavior).
The one thing that I think is a valid criticism is the role of Fannie and Freddie in the mess in general not as far as their originating behavior, but as buyers. This is a perfect example of why I am against psuedo-private entities across the board (government granted monopolies falls in this as well). I dunno, you may feel it is a distinction without merit, but I think it is very important to separate regulatory failures from risk failures. I don't think that the CRA, FNM, FRE were regulatory failures because they had proper burdens, risk tolerances, incentives, etc. for the most part (within their guidelines. I am sympathetic that the whole aim of the government interfering with the mortgage market just raises housing values even as it lowers interest payments and makes things worse and less affordable, but that's a different topic). However, I also think that the vast majority of community mortgage companies that originated and kept loans on their books also did due diligence. The problem was when risk was separated from origination either because the government assumed it or some random investors did through MBS.
Pretty much our entire financial system is now constructed in a way where the risk is ultimately on the taxpayer and I think that is very dangerous for both public interest and the free markets…but to me that is a separate issue than “did government regulation fail.”
This is what people that argue that economics should be driven by systems theory explicitly point out. Traditionally “liquidity” as overall levels and between parts of the financial system is seen as the ultimate good for reducing risk…which is some what hilarious because all major crashes happen after bubbles that formed from too much liquidity, but traditional economic models couldn't explain why so they ignored it. In systems theory though it makes perfect sense, which is that there are feedback loops within components and between components of the system, and if you introduce a connect something that is perfectly valid on its own merits to other parts, it doesn't necessarily mean that it will remain valid in the new system. They argue for explicit walls built up amongst parts of the financial system where assets will be contained.
Like I referred to in my previous comment, one of the major walls is the difference between regulated and unregulated assets, as well as between guaranteed and non-guaranteed parts of the market (some of the other walls are between asset class groups and also countries). If the government wants to do something for the “public good” by creating regulatory constructs, then they shouldn't be allowed to mix. One immensely successful program I can think of is SBA loans. Those encourage banks to make loans at better rates than they may normally, but still keep enough risk on the bank itself that they do due diligence. SBA loans are treated entirely differently than other business loans and aren't really subject to market dynamics other than the spread that the bank is willing to offer to get the initial loan.
As for your comment about Section 8 and its similarities to this, to me the take home message is that programs don't necessarily scale. I believe that government programs can't manage things effectively but that a lot of private programs don't have the incentive to take risk to create programs. I am for the government having aims like CRA and Section 8 and educational improvement grants where they give incentives to create and experiment with programs that can help address how to help people that will positively benefit, and then turn over those findings to private/local groups that wish to tailor them to their own scenario…so something very similar to how science research is funded and works its way out into the marketplace.
The one thing that I think is a valid criticism is the role of Fannie and Freddie in the mess in general not as far as their originating behavior, but as buyers. This is a perfect example of why I am against psuedo-private entities across the board (government granted monopolies falls in this as well). I dunno, you may feel it is a distinction without merit, but I think it is very important to separate regulatory failures from risk failures.
Oh, I definitely agree. But it's precisely because of the public/private partnership concept that the regulatory failures and risk failures get intermingled. Conceptually you can and probably should analyze those problems separately, but in practice the risk failures had to do with the goals of the public program which opened up the need for tighter regulation but that wasn't put into place or not done effectively. And I don't know, from what I've seen of the testimony during the Fannie/Freddie meltdown, it really sounded to me like the Bush administration- along with some other Republicans like Congressman Baker, and McCain, and others- were recognizing that more regulation was needed and then Democrats like Dodd and Frank were fighting them on it. I don't mean to make it into a partisan thing, but it strikes me that it's problematic for people to either attach all of the blame to one party or the other, or to dismissively claim that there's fault to be spread around, without taking a closer look at what political forces contributed to the bad policy. What I mean by that is that I'm convinced that this failure to acknowledge the systemic risk that had crept into the subprime mortgage industry was in large part due to political opposition from Democrats who were feeding at the trough because of corrupt relationships with the GSEs, while the flip side of that is the failure to regulate the finance industry in general was in large part due to the corrupt GOP relationships there.
The SBA analogy is a good one, and to put it in the context of my points here on political forces, I'd say that if there were an activist movement among entrepreneurs (which is funny to even imagine such a thing), then I think we'd end up with the same kind of systemic meltdown as a result of political pressure to make more and more of those loans (beyond that which the banks could keep on their books) which forces a shift of those loans to a government guarantee status, and then there we are again.
About the Section 8 and your comment that these programs don't scale- yes, that's exactly the type of unforeseen consequence that is never considered by the authors of these social programs (it's a big concern that I have about health care, too.) It's also a very good argument for a federalist approach, to let the states be the innovators and incubators of new ideas and let the best ideas be tested by competition before even considering a national program.
T-Steel, CStanley, Mikkel:
More links …
http://traigerlaw.com/publications/the_communit…
http://www.econbrowser.com/archives/2007/09/com…
http://www.econbrowser.com/archives/2008/07/did…
From what I've read, CRA loans, as a group, were:
1. a small portion of subprime loans
2. disproportionately kept on the books of the loan originator
3. had lower default rates than comparable high interest rate loans
So in this age of automatic search and replace, it seems easier to just replace CRA loans with privately originated speculative middle to upper income mortgages (unwieldy phrase I know) and then the arguments make equally good sense and actually fit the data.
As to why CRA loans might have lower default rates, suppose that redlined neighborhoods were economically disadvantaged ceteris paribus compared to a comparable non-redlined neighborhood, e.g.
Non-redlined: 80% of homeowners qualify
Redlined: 50% of homeowners qualify
This means that 0% of the 50% get loans. Suppose that the top 20% of the 50% are actually pretty good quality borrowers. Then a lender who is willing to apply differential standards and pricing could actually cherry pick the *best* of the redlined borrowers, *and* charge a higher interest rate.
Finally, there is something a little strange about Mikkel's comment
“So if the question is “Did the CRA lead the the development of subprime products?” I would say “yes.” If the question is “Did the CRA lead to the development of the subprime problem?” those people I cited argued no.”
I'm not sure I can ascribe a precise meaning to “lead to” here. Did the US Postal Service “lead to” the development of FedEx and UPS?
When I refinanced my home in 2006, despite seeking a very specific fixed mortgage product, I was offered several different loan products, ARMs, Balloon payments. I was nearly ridiculed by the mortgage brokers for not taking advantage of the surefire, never going to deflate housing market and leveraging much more than the realistic value of my home. Of course with the bubble bursting I've lost even modest pre-bubble gains. Glad I didn't listen to them.
But, I am alright. Its my home. I actually live here. There is some sense of investment/wealth creation tied up in it but more than anything else, its a place where I can keep my stuff and where my family finds some refuge. I am not moving soon.
I think that some of the basis of how sub-prime mortgages got started does get tied up in the good intention politics of increasing homeownership and responsibility to your community. Values that are scoffed out by republicans when they are pushed by an agency such as ACORN and targeted to lower income people. Why should they be enfranchised? But truthfully its only a small portion of those “sub-prime” loans that are failing. I think the last figures I saw estimated about $200 billion in loan failures, not all of them sub-prime by a long shot.
So $200 billion. Now, how is it that $200 billion was leveraged 100 times over into the “house of cards” that CS refers to in the CNBC documentary? Because ACORN pushed for it? Please.
I look forward to watching this CNBC special.
Values that are scoffed out by republicans when they are pushed by an agency such as ACORN and targeted to lower income people.Why should they be enfranchised?
Boy, it sure would be nice to get through a single discussion about differing political points of view without someone impugning the motives of his opponent.