Mortgage Meltdown Solutions

Many years ago I took a business trip from Atlanta down to Florida to meet on a project there. I was accompanied by a guy from another company involved in the project who was from Chicago and while we were there he announced that he wanted to go look at a piece of property that he had purchased. The Florida guy and I sort of looked at each other like, wtf, but we went along with this guy to look at the property. I don’t need to tell you that the property was in a swamp and as we were driving back to the jobsite, the Chicago guy kept wondering aloud why the seller had claimed that it was “ocean view property” when it so clearly was not. The Florida guy finally lost it and said, “They called it ocean view property so that idiots from Chicago would buy it.” The rest of the car ride back to the jobsite was made in a profound silence.

Funny, the government never considered rescuing people who bought “ocean view property” in Florida in the 1960’s.

But the government today wants to rescue people who are about to lose their homes due to bad loans. Let’s look at one of the loans that that the government considers to be in need of rescue. The financial history of this loan is provided by the Irvine Housing Blog,

purchase	7-20-2001	$317,000	$79,400 down
4 mths	11-07-2001	$48,000 HELOC	half+ of down
13 mths	8-26-2002	$360,000 ReFi
3 mths	11-26-2002	$29,000 HELOC
	11-26-2002	$71,000 HELOC
7 mths	6-18-2003	$56,000 HELOC
	6-18-2003	$100,000 HELOC
12 mths	6-1-2004	$517,500 ReFi	pd off HELOCs?
4 mths	10-22-2004	$89,900 HELOC
6 mths	4-21-2005	$624,000 ReFi 1st
	4-21-2005	$156,000 ReFi 2nd
17 mths	9-12-2006	$948,750 ReFi 1st
	9-12-2006	$189,750 ReFi 2nd

Leaving a total debt of $1,138,500 against an original loan of $317,600.

A home originally sold for $396,400 is now mortgaged for $1,138,500.

The history of the home does show some $200,000 in capital improvements, but the rest… Forget about emergencies and healthcare crisis costs, that half-million plus went to finance an “enhanced lifestyle.”

This is one of the homeowners that Washington wants to rescue. What portion of problem loans does this type of activity represent? I don’t think anyone really knows the answer to that, but to start throwing solutions at the problem without asking that question and getting an answer to it is reckless and irresponsible. Any solution should be crafted to avoid “rescuing” this kind of behavior, and none of the solutions that I’ve heard proposed addresses this issue.

One more little homily and I’ll get to my second point.

For health reasons I usually knock off work by early afternoon and fairly often watch the judge shows on television. I can’t tell you how often the judge will ask the plaintiff with disbelief, “You signed the contract without reading it?” This is almost invariably followed by something like, “Why would you sign a contract without reading it?” and, “When you sign a contract without reading it the law can’t help you.”

The point that Washington wants to make is that they are trying to rescue homeowners from “predatory lenders.” There is no doubt that the vendors of these loans were charlatans, but I do not for a minute believe that it was not spelled out in the loan documentation that the payments would increase. If the seller of the loan claimed otherwise then the borrower’s first question should have been, “Show me where it says in writing that the payments will not increase.” If the borrower did not see that written in the document then the loan papers should never have been signed.

Undoubtedly there is some portion of this debacle that truly consists of innocent victims: little old ladies who were stampeded by predatory relatives, illiterate homeowners who were unable to read the loan documents... I would suggest, however, that such innocent victims are in a very, very small minority. By far the greatest portion of the home mortgage meltdown is caused by the type of greed illustrated by the homeowner from Irvine described earlier, or by buyers too greedy or careless to be responsible for their own actions.

The responsibility for the affordability of a loan lies with the borrower. To say that a borrower should be relieved of a debt because he chose to borrow more money than he could afford to repay is utterly absurd. No one forced that borrower to assume that unpayable debt.

The risk of a loan lies with the lender. To say that a lender should be relieved of the loss because he chose to lend money to someone who was transparently not going to repay the money is equally absurd.

The government is trying to do both things at one time; to erase the bad debt with neither the lender or the borrower losing anything.

The fact that there was a middle man does not relieve either party of responsibility. First, there should not have been a middle man and simply allowing there to be one was reckless on the lender's part. The lenders should certainly have known better. Secondly, both borrower and lender should have been more responsible than to allow a middle man who had everything to gain by making the loan and nothing to lose when it later went sour to, in effect, make the decisions for them as to whether or not the loan was going to be consummated and how it was going to be structured. The middle men were, for all practical purposes, selling "ocean view property in Florida" to borrowers and lenders at the same time.

I am reminded of a scene from Bridge on the River Kwai. In the aftermath of battle the major stands on an embankment overlooking the blown-up bridge and all of the death and devastation and he says just one word, in disbelief,

“Madness, madness.”