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Well, You Can't Expect the Rich to Eat Themselves
July 9, 2010 11:47 AM   Subscribe

There's been plenty of politically partisan debate about who or what ultimately caused the real estate crash that triggered the recent US financial crisis. One popular view blames "the Democrats and their efforts to expand homeownership to people who, in some cases, may not have been quite ready for it." But contrary to this view, new data strongly suggests that throughout the real estate collapse, the rich have actually been defaulting on mortgages for strategic reasons at much higher rates than the huddled masses.

Perhaps it's not such a surprise, then, that new data also shows the rich in the US are still getting richer even as the rest of us watch our share of the economic pie continue to shrink.

But luckily for the rich, the American electorate seems to hold no lingering resentment against them, as evidenced by the fact that even the economically hard hit state of Florida (which along with California, Nevada and a few others, led the real estate collapse) seems poised to elect both newcomer Democratic senate candidate, Jeff Greene, a self-financing billionaire who cashed in on the real estate crash by betting against the Florida real estate market, and newcomer Republican gubenatorial candidate and scandal-plagued former health care industry CEO, Rick Scotts, another self-financing billionaire who (borrowing a page from the playbook of the wealthy self-financing candidates in the Arizona public financing case discussed previously here on the blue) recently filed suit against the state of Florida to block Florida's public campaign financing system from providing matching funds to his less wealthy electoral rivals on free speech grounds.

Still poorly understood and little examined is the role large-scale, systematic mortgage fraud in loosely regulated states like Florida may have played in accelerating or exacerbating the real estate collapse.

Also related previously here and here.
posted by saulgoodman (131 comments total) 31 users marked this as a favorite

 
But luckily for the rich, the American electorate seems to hold no lingering resentment against them...

Natch! Because the US is a class-free society and by "class-free" I mean "the class warfare happens in only one direction".
posted by DU at 11:52 AM on July 9, 2010 [24 favorites]




Didn't the Bush White House coin the phrase "ownership society"?
posted by boo_radley at 11:58 AM on July 9, 2010 [6 favorites]


You should have more respect for your betters!
posted by vibrotronica at 11:58 AM on July 9, 2010 [1 favorite]


Well, data be damned, I still blame the black people.
posted by Mister_A at 11:58 AM on July 9, 2010 [3 favorites]


As someone who was on Capitol Hill at the time of much of the "irrational exuberance," let me just say that it was the fault of both the Democrats and the Republicans, and that there was no question at the time that it would end the way that it is ending. Everybody on both sides knew it, and anyone who said otherwise then or says otherwise now is either a liar, an idiot, or both.
posted by The World Famous at 11:59 AM on July 9, 2010 [7 favorites]


is either a liar, an idiot, or both

Or a politician.
posted by spicynuts at 12:00 PM on July 9, 2010 [3 favorites]


anyone who said otherwise then or says otherwise now is either a liar, an idiot, or both.

Well then! I guess that eliminates any need for discussion.
posted by Marisa Stole the Precious Thing at 12:01 PM on July 9, 2010 [5 favorites]


I'm currently trying to decide if I'm a liar or an idiot, or both.
posted by kiltedtaco at 12:04 PM on July 9, 2010 [3 favorites]


Metafilter: both
posted by idiopath at 12:05 PM on July 9, 2010


Well then! I guess that eliminates any need for discussion.

WTF?
posted by The World Famous at 12:05 PM on July 9, 2010


Suppose you were an idiot. And suppose you were a member of congress. But I repeat myself.
--Mark Twain
posted by TedW at 12:05 PM on July 9, 2010 [9 favorites]


I'm currently trying to decide if I'm a liar or an idiot, or both.

Hang on, I think I got this one figured out. If you decide you're not an idiot, you will be one (for thinking one can simply decide themselves out of idiocy) and thus become a liar, as your statement will be proven false.

Okay, next riddle: what's in my pocket?
posted by griphus at 12:08 PM on July 9, 2010 [10 favorites]


the rich have actually been defaulting on mortgages for strategic reasons at much higher rates than the huddled masses.

This makes perfect sense. The rich are wealthy in part because they are enculturated into a mindset that assists in the acquisition and maintenance of wealth. While more proletarian types tend to be raised to believe that your word is your bond and that contracts are holy writ which must be fulfilled because dammit, you gave your word, the wealthy generally aren't filled up with that nonsense and are perfectly willing to think strategically- call it "thinking in a business way"- instead of thinking in terms of honor and all that silliness.

This is a part of how class perpetuates itself- while some people learn these values and thought patterns, people born to wealth have the advantage of speaking the language natively, if that makes sense.

OH GOD THE METAPHORS ARE ALL MIXED UP OH GOD
posted by Pope Guilty at 12:11 PM on July 9, 2010 [29 favorites]


I, too, blame the Prosperity Gospel.
posted by box at 12:13 PM on July 9, 2010 [2 favorites]


But luckily for the rich, the American electorate seems to hold no lingering resentment against them...

My opinion is this generation is slightly different than previous ones. We all know what happens when the rich start becoming too rich and influential while only the middle class and lower class feels the burn...

This time, some of the populous is glued to their cable television and Facebook. The rest are designing some "off the grid" maneuvers and trying not to say anything to give it away. The former will be the first to let us know about the latter.

Whether I'm right or wrong, I'm buying stock in gas masks, kevlar, and canned goods.
posted by Bathtub Bobsled at 12:14 PM on July 9, 2010


“The rich are different: they are more ruthless”

You don't say...
posted by photoslob at 12:14 PM on July 9, 2010


One asshole with a multimillion dollar house defaulting on a mortgage knocks a bigger hole in the economy than a family who bought a $100-150k (and yeah, there are a lot of $100k-and-under houses getting foreclosed on) house that they're losing. Not to mention the fact that there's more movement in the low income housing right now so the mortgage company might be able to get most (if not all) of the money back.
posted by mikeh at 12:16 PM on July 9, 2010


And the rich keep getting.
posted by swift at 12:16 PM on July 9, 2010 [1 favorite]


Because the US is a class-free society and by "class-free" I mean "the class warfare happens in only one direction".

DU, if I may repeat myself, I personally believe the rebuttal to this is being planned.
posted by Bathtub Bobsled at 12:17 PM on July 9, 2010 [2 favorites]


Well, I hope this serves as a friendly reminder why jingle mail is A-OK in my book. What's good for the goose is good for the gander. Dear Invisible Hand of the Market: Can you see my Invisible Finger?
posted by KingEdRa at 12:18 PM on July 9, 2010 [1 favorite]


This makes perfect sense. The rich are wealthy in part because they are enculturated into a mindset that assists in the acquisition and maintenance of wealth.

And they have the wealth to pay lawyers to find or set up loopholes. I'm sure there are people with less money who think "if there were only way I could profit instead of lose money," but they lack the contacts who know how to make that glint of an idea into a legally sound reality.
posted by filthy light thief at 12:19 PM on July 9, 2010 [6 favorites]


Slave morality for us, master morality for them. Remember, plebs, it's immoral (for YOU!) to walk away from your mortgage!
posted by r_nebblesworthII at 12:21 PM on July 9, 2010 [7 favorites]


Rising inequality seems to me to be allowing the wealthy to capture the political class and the media. Brad DeLong regularly points to research on the growing income inequality in the U.S.. Emmanual Saez does some of the number crunching on the topic. In essence there is, as others have alluded to, a class war in which one side is winning handily. An example would be the current debate (or lack thereof) on how to improve the unemployment situation.

There are structural problems in the U.S. and very little capacity to change them. I'd like to be surprised and proven wrong, but am increasingly despondent.
posted by idb at 12:25 PM on July 9, 2010 [1 favorite]


Cmon, folks, this one's easy: Poor people are "immoral". Rich people are "business-savvy"!
posted by LordSludge at 12:25 PM on July 9, 2010 [17 favorites]


I'm just very nervous, personally, about what Scotts is up to. It seems to me it can't be purely coincidence that a very likely corrupt former health care industry insider is putting everything he's got into winning the highest office in a state already notorious for its lax regulatory practices and inadequate industry oversight, just as the most sweeping and costly package of health care industry reforms in recent American history are on the verge of going into effect.

Especially when you consider the reforms, in their weakened form, center on the creation of state controlled insurance exchanges (basically, a public system that could easily be exploited to create abusive health care monopolies at the state level) that rely heavily on good faith at the level of implementation to curb potential market abuses.

In other words, I think this particular shark smells blood on the water and that's why he's swimming so quickly this way.
posted by saulgoodman at 12:25 PM on July 9, 2010 [5 favorites]


The economy didn't crash because large numbers of individual homes went into foreclosure. Although the rate of change was high, the total number of foreclosures was still a single-digit percentage of all property loans.

The economy crashed because the over-leveraged banks and mortgage companies defaulted on billion-dollar short-term loans that were built on financing mortgages and immediately selling them in mortgage-backed security bundles.

Mortgages as a whole are still a money-making proposition, as long as you're not betting your shirt on selling those mortgages as if they were blue-chip stock, which is what the banking industry appeared to be doing.
posted by KirkJobSluder at 12:27 PM on July 9, 2010 [15 favorites]


EAT THE RICH
posted by infinitywaltz at 12:28 PM on July 9, 2010 [1 favorite]


Okay, so let me get this straight. Banks and mortgage brokers encouraged folks who may not have been financially ready for homeownership to get in the game. Rich people, seeing an opportunity for a quick buck also get in the game, artificially driving up prices, causing the poor people to pay more for a house than they otherwise would.

When poor people default, based upon job loss, inability to pay after a mortgage rate resets or for whatever other reason, they are morally bad. When rich people decide not to pay their mortgage because its no longer profitable for them to do so, hey, that's business!

Got it.

The mortgage crisis isn't an issue of morality, it's an issue of economics. Yes, greed has a lot to do with it, but it's not the greed of the homeowner, it's the greed of the bank and of the investor. Me, I'm just Joe Schmoe, stuck in my house, with a $30K deficit between what it's worth and what I can get for it. Great.

I think we want to believe that it was irresponsibility that got 'those people' in trouble with their mortgages because most of us aren't any more financially sophisticated than they are.

The truth of the matter is that very few of us shop around for our mortgages, or even understand what our options are. Sure, we SHOULD, but the reality is we get all excited because the market is hot and even if the mortgage turns out to be a bit of a stretch, I don't want to NOT be in the market when it's escalating like this.

Interestingly enough, after the crash, not too many poor people getting into a house they can't afford with a shitty mortgage now, are there? So it's not morality, it's economics. Banks aren't so willing to lend now that there's a possibility that they could LOSE on the proposition. So who's more at fault? The morgager for over-exending themselves, or the banks who KNOW the consequences and loan anyway?

What a mess.
posted by Ruthless Bunny at 12:29 PM on July 9, 2010


the rich have actually been defaulting on mortgages for strategic reasons at much higher rates than the huddled masses.

No shit. Never mind the fact that the number of so-called "strategic defaults" pales in comparison to actual, plain vanilla defaults. Like, there are at least four times as many of the latter.

Also, never mind that if we define "rich" to mean "making more than 80% of the population," which doesn't strike me as an unreasonable definition, your household only needs to earn $88k.

By which definition a large number of people MeFites probably count as "rich".

No, this is obviously evidence that "the rich" are obviously out to screw "the rest of us".

Your relentless droning on this subject is growing tiresome.
posted by valkyryn at 12:29 PM on July 9, 2010 [1 favorite]


Didn't the Bush White House coin the phrase "ownership society"?
posted by boo_radley at 2:58 PM on July 9


I definitely remember Bush touting an ownership society at one point. I hold him personally accountable for serving as spokesmodel for the predatory lending industry at one point in the house of cards that is the American economy.
posted by vhsiv at 12:33 PM on July 9, 2010 [1 favorite]


Also, never mind that if we define "rich" to mean "making more than 80% of the population," which doesn't strike me as an unreasonable definition, your household only needs to earn $88k.

If you read the article, they're talking about people with mortgages in the amount of a million dollars are more. That's a significantly smaller slice than 20%.
posted by infinitywaltz at 12:36 PM on July 9, 2010 [13 favorites]


Why bother reading anything, infinitywaltz? Don't you get it? This subject is getting tiresome to valkyrn. It's so vital for you to understand that!
posted by saulgoodman at 12:38 PM on July 9, 2010 [12 favorites]


valkyryn, the NYT article focused on people who owed more than $1 million on their property. That's not a bad working definition of rich (more appropriate than $88,000+ per annum). It's a bit speculative, as it's hard to tell when a default is strategic and when not. HEre's what NYT said about it:
More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.
Then there are some anecdotes about actual strategic defaults, followed up by some speculation:
“Those with high net worth have other resources to lean on if they get in trouble,” said Mr. Khater, the analyst. “If they’re going delinquent faster than anyone else, that tells me they are doing so willingly.”
So, it's fair to claim that the headline over-reaches, and the thesis is a bit of a stretch; but it's also worth considering—are these surrogate markers for strategic defaults? What is going on here exactly? It's an interesting and disturbing trend.
posted by Mister_A at 12:43 PM on July 9, 2010 [2 favorites]


No, this is obviously evidence that "the rich" are obviously out to screw "the rest of us".

When will those dastardly poor people stop oppressing the rest of us?
posted by shakespeherian at 12:44 PM on July 9, 2010 [5 favorites]


And they have the wealth to pay lawyers to find or set up loopholes. I'm sure there are people with less money who think "if there were only way I could profit instead of lose money," but they lack the contacts who know how to make that glint of an idea into a legally sound reality.

For a long time, I've pondered the mystery of never-ending wealth. How is that rich people, when they go bankrupt or get brought down, or go to jail, never seem to end up working at a Burger King?

Like OJ Simpson, who didn't seem to have any visible means of support right up until he finally went to jail, or Donald Trump who seems to be a serial bankruptee...

Of course then, there's Madoff.
posted by mmrtnt at 12:48 PM on July 9, 2010 [2 favorites]


Ownership Society:
Ownership society is a slogan for a model of society promoted by former United States President George W. Bush. It takes as lead values personal responsibility, economic liberty, and the owning of property. The ownership society discussed by Bush also extends to certain proposals of specific models of health care and social security.

History

The term appears to have been used originally by President Bush (for example in a speech February 20, 2003 in Kennesaw, Georgia) as a phrase to rally support for his tax-cut proposals (Pittsburgh Post - Gazette, Bush OKs Funding Bill for Fiscal '03, Feb 21, 2003 Scott Lindlaw). From 2004 Bush supporters described the ownership society in much broader and more ambitious terms, including specific policy proposals concerning medicine, education and savings.

posted by zarq at 12:48 PM on July 9, 2010 [1 favorite]


No, this is obviously evidence that "the rich" are obviously out to screw "the rest of us".

At some point you have to stop blaming pareidoilia and start recognizing a pattern.
posted by Pope Guilty at 12:51 PM on July 9, 2010 [9 favorites]


If you read the article, they're talking about people with mortgages in the amount of a million dollars are more.

True. But if you read the article, what they don't talk about is how many mortgages are actually in that category. I mean, if people who owed $1 million or more on their mortgages were ten times as likely to default as people who owed less than that but there were only a thousand of them... this does not constitute a trend we should care about. We don't even get any idea of the proportion of $1 million mortgages vs. the total number of mortgages.

What we do get is precisely calculated headline fodder for both NYT, which could sorely use some, and the OP, whose ideology he does not exactly take pains to conceal. Though it's not his fault the NYT writer decided to be sensationalistic, that's no excuse for following suit.
posted by valkyryn at 12:51 PM on July 9, 2010 [1 favorite]


Also:
..if you own something, you have a vital stake in the future of our country. The more ownership there is in America, the more vitality there is in America, and the more people have a vital stake in the future of this country. - President George W. Bush, June 17, 2004

We're creating... an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, welcome to my house, welcome to my piece of property. - President George W. Bush, October 2004.
posted by saulgoodman at 12:55 PM on July 9, 2010 [2 favorites]


Bush drive for home ownership fueled housing bubble, New York Times, December 21, 2008.
Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. The president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary wanted to cut a deal. And the regulator Bush chose to oversee them - an old school buddy - pronounced the companies sound even as they headed toward insolvency.

As early as 2006, top advisers to Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Bush and his team misdiagnosed the reasons and scope of the downturn. As recently as February, for example, Bush was still calling it a "rough patch."
posted by kirkaracha at 12:58 PM on July 9, 2010 [3 favorites]


Oh, completely okay with the idea that Republicans are at least as guilty as Democrats for causing this debacle. No objection there. They can all rot in hell as far as I'm concerned.

My objection is in the idea that "the rich" are somehow this homogeneous, monolithic force which acts consistently against the interests of the "not rich". People with money are an incredibly diverse group--Obama and the Bushes are both "rich"--and in any case, the threshold for being considered "rich" by any reasonable standard is so low as to render such class warfare meaningless.
posted by valkyryn at 12:59 PM on July 9, 2010 [1 favorite]


While more proletarian types tend to be raised to believe that your word is your bond and that contracts are holy writ which must be fulfilled because dammit, you gave your word, the wealthy generally aren't filled up with that nonsense and are perfectly willing to think strategically- call it "thinking in a business way"- instead of thinking in terms of honor and all that silliness.

This drives me up a tree, when I see people talking about how they will go to any length to pay off an underwater mortgage because "I made a promise" or "my word is my bond." That may be true, but it's premised on an assumption that your word was "I will pay you this amount of money."

The words you signed are your bond. No mortgage says "I, homeowner, will pay you, bank, $X00,000 come hell or high water." Mortgages say "I will pay $X00,000 at x% interest or I will give you the house." Those are the two morally equivalent ways of fulfilling your obligation. If you were going to say "I'm not paying you, and I'm keeping this house, ha ha ha," that would be an issue. But jingle mail is just the half of the contract the bank would rather you not opt for.

I don't think it's a matter of poor or working class people being more ethical or more honest than rich people. I think it's a matter of richer people having a firmer grasp on what exactly their contractual obligations are, and better tools for calculating their own interests. Probably because richer people get a better education.

So I'm not saying it's not a class issue, but it's not at all the kind of simplistic class-based morality issue it's being presented as.
posted by rusty at 1:00 PM on July 9, 2010 [18 favorites]


Why are we using scare quote for 'rich'? Are we not convinced that such a category exists?
posted by shakespeherian at 1:01 PM on July 9, 2010 [3 favorites]


Donald Trump who seems to be a serial bankruptee...

Trump has never been shy about how his bankruptcies are strategic. His wealth is partitioned off among several distinct enterprises and holding companies and the like, and if any of them goes bankrupt, it's because it's easier for him to cut his losses and keep the rest of his money from sliding down the same hole.

(Not that I'm saying he's good at it -- if he'd just taken the money he inherited and put it into a savings account, he'd be richer than he is at the moment, if significantly less famous.)
posted by Etrigan at 1:03 PM on July 9, 2010


Isn't the whole thing Paul Volcker's fault? I read that somewhere.
posted by tigrefacile at 1:03 PM on July 9, 2010


Also, never mind that if we define "rich" to mean "making more than 80% of the population," which doesn't strike me as an unreasonable definition, your household only needs to earn $88k.

Holy crap, I must be a multi-millionaire, then. Break out the gold-crusted caviar!
posted by Huck500 at 1:05 PM on July 9, 2010 [1 favorite]


the threshold for being considered "rich" by any reasonable standard is so low as to render such class warfare meaningless.

You're going to define your own threshold for being rich and then complain that it's too low to be meaningful? That seems like a kind of masturbatory exercise.
posted by enn at 1:09 PM on July 9, 2010 [12 favorites]


the threshold for being considered "rich" by any reasonable standard is so low as to render such class warfare meaningless.

This statement might not come across as ridiculously out of touch and reflecting an extraordinarily privileged perspective if you happen to spend most of your time associating with the 20% or so of the population who are above this threshold. But when you don't meet this criterion yourself, and personally know and associate more or at least as often with others who don't, you come to have a much more realistic understanding of what a reasonable standard of wealth is, IMO. Not to drone on to the point of being wearisome.
posted by saulgoodman at 1:10 PM on July 9, 2010 [4 favorites]


valkyryn : Also, never mind that if we define "rich" to mean "making more than 80% of the population," which doesn't strike me as an unreasonable definition, your household only needs to earn $88k.

This is not only an unreasonable definition, but it is a ridiculously unreasonable definition. There are these little things called "wealth distribution" and "wealth inequality." Maybe you've heard of them? As wealth inequality increases, the 80% mark may actually trend downwards as more and more wealty accumulates into the top percentiles. Your measure also ignores the fact that most rich people make their money out of wealth, not income. The richest 1% of Americans own something like 40% of the private wealth in this country. the richest 10% own around 80%. This gives these people a vastly disproportionate control over the economics of the other 90% in this country.

I wouldn't necessarily say that the rich are out to consciously screw the non-rich in this country. Although I wouldn't necessarily say they weren't either. I don't think it matters. They don't get to be that rich without standing on the backs of the non-rich, and acting in their own self-interest perforce screws the non-rich.
posted by slkinsey at 1:11 PM on July 9, 2010 [7 favorites]


Why are we using scare quote for 'rich'? Are we not convinced that such a category exists?

The rich are never convinced this category exists. That's why they're so determined to keep getting richer.
posted by saulgoodman at 1:12 PM on July 9, 2010 [8 favorites]


I think most people believe this to be true:
“Those with high net worth have other resources to lean on if they get in trouble,” said Mr. Khater, the analyst. “If they’re going delinquent faster than anyone else, that tells me they are doing so willingly.”
But Mr. Khater apparently fails to consider that there are a fair number of people out there who have $1 million mortgages who aren't really rich, who don't have a particularly high net worth. It was possible, in the middle part of the decade, for a working couple making $100,000 each to qualify for a million-dollar mortgage loan. Many people in those circumstances did just that, in fact! But these are 40-ish people hitting their stride in their prime earning years, not professional baseball players or heiresses or what have you. Well-paid working stiffs. Many people took on these exotic instruments of finance (ARMs, interest-only loans, etc) based on the false premise that real estate never goes down. Then it went down, and one member of the family lost a job, and with your income halved and your mortgage payment increased by 50%, well, like it or not, you are going to default on that million-dollar loan.

I'm not saying that there aren't strategic defaults among the rich, but the issue is complex and needs more thorough analysis than what the NYT has given here.
posted by Mister_A at 1:13 PM on July 9, 2010 [2 favorites]


My objection is in the idea that "the rich" are somehow this homogeneous, monolithic force which acts consistently against the interests of the "not rich". People with money are an incredibly diverse group--Obama and the Bushes are both "rich"--and in any case, the threshold for being considered "rich" by any reasonable standard is so low as to render such class warfare meaningless.

Of course the rich is not a homogeneous group. The point remains that there are a statistically significant number of people who have a large amount of money that they gained wholly or partially by enriching themselves at the expense of others and the nation as a whole.
posted by Zalzidrax at 1:13 PM on July 9, 2010


If 80% of the population are serfs, you aren't rich just because you make a few more pennies than them.
posted by furiousxgeorge at 1:13 PM on July 9, 2010 [1 favorite]


I know it means I'm a socialist/communist nazi, but really there has to be a way to ensure that every person who works can fulfill the American Dream... meaning buying a house and living there successfully, not the bastardized dream that seems to involve MTV Cribs and mounds of cocaine.

It's not like the money isn't there, it's just sitting in a thousand Scrooge McDuck vaults being ignored or being passed back and forth between people/countries who really don't have anything else to do with it.

I don't know anything about the stock market, but what if every company that went public was required to divide among all its employees the same amount of stock that was sold to the public. Would everything explode?
posted by Huck500 at 1:15 PM on July 9, 2010 [1 favorite]


rusty: I don't think it's a matter of poor or working class people being more ethical or more honest than rich people. I think it's a matter of richer people having a firmer grasp on what exactly their contractual obligations are, and better tools for calculating their own interests. Probably because richer people get a better education.

So I'm not saying it's not a class issue, but it's not at all the kind of simplistic class-based morality issue it's being presented as.


Aren't we also considering the fact that the not-rich people probably have that house as a sole residence, whereas the rich people do not? It's one thing to default on the mortgage on that house in the Hamptons you over-reached opn when you can retreat to the comforts of your Brooklyn Heights brownstone. It's another thing to default on the mortgage for the only house you own.
posted by slkinsey at 1:20 PM on July 9, 2010 [7 favorites]


Many people unable to buy or own homes bought homes....true. But those whose "profession" it is to know who ought and ought not own homes managed to get those people to buy their products though training and knowledge told them which people should not be buying homes. Why blame the dumb consumer when the clever seller tells him it is ok to go ahead and buy?
posted by Postroad at 1:20 PM on July 9, 2010 [1 favorite]


The richest 1% of Americans own something like 40% of the private wealth in this country. the richest 10% own around 80%. This gives these people a vastly disproportionate control over the economics of the other 90% in this country.

So let's see...

From the article in the OP, we're talking about mortgages with values over $1 million. Something like 20% of all mortgages over that value are in default , and something like 20% of defaults are suspected to be strategic. So we're talking about... what percentage of all mortgages? If every single mortgage in the country were worth more than $1 million, we'd be looking at 5% of them strategically defaulting. Given that only the richest 1-2% of Americans are probably even eligible for such a stupid financial instrument, we can't be talking about more than a fraction of that.

I say again: decent headline fodder, awesome grist for the proletariat mill, but not actually news.
posted by valkyryn at 1:23 PM on July 9, 2010


Silly peons. Personal responsibility is for poor people.
posted by lordrunningclam at 1:26 PM on July 9, 2010


Why blame the dumb consumer when the clever seller tells him it is ok to go ahead and buy?

Yeah, that's a big part of the problem. Not only that, but to make the dumb consumer swallow it, they'd start him or her off with an unrealistically low monthly payment through the magic of ARM, etc.
posted by Mister_A at 1:30 PM on July 9, 2010


valkyryn: "Also, never mind that if we define "rich" to mean "making more than 80% of the population," which doesn't strike me as an unreasonable definition, your household only needs to earn $88k."

I'm not sure that's a reasonable definition (although the NYT would agree with you). Quintile analysis is a good tool when your population is similar throughout, but the top quintile's data are not even close to normal.

$88K gets you firmly into a middling tax bracket. Speaking statistically, I'd expect 2 sigmas above median would be a good qualifier for "rich" -- this is approximately the top 2.1% of households, and according to Census Bureau data, clocks in somewhere around $250,000.
posted by boo_radley at 1:33 PM on July 9, 2010 [1 favorite]


Valkyryn, the articles you link do not actually contain the information you imply they do. Considering that you previously decided to try to throw in a definition of "rich" unrelated to any article or discussion at hand, your arguments are beginning to seem extremely disingenuous.

Furthermore, even assuming your numbers are correct, the impact of the strategic defaults must also take into account the fact that the monetary value of the loans is many times the average. Considering that the average home price peaked at $313k that's a minimum of well over 3 times the average impact of a loan default. Of course without the numbers for the strategic default on sub-million dollar loans, we can't draw very solid conclusions.
posted by Zalzidrax at 1:35 PM on July 9, 2010


Equally interesting to consider, valkyryn, is the total value of the defaulted loans at $1M+ compared with the total value of defaults <$1M. It seems like a million-dollar default would be a much bigger hit to a financial institution because the chances of getting the $1M+ back are slim to none, what with values of the more expensive properties having been hit hardest in most places. That relatively small proportion of mortgage defaults may have a disproportionate negative effect on bank ledgers.
posted by Mister_A at 1:35 PM on July 9, 2010


Why blame the dumb consumer when the clever seller tells him it is ok to go ahead and buy?

Anyone dumb enough to base a purchasing decision on the word of the seller that "it's ok to go ahead and buy" is dumb enough to bear a significant portion of the blame for their dumb decision.
posted by The World Famous at 1:35 PM on July 9, 2010 [3 favorites]


Either way, wealthier people are defaulting at more than twice the rate of other mortgage holders, as noted here:

CoreLogic additionally found that the delinquency rate on $1 million-and-above investment homes was more than twice the rate on less-expensive investment homes - 23% versus 10%.

And in Florida, Nevada and the other states that sparked the collapse--meaning those states that by all accounts led the way in increasing default rates at the start of the meltdown--there continues to mount evidence of potentially billions in mortgage fraud, as described in this link from the fpp (and in other scams reported elsewhere):

A network of Broward County attorneys, law enforcement officers and mortgage brokers are accused of falsifying a slew of documents to obtain $16.5 million in loans that they used to buy and flip properties during the real estate boom, according to an indictment unsealed Wednesday.
posted by saulgoodman at 1:36 PM on July 9, 2010 [2 favorites]


Although it came out almost a year ago, I still highly recommend the documentary American Casino to anyone who wants to understand how the sub-prime mortgage bubble was systematically inflated by predatory lenders.
posted by HP LaserJet P10006 at 1:39 PM on July 9, 2010


Why blame the dumb consumer when the clever seller tells him it is ok to go ahead and buy?

It takes a lot of education to master the Special Double Standard Model of Economics: When bankers need your money to make investments, you should totally trust their expertise, but if your money is lost, it's your fault for having trusted their expertise.

Risk free capitalism relies on finding the right mark sucker investor for all your finance plans. It's part of the that hard-working American honesty that makes our country great!
posted by yeloson at 1:39 PM on July 9, 2010 [2 favorites]



I don't know anything about the stock market, but what if every company that went public was required to divide among all its employees the same amount of stock that was sold to the public. Would everything explode?


What is that supposed to accomplish? If you wanted to improve the lot of the average worker living wages and universal healthcare would probably be better starting points than monkeying with the stock market. Anyway, I would imagine the vast majority of workers are employed either by: already public companies, governments, non-profits, or private companies that are never going public (small businesses etc.).
posted by ghharr at 1:40 PM on July 9, 2010


If you are defaulting on a $1.5 million house, by definition you are not rich. Rich is when assets - liabilities is a large number.

What caused the housing crisis is simply poor people who thought they were rich.

The size of your house does not make your rich, unless you do not pay a mortgage. The model of car you drive does not make you rich. Every single person who drives a car drives a used car. The brand of stove, the latest phone, your clothes, which trends you keep up with, the friends you keep, and the neighborhood you live in do not make you rich.

Those things, perversely, conspire to keep you from becoming rich. If you're lifestyle depends on a particular net cash flow, it might be a very comfortable life, but you aren't rich.

The iPhone/smartphone does not cost you $299. It costs you $1000 per year for the first two years you own it. Cable TV costs another $1000 per year. Those are things absolutely every single American can easily live without, and they absorb $2000 per year in your after-tax income.

What if I snapped my fingers, and you got a $2000 a year raise? How much would you thank me? $2000 a year is music lessons every single week for your kid. Or a math tutor, or a writing tutor, or a batting coach. It's a personal trainer, enough to keep two old cars running smoothly. It's a month's mortgage payment.

$2000 will let you see things in nature that you would never have imagined existed in even the most extravagant fiction.

And yet, people don't stand in line overnight in front of a pianist's house to get lessons. American's are still overweight. People are scraping by instead of saving.

$2000 per year at 3% interest is $45,000 in 18 years. But iPads, the product that that will be worth nothing in 18 months when it is replaced with a newer model, are back-ordered.

Now add in all the other crap. $3.00 apps, lattes, gourmet cupcakes, etc. Things that should cost $0.70 but cost $4.00 because the person selling it spent more time choosing the font on the box than in making the thing. Now add the big stuff, like a new state-of-the art PC every 4 years, or a new car every five years.

The iPad was announced on the afternoon of January 27, 2010. People couldn't wait to buy it.

At 9:00pm that exact same day, the President of the United States said this in his State of the Union Address:
But the devastation remains. One in ten Americans still cannot find work. Many businesses have shuttered. Home values have declined. Small towns and rural communities have been hit especially hard. For those who had already known poverty, life has become that much harder.

This recession has also compounded the burdens that America's families have been dealing with for decades – the burden of working harder and longer for less; of being unable to save enough to retire or help kids with college.
The cognitive dissonance here is staggering. On exactly the same day, those two messages were delivered to the same audience. Maybe of the people waiting with bated breath for Steve's announcement, also voted for Obama precisely because they thought the former administration tanked the economy. And yet here they were, perpetuating the same consumer psychology actually responsible for destroying the American economy over the last 30 years.

The problem is that Americans are so programmed to receive marketing--so attuned to chase status and hunt cool--that they are no longer able to perceive the actual world as it is. Their cognitive apparatus is short-circuited, and now the visual cortex is directly connected to wallet. I see something cool, therefore I want it, therefore I buy it.

If any product you own appeared on the cover of a magazine, you got taken. If you every stood in line to spend your money, you got taken.

Look at all the marvelous things you have. Stare at them. Then ask yourself out loud what you don't have. Ask yourself out loud what those things took from you beyond what was indicated on the price tag.
posted by Pastabagel at 1:40 PM on July 9, 2010 [43 favorites]


Mister_A is exactly right that you do not have to be rich in terms of wealth to owe more than one million dollars on a home. A couple earning between 100-150K could easily owe that much on a mortgage + HELOC in Southern California, where I worked for a bankruptcy lawyer in the midst of this crisis. I would field calls all day long from people with more than 800K of mortgage and HELOC debt who were certainly making well above median income but were not necessarily wealthy.
posted by Aizkolari at 1:41 PM on July 9, 2010


I'd point out again that one major factor that helped make Florida in particular such an attractive target for mortgage scams was deregulation that took place under Governor Jeb Bush, which led directly to thousands of individuals with previous criminal records working as unlicensed loan originators in Florida. As the Miami Herald previously reported:
More than half the mortgage professionals registered in Florida -- 120,563 -- entered the industry this decade without being licensed by the state, The Miami Herald found.

Known as loan originators, they perform the same job as mortgage brokers but aren't bound by the same rules.

Time and again, industry leaders asked Florida regulators to bring this group under their watch by imposing mandatory licensing. But regulators refused to press for any changes, claiming that lawmakers would never approve.

The state's refusal proved costly during the biggest housing boom in Florida history: Thousands of loan originators entered the industry with criminal histories, state records show.

While The Miami Herald found breakdowns in the state's licensing system for mortgage brokers, the lack of controls over originators created even more problems for an industry steeped in the highest fraud rate in the nation.
posted by saulgoodman at 1:43 PM on July 9, 2010 [1 favorite]


regulations banning recourse loans benefit the rich more than the poor. we can get rid of them now right?
posted by drscroogemcduck at 1:44 PM on July 9, 2010


One popular view blames "the Democrats and their efforts to expand homeownership to people who, in some cases, may not have been quite ready for it."

The Carter administration, with the CRA, got the ball rolling. The Reagan, Bush, Clinton and Cheney administrations either generally expanded cheap credit for sub-prime borrowers or did nothing to stop it.
posted by ZenMasterThis at 1:44 PM on July 9, 2010


Two thousand dollars could also pay for tutoring that would let you use apostrophes correctly.

Posted from my iPhone.
posted by entropicamericana at 1:45 PM on July 9, 2010 [5 favorites]



Equally interesting to consider, valkyryn, is the total value of the defaulted loans at $1M+ compared with the total value of defaults <>

DING DING DING We have a winnah!

My quick googling leads me to believe the median home price in the US is ~$180k. In other words, someone owning a $1M home who's defaulting is throwing at least five times the bad debt into the debt pool than the median home that goes into foreclosure. And, while I have no statistics to back this up, I kind of doubt they're going to resell very quickly.

So yes, people with ~$1M+ homes who default, whether deliberately or due to financial distress, are fucking up the system more than other people. At least proportionately more.

When it comes down to it, with great financial wealth comes great responsibility. Because while people will lend to you based on a reasonable expectation of your ability to repay the debt (in theory), it takes a lot more peons screwing up to rack up millions in debt than it does one high roller.

posted by mikeh at 1:47 PM on July 9, 2010


And I screwed up my italics. Mea culpa.
posted by mikeh at 1:49 PM on July 9, 2010


What caused the housing crisis is simply poor people who thought they were rich.

I'm sorry, but this is utter BS. The housing bubble was caused (not entirely, but in large part) by greedy speculators on Wall Street who encouraged predatory practices among sub-prime lenders, and who knew full well there would eventually be massive numbers of defaults.

But given the staggering growth of sub-prime, the lenders did not care:
The subprime industry grew from a $35 billion per year industry in 1994 to more than $330 billion in 2003, and from 2004 to 2006 the volume of subprime loans nearly doubled to more than $600 billion.
posted by HP LaserJet P10006 at 1:54 PM on July 9, 2010 [4 favorites]


Governor Jeb Bush, which led directly to thousands of individuals with previous criminal records working as unlicensed loan originators in Florida.

Really? Jeb Bush caused it? If this problem only happened in Florida, and not across all of the US, the UK, and continental Europe, maybe you'd have a point.

For the same reason I have zero patience for the "minority borrowers are to blame" Fox News bullshit, I have no patience for this. Only grown-ups can buy houses. And they buy them maybe three or four times in their whole life. It is the single most important financial decision of most people's lives. If you got screwed because you took someone's word about an mathematically verifiable fact about your money because you were too lazy to ruyn some numbers, then you are responsible. Not Jeb Bush or George Bush or Pablo Escobar, Certified Financial Planner.

You.
posted by Pastabagel at 1:55 PM on July 9, 2010


And Pastabagel, that's a heckuva rant, but what's the moral there? That nothing popular is worth doing, that spending money is always worse than saving, that buying a product that's been marketed means that I'm buying into marketing?

I mean, I bought an iPad, and I gave about twice that much money to a community organization the same week. I also threw some into my "improve the house" fund because I live there, and because I'm helping to keep up a home that might otherwise be ailing in an older neighborhood. I put away toward a savings account and a 401k. I spend time working like crazy, but I also volunteer with kids. And I own a damn iPad and a new MacBook Pro.

Stop telling people they're wasting their money. People will always do something you feel is a waste of money if you look hard enough. Just make sure they're not wasting all of their money, and make a convincing argument for spending enough where it counts.
posted by mikeh at 1:57 PM on July 9, 2010 [1 favorite]


I love a good rail against the rich as much as the next guy, but this link had a bit of context-free statisticalizing as bad as any I've seen:
The report says those in the lowest income group (making $12,499 or less) and the second-lowest group (making $12,500 to $20,000) account for 30.8% and 19.1%, respectively, of those unemployed during the fourth quarter of 2009. They also accounted for 20.7 and 17.2% of those who were underemployed. By contrast, those making $100,000 to $149,000 or $150,000 or more accounted for 4% and 3.2% of the unemployed, respectively, and 2.5% and 1.6%, respectively. of the underemployed.
I mean, even the dullest idiot knows that the rich form a much smaller proportion of the population than the poor. The question is what the relative rates of un- and underemployment was within those groups, or at least the relative frequency of the whole group in the population, so those frequencies can be compared to the frequency among the un- and underemployed. Anybody have either of those numbers at hand?
posted by Mental Wimp at 1:57 PM on July 9, 2010


I see two problems with the mindset that prompted people to buy more home that they could *reasonably* afford:
1. Property values will always go up. BS - a bubble is a bubble is a bubble.
2. A home is an investment. double-BS. A home is a place to live, it is shelter. For more than 50 years, if you were lucky you got 20% or so on the house when it sold; part of that era, you lost (the Depression). Then the 80's hit, and BAM! people expect to make money on their home.
posted by dbmcd at 1:58 PM on July 9, 2010


If you are defaulting on a $1.5 million house, by definition you are not rich. Rich is when assets - liabilities is a large number.

This is only true if you have to default on that $1.5MM house because you don't have the money to pay the mortgage. If you have enough money to pay the mortgage and choose to default on that $1.5MM house (i.e. a "strategic defaul"), then you may very well be rich.
posted by slkinsey at 2:00 PM on July 9, 2010 [4 favorites]


The housing bubble was caused (not entirely, but in large part) by greedy speculators on Wall Street who encouraged predatory practices among sub-prime lenders, and who knew full well there would eventually be massive numbers of defaults.

Let's assume you are correct. In order for the Greedy Fatcats to know that there would be a massive number of defaults, they'd have to know that there'd be a massive number of loans taken out in the first place. How did they know this? I didn't know this. I saw "interest-only 2% for the first two years!" and thought, "Interest only on a $750k house?! No one is stupid enough to do that, that's suicide."

They knew this for exactly the same reason Steve Jobs knew that Obama's dour recession talk the night of his iPad announcement would not affect sales of his luxury product. In both cases, they knew their market.

And in both cases, they were addressing the same pool of consumers. So we're both right.
posted by Pastabagel at 2:01 PM on July 9, 2010


The golden rule: those with gold, rule.
posted by bobbyelliott at 2:02 PM on July 9, 2010 [1 favorite]


hello from reddit, mefi!
saulgoodman, you made the front page :-)
posted by cgs at 2:02 PM on July 9, 2010 [1 favorite]


I already take Pastabagel's advice to heart. I assume everyone in the Finance, Insurance, and Real Estate industries are criminals trying to defraud me. And guess what? It's true! Every time! And guess what else? It's not possible to avoid dealing with these criminals! You know why? Because they run the damned country.
posted by vibrotronica at 2:04 PM on July 9, 2010 [5 favorites]


What caused the housing crisis is simply poor people who thought they were rich.

....

Look at all the marvelous things you have. Stare at them. Then ask yourself out loud what you don't have. Ask yourself out loud what those things took from you beyond what was indicated on the price tag.

-Pastabagel


Look at all these marvelous things you have. Stare at them. Then remind yourself that a good chunk of these frivolous purchases result in job creation. Production, sales, and retail sales jobs depend upon it. Unless, of course, they decide to start teaching piano, instead.
posted by Bathtub Bobsled at 2:04 PM on July 9, 2010 [1 favorite]


PB: I didn't say anything of the sort! I only pointed out three simple facts:

1) Under Bush in Florida, the real estate market was deregulated and a new class of loan providers was established.

2) The relaxed regulatory environment contributed significantly to Florida having one of the highest rates of mortgage fraud in the nation.

3) Florida (along with California, Nevada and other states with high rates of mortgage fraud) was among the first states to see high default rates at the start of the collapse.
posted by saulgoodman at 2:05 PM on July 9, 2010 [1 favorite]


The Carter administration, with the CRA, got the ball rolling. The Reagan, Bush, Clinton and Cheney administrations either generally expanded cheap credit for sub-prime borrowers or did nothing to stop it.

This is false equivalency. It was only during the last decade that banking and investment institutions realized that they could make ridiculously large profits by repackaging the crappy mortgages and selling them as high-quality investment instruments. This created a powerful secondary market for these crappy mortgages and huge incentives were given to the makers of such mortgages to generate a lot of them, which they could only do quickly by getting a lot of unqualified customers. With those incentives to not look too hard at the finances of the persons taking out the mortgage, of course, credit wasn't checked too hard or even at all. You know the rest of the story.
posted by Mental Wimp at 2:05 PM on July 9, 2010


As a totally meaningless anecdote, I offer the following:

I was hospitalized for a stint a while back. Somewhere down the hall from my room, some poor demented individual was screaming "ADAM SMITH! ADAM SMITH! ADAM SMITH!!!!"

My brother suggested that I scream back "INVISIBLE HAND! INVISIBLE HAND! INVISIBLE HAND!" But I could never work up the courage.

More relevantly, F. Scott Fitzgerald was fascinated with the difference between the rich and the poor, i.e., the different ways the two groups thought.
posted by angrycat at 2:05 PM on July 9, 2010


Only grown-ups can buy houses. And they buy them maybe three or four times in their whole life. It is the single most important financial decision of most people's lives. If you got screwed because you took someone's word about an mathematically verifiable fact about your money because you were too lazy to ruyn some numbers, then you are responsible.

People are responsible for their debts. It's serious business. We both understand that. But, the thing is, I'm not going to act like I'm Mr. Responsible Money-Saving Man while other people are dealing with the jacked-up system.

I learned the way to do things, but obviously as a society we did fail because a lot of people did the wrong thing, we had shitty institutional controls, and shit happened. Now we all have to clean it up, so acting like all people are capable of mathematically verifying shit, and there's not a reason we have controls, elected and appointed officials, and financial system rules to keep people from fucking up their own finances and the system. Everyone *should* be able to do things, you shouldn't buy a house unless you can balance a damn checkbook, and so on. But the world doesn't work like that.
posted by mikeh at 2:06 PM on July 9, 2010 [1 favorite]


I don't think it's a matter of poor or working class people being more ethical or more honest than rich people. I think it's a matter of richer people having a firmer grasp on what exactly their contractual obligations are, and better tools for calculating their own interests. Probably because richer people get a better education.

My point isn't that non-rich people are more moral, it's that non-rich people are enculturated into value systems that, if not unlearned, tend to make them easy to fuck over.
posted by Pope Guilty at 2:08 PM on July 9, 2010 [2 favorites]


On exactly the same day, those two messages were delivered to the same audience. Maybe of the people waiting with bated breath for Steve's announcement, also voted for Obama precisely because they thought the former administration tanked the economy. And yet here they were, perpetuating the same consumer psychology actually responsible for destroying the American economy over the last 30 years.

well, as a person who doesn't have an i phone OR cable tv, i guess i've taken your advice, pastabagel - and i don't think there's much doubt in my mind that any given person who did so would see $2,000 extra to save

where it falls apart for me is what happens when EVERYONE does that? - won't the recession get even worse?

we can dig the hole deeper by borrowing more so we can spend more - or we can dig the hole deeper by not spending as much

what a choice
posted by pyramid termite at 2:16 PM on July 9, 2010


It takes a lot of education to master the Special Double Standard Model of Economics: When bankers need your money to make investments, you should totally trust their expertise, but if your money is lost, it's your fault for having trusted their expertise.

This is pretty much what my life for the past 18 months has been like: on the one side, constant assurances spanning back over the years from trusted authorities in finance and politics telling people to put their money in this or that bank; and on the other side, these same trusted experts - now that their recommended banks have collapsed - blaming pensioners, parents tucking their savings away for their kids' college funds, and charities for foolishly believing that if they put their money into these bank accounts, they should be able to withdraw at least the amount they put in. It's the sort of double standard that ~*~the rich~*~ love to foist upon people, to absolve themselves of any kind of responsibility.
posted by Marisa Stole the Precious Thing at 2:18 PM on July 9, 2010 [4 favorites]


Stop telling people they're wasting their money. People will always do something you feel is a waste of money if you look hard enough. Just make sure they're not wasting all of their money, and make a convincing argument for spending enough where it counts.
posted by mikeh at 4:57 PM on July 9


I never once said people wasted their money. Look very closely at what I wrote.

You and me an everyone else are conditioned to see the cost of things in terms of the money. $499 for an ipad costs $499. Simple.

But wrong. It costs $499 or the loss of the other things you would have spent the money on. We are talking about a problem of perception of value and opportunity costs. Did you actually choose the ipad over dance lessons or some courses to help you at your job? No, you thought the trade-off was iPad or keeping $500.

Money is a unit of exchange. The purpose is to facilitate comparisons of the value of goods. iPhone and cable tv costs as much as piano lessons for a year. But no one walks into the store thinking like that.

Because if they did, they'd spend the money on things that would make them better and happier people for the rest of their lives. None of those things are available at malls or from publicly traded companies.
posted by Pastabagel at 2:20 PM on July 9, 2010


Ohhhh, but I wanted a peanut!
posted by entropicamericana at 2:31 PM on July 9, 2010 [2 favorites]


Look at all these marvelous things you have. Stare at them. Then remind yourself that a good chunk of these frivolous purchases result in job creation. Production, sales, and retail sales jobs depend upon it. Unless, of course, they decide to start teaching piano, instead.

The world doesn't need jobs making and selling stuff that people don't need. If everyone spent their money wisely, there would still be plenty of jobs to go around.

(Not that I spend my money wisely, but I was smart enough not to buy a house in Southern California, so at least I have that going for me.)
posted by The World Famous at 2:33 PM on July 9, 2010


Because if they did, they'd spend the money on things that would make them better and happier people for the rest of their lives. None of those things are available at malls or from publicly traded companies.

You're just plain wrong. You keep saying things like cable tv costs as much as piano lessons for a year. Yeah? So what? The difference between cable tv and piano lessons for a year is that I like cable tv and I'd rather gouge my eye out with a spork than take piano lessons for a year.

Everyone in the world is not exactly like Pastabagel. Some of us actually enjoy the things we purchase. Also, think about how much Quality Life Experiencetm you could have gotten with the cash you dropped on that Nikon and those lenses and that Blackberry. Or is chastisement just for the little people?
posted by Justinian at 2:38 PM on July 9, 2010 [7 favorites]


I'm pretty sure piano lessons were just an illustrative example. The point, as I understood it, was that in present-day America, consumers tend to spend far more on things than they really realize, without thinking about it terribly accurately. The myriad monthly fees that we seem to be subjecting ourselves to right and left are a big part of that. And we're spending money basically on stuff that a) costs virtually nothing for the seller to create or procure and b) doesn't do us any good other than scratching an itch that we've convinced ourselves that we have.
posted by The World Famous at 2:41 PM on July 9, 2010


Equally interesting to consider, valkyryn, is the total value of the defaulted loans at $1M+ compared with the total value of defaults <>

DING DING DING We have a winnah!

My quick googling leads me to believe the median home price in the US is ~$180k. In other words, someone owning a $1M home who's defaulting is throwing at least five times the bad debt into the debt pool than the median home that goes into foreclosure.


On a per-unit basis, yes, this is correct. But as there are something like twenty times as many houses below the median as there are above $1 million, the numbers still don't do what you want them to. So "normal" houses constitute the vast majority of the problem here.
posted by valkyryn at 2:48 PM on July 9, 2010


I understand, TWF, I was just running with his analogy. My point was that I don't think Pasta has really thought his position through very well. He is taking it as a given that people who buy some of this stuff would have been happier spending their money on other things and then constructing an argument from there. I don't think that can assumed and I think it's rather paternalistic to do so.

How much it costs a seller to make something has no bearing on the price, except as a floor. Something is worth what the buyer will pay for it. If I come up with a magical new invention that has a marginal cost of $1 to me but is so awesome that people line up to pay $1000 for it, it is worth $1000.
posted by Justinian at 2:48 PM on July 9, 2010


"Anyone dumb enough to base a purchasing decision on the word of the seller that "it's ok to go ahead and buy" is dumb enough to bear a significant portion of the blame for their dumb decision."

The whole field of professional ethics is essentially concerned with this very topic, TWF. Anyone who has a professional license -- doctors, attorneys, real estate agents in most states -- will be familiar with this issue. People who are considered professionals by the public are perceived to be knowledgeable and competent by those who are not professionals in a field. Part of that authority is an implied trust that the professional will not abuse their superior knowledge at the expense of their client, but put their knowledge and experience to work in service of their client.

This very concept is embodied in the ethics rules as 'fiduciary duty.' A fiduciary duty to a client means that the client's interests supercede the professional's own interests. As a licensed real estate agent, for instance, I cannot steer my clients toward a house that might earn me a greater commission if I know there is a more suitable house available, but would earn me less commission. I must put my client's own interests ahead of mine.

In fact, most *licensed* professionals are required to take ethics classes (and continuing education) to pound this very point home. Naturally, many many professionals behave unethically, because they don't understand their ethical obligations or because they are simply crooked.

However, where the problem comes in with the housing crisis is that the public is confused as to *who* is a licensed professional and who the public perceives to be a professional. "You don't know what you don't know," and the general public isn't particularly aware of the distinction between a licensed professional and unlicensed professionals and fiduciary duty and such.

Banks are regulated both at the federal and state levels. There are laws against bank fraud, writing bad checks, identity theft, etc. If you mess around with the bank, you can go to jail. Banks are always trying to protect their investments and deposits. When people put their money in the bank, they believe they have it in a safe place with professionals who will look after it.

When people go to buy a house, they don't have time to learn the mathematics of amortization, which involves calculus. They trust that the mortgage lender is a professional who knows their business and is going to protect both the bank's interest and the client's interest. There's a saying, "Your success is my success." If the borrower loses, the bank loses. At least, that was always the understanding. Getting a mortgage was always a shared risk. A bank might be able to recoup a loss on a default through foreclosure, but it was not generally a money-making proposition for the bank.

The historic foreclosure rate was always very low. It was very rare to hear of anyone going through foreclosure unless they fell on really hard financial times. There was a reason for this, and it wasn't because earlier borrowers were somehow more savvy with their money. It was because the banks were very cautious about who they'd lend money to.

This entire debacle turned everything we ever knew on its head, and your average person on the street made the 'mistake' of trusting the professionals, who they thought were regulated and very conservative and protective of their own money. The reason the banks didn't care any more about risk is because they weren't gambling with their own money, but reselling the mortgages on to third parties. Your average person on the street doesn't understand the secondary mortgage market or why the bank's behavior over generations should suddenly change in the span of a couple of years.

It took experts in the field a while to identify exactly what caused this whole crisis, even though people were screaming this would happen the whole time and these smart bankers ignored the warnings. If they do this for a living and didn't see it coming, how is your average person in the street supposed to see it?
posted by PigAlien at 3:06 PM on July 9, 2010 [13 favorites]


My point was that I don't think Pasta has really thought his position through very well.

You can pretty much say that for any of his rants. It's the "being contrarian and confusing that with deep" syndrome.
posted by aspo at 3:15 PM on July 9, 2010 [3 favorites]


Pastabagel: Probably worth pointing out that my iPad will not be 'worth nothing' in 18 months - it'll be worth around 50-70% of its original value. I recently sold my 3 year-old iMac for 50% of its original value, which actually makes it pretty affordable compared to a cheaper commodity PC (and that's disregarding ease of use etc). But hey, let's not have facts get in the way of a good rant, eh?
posted by adrianhon at 3:25 PM on July 9, 2010 [1 favorite]


^from 2004 to 2006 the volume of subprime loans nearly doubled to more than $600 billion.

That's SO upsetting. Next time, we ought to bail-out Main St. and hang Westchester Co. out to dry. NY State won't be happy, but they need to take responsibility for their own poorly distributed wealth.
posted by vhsiv at 3:33 PM on July 9, 2010


so acting like all people are capable of mathematically verifying shit...

Just want to talk a little bit about this. I'm supposedly one of the people who should have a leg up because of my ability verify this stuff -- I've got your typical nerdish ability to focus on details and have a decent enough grip on the interest-related math in question (I can derive amortization formulas from scratch if I need to). Yay for me, right? That mathematical literacy pays off! An arrow in my quiver when I'm dealing with the financial professionals, making big decisions!

The thing is, while this literacy does in fact warn me that interest only loans are very rarely a good idea, in practice when I've noticed an discrepancy between my calculations and the values an institution has come up with for a bond, a car payment, a credit card bill, and yes, even a putative mortgage, the conversation that ensues when I go down to get to the bottom of things doesn't go like this:

ME: So, I've noticed a discrepancy between my calculation and the values your institution has indicated on the statement for my bond value/car payment/credit card bill/putative mortgage

BANK REP: That's very interesting. Can I see how you arrived at these calculations?

ME: Here's my work.

BANK REP: OK... yes, there's the difference equations, good on the induction, looks like you've got the parameters correct, the calculations check out. Your math is sound, sir. Let's check and see how the discrepancy might have been introduced to the system!

Instead, most of the time I find the following:

1) Finding anyone available at the institution who can substantially account or take responsibility for the discrepancy -- let alone follow a mathematical argument and tell you where you or their systems went wrong -- is a chore at best. Impossible is more common.

2) When we can get to the bottom of things, it's that there was something in the fine print that I missed, some condition I've somehow invoked or accidentally signed up for or even something beyond my control that just happened that's triggered a fee or rate change I didn't anticipate.

And at that point, the whole interaction becomes far less about my general numeric/financial literacy, and much more about my social skills, negotiation assets and abilities, value to the institution as a customer.... and relative understanding of the ins and outs of the fine print of any agreements we have.

I don't think that the ability of most people to do the math is really the problem here.
posted by weston at 3:39 PM on July 9, 2010 [4 favorites]


but I was smart enough not to buy a house in Southern California

I bought a house in Southern California, and it's still worth $150,000 more than I bought it for. It's a matter of timing and luck, not smarts.
posted by Huck500 at 3:43 PM on July 9, 2010


I don't have an iPad. But I have a Kindle, which I paid $500 for, and then I proceeded to save enough money on all the books that I bought that I ended up saving a lot of money in three years. Money that went to keeping me immersed in all the sundry worlds of literature.

When I graduated high school, I got an ultrahighend Macbook Pro. On that computer I taught myself to design web sites; I don't think it'll be long before I've made enough in commissions for this computer to pay for itself. And this is a business where the longer you've worked the more you get paid, so I don't begrudge the time it took me to pay this one back. It's made being an autodidact more than pleasurable.

I've spent the last five years using the same Samsung somethingorother. Now that the iPhone 4's out with the new data plan, I'm thinking I'll jump in. $15/month for two years means $240 in the next two years, which is about 1/4th what you seem to think I'll be paying. And that lets me read PDFs on the fly (my Kindle can't, because it's first-gen), it lets me stream music, it lets me check my email without much of a hassle, it lets me take HD pictures, play chess, create an interesting variety of music, and generally tackle a lot of various creative impulses in one go.

My family still uses the iPod touch that we got the year it came out. It still holds 32GB of music. No deprecation of value there. We got exactly what we paid for. And I suspect I'll keep this laptop for at least another five years, or else I'll donate it to my brother when I'm rich enough to splurge for a new one.

I'm an edge case in all of these situations. Not everybody makes as much use out of their phone as I do. But I kind of resent being told that when I buy a piece of technology I'm cheapening my life, Pastabagel. It's not the technology that inherently cheapens that life.
posted by Rory Marinich at 4:25 PM on July 9, 2010


I bought a house in Southern California, and it's still worth $150,000 more than I bought it for. It's a matter of timing and luck, not smarts.

There's no such thing as luck, and smarts can greatly increase the likelihood that one's timing is good.

I was not saying that anyone who has ever bought a house in Southern California is dumb. Just that I was smart not to.
posted by The World Famous at 4:26 PM on July 9, 2010


Pastabagel: What caused the housing crisis is simply poor people who thought they were rich.

The effect of individual foreclosures was magnified by really stupid business decisions higher up on the food chain. The total volume of foreclosures during the crisis only rose from %2 to about %7. Any other investment market would have just swallowed the loss having hedged their investment to start with. But the way the mortgage business worked was that a mortgage company would:

1) borrow large sums of money as a short-term loan
2) make hundreds of mortgages in any way possible
3) sell the mortgages as an MBS, an instrument that was advertised as being better than a U.S. Bond
4) pay off the short-term loan, and repeat.

So the mortgage companies had two-big problems. First, they had to make mortgages to pay off what they borrowed, because they had few assets. Second, they had to sell a long-term illiquid investment as if it were a bond.

Foreclosures and defaults are a fucking part of the business. Had the mortgage companies not been both over-leveraged to the gills and dependent on the liquidity of the MBS, the increase in defaults should have triggered a minor market correction. Instead, you had an entire segment of the industry built on smoke, mirrors, and inflated promises. And responsibility for that rests firmly on the people who were borrowing money on Monday to create mortgages on Tuesday that they sold on Wednesday.
posted by KirkJobSluder at 5:23 PM on July 9, 2010 [2 favorites]


. My point was that I don't think Pasta has really thought his position through very well. He is taking it as a given that people who buy some of this stuff would have been happier spending their money on other things and then constructing an argument from there.

Actually I have thought it through quite a bit. I'm not assuming people would be happier. I'm assuming they haven't considered at all whether they would be happier doing something else with the money (or saving it).

Something is worth what the buyer will pay for it. If I come up with a magical new invention that has a marginal cost of $1 to me but is so awesome that people line up to pay $1000 for it, it is worth $1000.
posted by Justinian at 5:48 PM on July 9


It isn't worth $1000. $1000 is its price, not its value. Its value is different for every consumer, including those who value it at $900, and therefore don't think its worth the price and therefore don't buy it. This isn't semantics. Economics and markets are concerned with price, not value.

My point is that people are not at all assessing the value of things. Instead, they perceive the price of things as obstacles to their desires.
posted by Pastabagel at 5:59 PM on July 9, 2010


I'm an edge case in all of these situations. Not everybody makes as much use out of their phone as I do. But I kind of resent being told that when I buy a piece of technology I'm cheapening my life, Pastabagel. It's not the technology that inherently cheapens that life.
posted by Rory Marinich at 7:25 PM on July 9


You are taking this way too personally, which is strange. If you're comfortable with your decision, what the hell difference does it make what I say? But don't get defensive about my criticism of Apple products. Would you have taken it personally if I used a McMansion as an example, assuming you don't have one of them?

Here's another example. Some people can go out with some friends, have a few drinks, and then for the next ten weeks never drink a drop. Then there are drunks.

Many of the people--not all--waiting in line for ipads, or droid x's, or rachael ray cookbooks or whatever are comsumption "drunks." These "drunks" are the same kind of people who leveraged ten-to-one to buy a house they didn't need and are now screwed. To do that is a cognitive defect. There is something very wrong--very deeply irrational--about that kind of purchasing decision that is equally implicated but to a lesser degree in many of the people who can't wait to hand over their money for some piece of consumer electronics.
posted by Pastabagel at 6:17 PM on July 9, 2010


Everyone in the world is not exactly like Pastabagel. Some of us actually enjoy the things we purchase. Also, think about how much Quality Life Experiencetm you could have gotten with the cash you dropped on that Nikon and those lenses and that Blackberry. Or is chastisement just for the little people?
posted by Justinian at 5:38 PM on July 9


I think somebody knows how to use the internet!

But zingers aside, if not everyone is exactly like me, they aren't exactly like you either. Some people like you, really love technology and having the latest thing. Other people like really big houses. Still others love SUVs. You can't place a value judgment on only some of those and not others.

My point is that the irrational pursuit of any one of those is exactly the same as the irrational pursuit of the others.

And since you brought it up, the blackberry was free with service, and my job pays for the service. So I don't actually pay any money for it. But I do enjoy my camera.
posted by Pastabagel at 6:36 PM on July 9, 2010


never mind that if we define "rich" to mean "making more than 80% of the population,"

Why make the cutoff so high? Why don't you define it as "more than 50% of the population," then you can really rail about how ridiculous it is to blame rich people for our economic troubles.

If you think $88K/year is rich, you must live in an impoverished country. That's only rich if it's non-salary income.
posted by Jimmy Havok at 7:07 PM on July 9, 2010


2. A home is an investment. double-BS. A home is a place to live, it is shelter. For more than 50 years, if you were lucky you got 20% or so on the house when it sold; part of that era, you lost (the Depression). Then the 80's hit, and BAM! people expect to make money on their home.

To be fair this is because of massive inflation in the mid to late 70s which would have caused a massive increase in house prices and a belief that you could make serious capital gains on the properties.
posted by Talez at 7:13 PM on July 9, 2010


What forest?! All I see are these goddamn trees!!
posted by r_nebblesworthII at 7:38 PM on July 9, 2010 [1 favorite]


The world doesn't need jobs making and selling stuff that people don't need. If everyone spent their money wisely, there would still be plenty of jobs to go around.

I nominate me as the sole, central, final arbiter of what people need, whether they spend their money wisely and how jobs shall be allocated.

Vote ZMT king of the economy.
posted by ZenMasterThis at 7:48 PM on July 9, 2010


The New York Times article managed to be both stupid and ignorant.

The author ignored recourse vs. non-recourse. In a non-recourse state like California, you don't have an enforceable obligation to pay any part of a first mortgage after your house is foreclosed, and if the value of the house is less than the mortgage balance, too bad for the bank. Your are honoring the contract if you mail in the keys and the rent the house across street for half your old payment. People with substantial incomes and assets (whether or not "rich") are routinely sued for deficiencies in recourse states, as they agreed they could be when they took the mortgage.

Anyway, the author certainly didn't find a single "rich" person to interview as an alleged defaulter. He found middle class people who had unwisely leveraged up to by upper-middle-class houses in the Bay Area. Debt doesn't make you rich. Frankly to call anyone who could only buy their primary residence by means of a morgage "rich" is absurd. Rich people's houses are a fraction of their net worth, not a multiple of it.
posted by MattD at 7:55 PM on July 9, 2010 [1 favorite]


"America is the wealthiest nation on Earth, but its people are mainly poor, and poor Americans are urged to hate themselves. To quote the American humorist Kin Hubbard, “It ain’t no disgrace to be poor, but it might as well be.” It is in fact a crime for an American to be poor, even though America is a nation of poor. Every nation has folk traditions of men who were poor but extremely wise and virtuous, and therefore more estimable than anyone with power and gold. No such tales are told by the American poor. They mock themselves and glorify their betters. The meanest eating or drinking establishment, owned by a man who is himself poor, is very likely to have a sign on its wall asking cruel question: “If you’re so smart, why ain’t you rich?” There will also be an American flag no larger than a child’s hand- glued to a lollipop stick and flying from the cash register."

- Slaughterhouse Five
posted by p3on at 8:07 PM on July 9, 2010 [5 favorites]


Shorter Pastabagel: The real estate market crashed because you overindulged and bought iPhones, and you should all feel ashamed of yourselves, never mind that I haven't cited a single piece of hard data to support my analysis (but really, isn't the fact that it feels true enough?)
posted by saulgoodman at 9:23 PM on July 9, 2010


I bought a house in Southern California, and it's still worth $150,000 more than I bought it for. It's a matter of timing and luck, not smarts.

We bought our house for under six figures. On paper it's worth more than twice that now (it's zillow estimated value is around $212,000). We got lucky, except that the Florida market seems destined for a protracted decline now due to BP's accidental destruction of most of our state's economic base.
posted by saulgoodman at 9:35 PM on July 9, 2010


Shorter Pastabagel: The real estate market crashed because you overindulged and bought iPhones, and you should all feel ashamed of yourselves, never mind that I haven't cited a single piece of hard data to support my analysis (but really, isn't the fact that it feels true enough?)

And the louche, decadent poor people who spent so frivolously and ruined everything did so because they have a "cognitive defect". Hey, maybe it's genetic.
posted by stammer at 9:54 PM on July 9, 2010


People with money are an incredibly diverse group -- Obama and the Bushes are both "rich"

That's a piss poor example of diversity. Mr. Obama has publicly lauded many of Bush's policies and programs, and has continued and extended them, with his own additions, like his trademark "drone attack". Politically, they're two peas in a pod as far as I'm concerned.
posted by lupus_yonderboy at 12:00 AM on July 10, 2010


Pastabagel: For the same reason I have zero patience for the "minority borrowers are to blame" Fox News bullshit, I have no patience for this. Only grown-ups can buy houses. And they buy them maybe three or four times in their whole life. It is the single most important financial decision of most people's lives. If you got screwed because you took someone's word about an mathematically verifiable fact about your money because you were too lazy to ruyn some numbers, then you are responsible. Not Jeb Bush or George Bush or Pablo Escobar, Certified Financial Planner.

You.

*

I think you might be more influenced by Fox News and its rationalizations than you seem to realize. Watch out.
posted by mondaygreens at 12:26 AM on July 10, 2010 [1 favorite]


"Who started it?" "Who defaulted more?" Aren't they two different arguments in the FPP posing as one question?
posted by uncanny hengeman at 9:29 AM on July 10, 2010


More in depth analysis of why the linked NYT article is stupid.
posted by valkyryn at 10:00 AM on July 12, 2010


More in depth analysis of why the linked NYT article is stupid.

Well, yes, the author of that take down endorses the truth of the assertion in the NYT article, she just says that they do a poor job of supporting it with, like, you know, evidence.
posted by Mental Wimp at 10:52 AM on July 12, 2010


Well, as far as I can tell, no one's disputing the assertion that the upper income earners have continued earning more during the recession, while the middle and lower income earners have all seen their earnings decline, nor that people with mortgages on million dollar properties (which are not nearly as common as some here have suggested, no matter how much you might like to believe your normal if you're in that boat) are defaulting at a rate more than twice that of lower mortgage holders. Hell, I know tv producers whose homes didn't cost a million bucks, so my own experience tells me it's not that common.
posted by saulgoodman at 4:48 PM on July 12, 2010


And the louche, decadent poor people who spent so frivolously and ruined everything did so because they have a "cognitive defect". Hey, maybe it's genetic.

Perhaps these defects could be plotted upon some sort of normative curve.
posted by Pope Guilty at 5:00 PM on July 12, 2010


To beat a dead horse instead of beating on Pastabagel elsewhere when this thread is nagging me:



So what was written that if people recognized the opportunity cost related to spending a lump of money, they might realize they'd be wiser to spend it elsewhere. How is that not wasting the money, unless you want to split hairs about how they're getting something that brings some happiness but not optimal happiness? You're making assumptions that people don't know what they really want, that they aren't spending money on what will have the optimal effect on their lives, and then trying to say that they're not wasting their money, because you're being a contrarian.

I know better than a lot of people too, or so I think.

posted by mikeh at 11:54 AM on July 13, 2010


And I screwed up the italics again! I give up.
posted by mikeh at 11:54 AM on July 13, 2010


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