Wealth Transfer

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Erik Kain

Erik writes about video games at Forbes and politics at Mother Jones. He's the contributor of The League though he hasn't written much here lately. He can be found occasionally composing 140 character cultural analysis on Twitter.

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56 Responses

  1. Avatar Will H.
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    says:

    That sounds good on paper, but it doesn’t play out so well other than that.
    I’m definitely against any measures that would ever make it easier for anyone to file for bankruptcy. A lot of that has to do with the fact that I was a creditor in a bankruptcy, and I’ve seen the abuses first-hand.
    Bankruptcy is a matter of fraud, plain and simple. The bankruptcy court expects discrepancies (ie, fraud) in the various schedules, and makes all kinds of allowances for that (ie, openly condones fraud).
    A creditor has no protection whatsoever. If I have people calling my cell phone threatening me with physical violence, so what. Nothing I can do about it.
    Bankruptcy is a dissipation of wealth. That one person’s outlay is another’s income. It’s pure robbery.
    A home is a secured debt, and secured debt is most often reaffirmed. House, car; that sort of thing. It’s unsecured debt that is discharged more often than not, and those creditors have no recourse. At least with a secured debt, the creditor doesn’t take a total loss.
    I would rather see every person filing for bankruptcy to receive fifty lashes from each and every bankruptcy court, Mutiny on the Bounty-style, before the meeting of creditors takes place, as a method of means-testing for need.

    I think you’re looking at the one end without really looking at the other.Report

  2. Avatar Jaybird
    Ignored
    says:

    I read all of these stories about bloggers getting information from taxi cab drivers and I’m jealous. I figure it’s my turn to try my hand at my version of it.

    I was taking the courtesy shuttle to get my car out of the shop (intake manifold) and the driver was complaining to me about apartment complexes using credit scores to keep people out.

    “This one complex demanded that if you didn’t have a 425, you had to give them TWO recent consecutive pay stubs proving that you had a job!”

    Now, from my privileged perch, I found myself boggling. “How in the hell could you *NOT* have a 425?” (I said this to myself, rather than to him.)

    I did what I could to turn this around to familiar ground and I said “I can’t believe that they don’t just ask for first month’s rent and last month’s rent when you move in. That’s what they did when I was a kid.”

    With all that said, I find myself wondering:

    If this guy went in for a mortgage, what would happen? (It seems to me that he’d be politely declined.)

    Is this right for the bank to do?

    It also seems that it’d be likely that the guy would get a higher rate than someone with a 750 would get.

    Is *THIS* right for the bank to do?Report

    • Avatar Simon K in reply to Jaybird
      Ignored
      says:

      Even FHA loans rarely go down to 425, although there isn’t aq hard floor. Private label subprime might once have plumbed those depths, albeit with an extremely high real average interest rate. Fannie and Freddie require 680, I believe.Report

  3. Avatar Scott
    Ignored
    says:

    Funny how you conveniently forget to mention the pressure that the Clinton admin put on Fannie Mae to lend to poor folks. Frankly, if you you were a no job, no income, no assets borrower and you default, you should lose the house. I hear so many folks bad mouth the mortgage industry but how about some scorn for these folks that were paycheck to paycheck and thought that taking out a large mortgage was really a good idea?Report

    • Avatar BlaiseP in reply to Scott
      Ignored
      says:

      Long ago, I did a system for FSLIC as Receiver, back when the S&L crisis was upon us. Tragic stuff. My crew was entering in all the assets from these little banks. A little box of 3×5 cards recorded the mortgages for maybe 150 homes, each payment and remaining balance neatly written thereon.

      The problem wasn’t these Po’ Folx getting into mortgages. They were making their payments very nicely thank you, as were the Little People with their S&L mortgages.

      Fannie Mae was the problem, as everyone now knows, as the S&Ls were the problem back then. “Liberated” from their previous constraints, the S&Ls began to speculate on commercial real estate. Fannie Mae began to speculate in Credit Default Swaps. The goddamn geniuses who dreamed up these impossibly synthetic derivatives seem to escape your recollection.Report

      • Avatar Jaybird in reply to BlaiseP
        Ignored
        says:

        There’s also the problem of what happens if you foreclose.

        If you foreclose on Poor Person? Well, he gets kicked out, you sell the house to another poor schmuck.

        If you foreclose on The Banks, it’s the end of the world as we know it, we’d have a liquidity crisis the likes of which the world has never seen, that’s why we needed to bail out AIG with 100 cents on the dollar, so on and so forth.Report

      • Avatar Scott in reply to BlaiseP
        Ignored
        says:

        Your one S&L example really hardly proves your point. As for CDSs, the problem isn’t with them per say, as they can be a valuable tool but with their use to speculate especially with the naked CDS was a problem.Report

        • Avatar BlaiseP in reply to Scott
          Ignored
          says:

          My “one” S&L?! I processed all of them that came through Chicago. Credit Default Swaps have two problems. First, they aren’t traded on legit exchanges. Two, since when did a collective pool of “creditworthiness” become a negotiable instrument? I mean, who says so? It’s like effing Pokemon Cards on steroids.Report

    • Avatar Dave in reply to Scott
      Ignored
      says:

      Funny how you conveniently forget to mention the pressure that the Clinton admin put on Fannie Mae to lend to poor folks.

      What’s so funny about it? It’s not his fault that conservatives and, sadly, some libertarians are hanging on to long-discredited theories about the causes of the crisis.

      P.S. you forgot to chide him for failing to mention the Community Reinvestment Act.Report

    • Avatar Simon K in reply to Scott
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      says:

      Because there is no evidence that any pressure various administrations may have put on anyone had any effect. The banking industry could hardly contain their desire to “lend to poor folks”, – any pressure that was applied was applied to an open door.

      Just for the sake of accuracy, Fannie and Freddie never directly purchased NINJA loans. Their own loan guidelines always required a 20% downpayment or PMI and an employment history and credit check. Fannie Mae purchases a bunch of private-label sub-prime MBS in 2006, to which they applied their guarantee the re-issued. This was, of course, stupid, but its also largely insignificant – those crappy loans had already been made lenders operating in the purely private part of the mortgage business.Report

  4. Avatar Kolohe
    Ignored
    says:

    I always thought there was some sort of homestead exception to bankruptcy – it was how I thought OJ, for example, was able to keep his house despite owing 30+ million dollars to the Goldmans.Report

    • Avatar gregiank in reply to Kolohe
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      says:

      I think had to do with living in Florida which had very different laws about what you could claim as retirement income and property.Report

    • Avatar Lyle in reply to Kolohe
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      says:

      It does depend on the state, In Texas for example a homes equity used to be protected, in exchange you could not borrow with the house as security except to buy or improve. Even today you can’t exceed 80% ltv with a cash out. This provision dates from the days of the Republic of Texas, based upon the idea if you have a home you are not hopeless, and the fact that back then everyone owed a lot of money. So what the exemption means is that if you have medical bills filing BK wont take your home away.Report

  5. Avatar North
    Ignored
    says:

    I sympathize with the sentiment E.D. but I can’t help but agree with the commentariate that in practice there’s no way to do this legally and productively. I feel it also does undersell the involvement of just about everyone from borrowers up in the problems that led to the disaster.Report

  6. Avatar Jason Kuznicki
    Ignored
    says:

    I know we recently granted an enormous perverse incentive to the banks. I thought it was a tremendously bad idea.

    Is perverse incentives for everyone really the right follow-up? Got to say I’m not buying this one.Report

    • Avatar Jaybird in reply to Jason Kuznicki
      Ignored
      says:

      I worry that we’ll need to bail them out again sooner rather than later.

      And worse: before we have the cash (or borrowing power) to bail them out.Report

    • Avatar E.D. Kain in reply to Jason Kuznicki
      Ignored
      says:

      I don’t find the perverse incentives argument all that compelling, actually. What we have is a huge systemic failure based on the bad decisions of all parties. But the nature of asymmetric information here needs to be factored in. A lot of people buying homes didn’t understand what they were getting into. A lot of people under-water in their homes now would genuinely like to be able to pay for them. A lot of these same people got stuck with an adjustable-rate mortgage and didn’t understand what that meant for them a few years down the line, or were told that they could refinance and get an even better deal. A lot of people were suckered by people who knew better. Because they didn’t know better. Oh I’m sure some of them did, but I’d bet the vast majority got on the buy-now bandwagon and were greeted by lenders only too happy to take their money.
       
      The incentive argument just leaves all of this out. Who is going to be effected by these perverse incentives? If homeowners get a second shot at paying off their mortgages with  more reasonable rates, or at a price closer to market value (probably a better deal than a bank will get with a foreclosure) will this lead other people to go buy homes they can’t afford? Maybe some. Probably not many. And certainly with stricter lending requirements I can’t see how these people would be able to do it in the first place. There will always be bad apples, but what we’re dealing with is a huge, nation-wide problem. Probably a lot of changes need to be made to make home buying a safer bet for everyone involved and less of a subsidized enterprise. I’m fine with this. But I think in the immediate term, worrying about perverse incentives for home owners is the wrong concern even if it has some validity.Report

      • Avatar Scott in reply to E.D. Kain
        Ignored
        says:

        What is so hard to understand about the concept that I give you money and in return you put your house up as a guarantee that you will pay? If you took a loan out and assumed that you would be able to refi later for a better deal then you are speculating and deserve what you get.Report

        • Avatar Tony B in reply to Scott
          Ignored
          says:

          Imagine never taking an econ class, an accounting class, or anything math related past grade 10. The banker says “Of course you can afford this house. We’ll give you a variable rate, which you can refinance later if things go sideways, and housing prices are expected to rise. You’ll be fine. Let’s get you in your dream home!”

          Most of the details just sound like arcane bank-speak but why wouldn’t you believe it? You’re pretty sure if its a really bad deal (like you won’t be able to pay in the end) the bank gets screwed too. Sure they take your house and re-sell it, but that’s a lot of hassle and expense. Its way more difficult than just taking your money.

          Except it turns out the bank won’t own your debt when everything hits the fan. They knew that the whole time, they counted on it. Nothing about it was illegal so why would they care if you got screwed?

          I think about this regularly when I hear investment commercials that are “recommended by bankers.” People trust experts in the industry. Its like only taking car purchasing advice from a used car salesman, but no one knows where else to go for it.Report

          • Avatar DensityDuck in reply to Tony B
            Ignored
            says:

            Exactly. It’s not as though these people buying houses were greedy fucks who wanted a mansion for a dollar a day. They honestly believed the financial agents who told them that they could afford the house. (Hell, in most cases they were paying those agents, either by commission or directly!)Report

        • Avatar Simon K in reply to Scott
          Ignored
          says:

          For sub-prime loans, the bank was also assuming the borrower would refi later. The structure of a sub-prime loan is such that the borrower pays a high but not ridiculous interest rate for some period (usually 2 years). The rate then resets to a level that is in fact intended to force a default or refinance. The borrower then either refinances the loan, usually with the same lender, generally on better terms, or defaults, in which case the lender gets the house.

          The banks knew what they were doing. They knew they were lending to deadbeats, and knew they were relying on said deadbeats speculating on the housing market, and were out for a piece of the action.Report

          • Avatar trumwill in reply to Simon K
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            says:

            The borrower then either refinances the loan, usually with the same lender, generally on better terms, or defaults, in which case the lender gets the house.

            A minor nitpick here, but I think you minimize the hazard to the bank in the event of foreclosure. Even before the housing crash, foreclosures meant a lot of lost money. This possibility to not remotely engender a shrug. It was truly a worst-case.

            Rather, figuring on the part of a lot of lenders was that by the time any default occurred, they would no longer be in possession of the loan and it would be somebody else’s problem. But even that is overstated, because there was the general sense in the mortgage industry (where I worked from 2004-06) that prior to foreclosure, in the event of no refi, the buyer would simply sell the house to someone else at a profit and they would be paid back.

            While there were many nefarious actors involved on the banking side, there was also a deadly optimism that this sort of thing could continue because land’s intrinsic value would never stop going up.Report

            • Avatar Simon K in reply to trumwill
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              says:

              Sure, foreclosure was the worst case. Typically a sub-prime borrower who’d been in the house long enough for the loan to reset would be able to refinance or sell, because they’d have equity. Because house prices only go up, right? As you say, deadly optimism.

              But was foreclosure that bad, really? Typically the servicer larded the amount owed with fees, which meant they got to keep a healthy cut, and since sub-prime MBS are over-collateralised, the investors would not actually take any losses, they’d just have some of their bonds prepaid, which is a risk mortgage investors expect.Report

              • Avatar trumwill in reply to Simon K
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                says:

                From what they said (and I can’t think of any reason for them to lie, my employer was in bed with them), it was pretty bad. They would take substantial losses simply to sell the property as quickly as they could to free up capital and avoid responsibility for upkeep. As it was explained to me (when I asked why they don’t try to maximize the value of the real estate, a question they are apparently asked quite frequently), “they’re in the lending business, not the property management, restoration, or sales business.” This is why there was serious money to be made in buying foreclosed upon homes, fixing them up, and reselling them. Their loss was your gain. And even in recourse states and with regard to foreclosure fees, a whole lot of it was unrecoverable from people who already knew that their credit was down the crapper.

                (Lest anybody think I am acting as an apologist of the banks, my experiences working there actually pushed me in the other direction: critical of the banks that should have known better – and in some cases surely did – and less unsympathetic to the borrower.)Report

              • Avatar Simon K in reply to trumwill
                Ignored
                says:

                That’s interesting. It implies that the servicer and/or bondholders were taking losses on foreclosures even when they were structuring mortgages more-or-less guaranteed to pre-pay or default after 2 years. Makes the deadly optimism look even stupider in retrospect.Report

              • Avatar trumwill in reply to Simon K
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                says:

                Or 10 years. Whenever I start feeling that the economy is going to start getting better, I think of all the 10-year IO loans that were going through at the time that won’t be coming due for a few more years. Nevermind the balloons.

                By late 2005, the banks were already stalling foreclosures. There’s no other way to put it than that they were kicking the cans down the curb at that point. And yet, even as they were doing that, they (and my employer) felt like 2006 was going to be a speedbump and if they could hold off on things just long enough, everything would rebound and be fine. It would just take a little while for property values to rise enough to “fill the bubble” with increased construction (justified by higher prices) and flipping for interest on more and more expensive homes. And in the meantime, just fill the gap by increasing the number of loans issued. Just keep doubling down (with ever-more permissive loan standards to increase the number of buyers).

                So even when things were starting to look sour, it was full-speed-wrong-direction. Their livelihoods depended on this being true (though, as a software guy, mine didn’t), because the alternative was massive, massive sunk costs. That’s some pretty intense motivation to believe in something.Report

              • Avatar Simon K in reply to trumwill
                Ignored
                says:

                Yes it is. That’s the classic Minsky moment – Hyman Minksy pointed out a long time ago than in credit-fueled cycles you go from normal growth, where the marginal borrower can pay both principal and interest, to one where he can’t pay principal and just rolls it over and justifies it off the back of appreciation, to one where he can’t pay all the interest any more and relies on appreciation to pay the bank. In the mortgage world, these correspond nicely to amortizing, interest only and negatively amortizing loans. Its when the last becomes the choice of the marginal buyer – as it did in 2006 – that the crash has come.

                Sub-prime as such was special and interesting, because the borrower wasn’t really paying all the interest, and was relying on appreciation to pay it, because much of the interest was postponed until the loan reset or the borrower refinanced, but because of the structure – there was no explicit negative amortization – neither the borrowers or the investors understood that that was what was going on. The idea in and of itself wasn’t stupid – you can lend to people you wouldn’t otherwise be able to lend to off the back of shared appreciation – but it should never, ever be the loan of choice for a marginal buyer in any market, as it was in some. That’s why 2 years was important – sub-prime loans were mostly 2/1 ARMs.

                I’m not that worried that there’s a significant wave of defaults very far down the line. Buyers who bought their houses to live in and aren’t under water are in a good position. Those who bought them as “investments” should have defaulted by now if they had any sense. There people living in homes that are underwater who are holding on while they make alternative living arrangements – I know a few – but I doubt many are holding on waiting for prices to recover unless they bought since the crash started with awareness of what they were doing. So a wave of defaults in 10 years seems unlikely.Report

          • Avatar Jaybird in reply to Simon K
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            says:

            I’ll tell my story about how I was lied to.

            We went in to Fliege Durch Nacht Lenders (they’ve got to be good at this! They’re German!) and were told that they found a *GREAT* deal for us.

            3.25%! It’s a variable… *BUT*!!! It can only go up one point a year! It will *NEVER* go up more than five points! Even if the end of the world comes, the worst we’ll pay is 8.25%!!! Well, since I remember mortgage rates in the teens, the downside still seemed pretty good to me… the part that made me feel a little creepy was when the lender said that the rate would always be indexed to prime… so I’d never be able to refi for a better rate. A fixed rate would *ALWAYS* be worse than the variable rate I’d be paying.

            I wrinkled my nose at that… but, hey, 3.25%! At worst, 8.25%! And I’d always be doing better than if I refied fixed (that moment, anyway).

            Well, of course, the next year it hit 4.25% like clockwork. I kinda expected that.

            The year after that, it hit 5.25% (even though I could refi for 6%… shouldn’t it have only gone up to 5%, I asked? They explained mumbo jumbo to me and talked about the timing of the rates).

            The year after *THAT*, it hit 6.25% and I hit the roof. We went out and refied at 6%.

            Freakin’ lenders. I wouldn’t have minded so much if I hadn’t been lied to.Report

            • Avatar ThatPirateGuy in reply to Jaybird
              Ignored
              says:

              Jaybird, I’ve been so distrustful if lenders that in my late-teens to early twenties I never would have gone in for variable rate. Why should I take the risk that the bank doesn’t want to? They would never lower my rate it would never be in their interest.

              But I got to see my parents worry about debt since I was 11. I’ve never been comfortable with interest rates working against me.Report

      • Avatar trumwill in reply to E.D. Kain
        Ignored
        says:

        Can anyone point to a program were refinancing has actually been successful? I know that there have been a few attempts, but my understanding is that it merely prolonged the inevitable. If this kind of thing *works*, I’m all for it. But I haven’t seen much indication that it does. That’s the main reason why I think the banks are so resistant to it, despite the fact that if successful it would (as you point out) be better off for them, too.Report

        • Avatar Simon K in reply to trumwill
          Ignored
          says:

          The programs that exist seem to be misconceived. I mean, they may have been okay when we were mostly talking about defaults on weirdly-structured mortgages, but most of that was over with even before 2008. Now we’re talking about people who are unemployed and can’t pay, or so far under water they won’t pay. Temporarily reducing monthly payments, which seems to be most of what HAMP and so on do, doesn’t really help – the unemployed need a new job, and the underwater need principal forgiveness. Simply lengthening the amount of time they’ll be paying the bank for doesn’t really help either group.

          The best thing we can do for the unemployed is some kind of arrangement where they can convert their mortgage into rent until they’re able to pay again.. The best we can do for the underwater is principal cram-downs in bankruptcy. Lower monthly payments is just a bullshit used car dealer trick and people are right not to fall for it.Report

          • Avatar North in reply to Simon K
            Ignored
            says:

            The problem with cram downs is that the bloody mortgages are all over the place with dozens of partial owners so it’s almost impossible to get approval to cram ‘em down. That’s without even going into the issue of this being a classic case of picking winners and losers since anyone who’s underwater will win while anyone who hasn’t purchased a home and rents or anyone who did buy and then paid their underwater mortgage down will lose big.
            Frankly I’m unconvinced there is any kind of easy solution.Report

            • Avatar Simon K in reply to North
              Ignored
              says:

              The ownership issue can fixed as long as its done in bankruptcy. Bankruptcy courts can and do (and should) ride roughshod over all kinds of property rights, and the exclusion of mortgages from this is quite recent.

              I agree it creates moral hazard, but it seems to be the least bad option – if the bank has to foreclose and sell the house, they’re going to recover less than the market value of the house, so why not just cram down the existing borrower’s principal. Note that I’m not suggest principal go any lower than what could be recovered in foreclosure, and I’m definitely not suggesting that the banks be paid merely to recognise their losses without dragging the issue through the court system.Report

          • Avatar trumwill in reply to Simon K
            Ignored
            says:

            What is rent beyond a lower monthly payment? I’d had thoughts along similar lines… except for that there is little reason to believe that the unemployed are going to be able to pay for either. Or, if they’re allowed to stay in their house regardless, that they will pay either way.Report

            • Avatar Simon K in reply to trumwill
              Ignored
              says:

              Its similar yes. I guess my ill-formed thought is that the unemployed who still have some equity have some incentive to stay in their house and pay on the assumption they’ll be able to resume full payments in the future, so you reduce the deadweight loss somewhat by cutting them a short-term interest-only or even lower deal. The problem is that the banks won’t contemplate that prior to default, and won’t do it after default, because hey, you defaulted, why should we trust you now? Seems like their is scope for some kind of scheme to make things easier for those who are temporarily unable to pay. Permanently is, of course, another matter.Report

  7. Avatar Robert Cheeks
    Ignored
    says:

    Hey, I’m the guy who long ago called for the public hangings of cheating banksters, and corrupt politicians and beaureaucrats…with no weight at the gates of Washington City, where their rottings corpses will hang for three months.
    With that said, E.D. I’m confused:

    “Not only were these huge, risky institutions bailed out by the government and shielded from the worst consequences of their recklessness, they also made a ton of money selling and re-selling mortgages that people never should have been able to afford in the first place.”

    The key, I think, is the phrase “should have been able to afford…” Does that make Barney Frank, Maxine Waters, Chris Dodd and other librul, commie-dems (and yes I know they were having intimate relations with RINO’s and NEo’s in this mortgage scandle) culpable in these unhappy matters? If so, where do you see their culpability? How does the default rate breakdown by race, ethnicity, and geography? Does that tell us anything?Report

    • Avatar Will H. in reply to Robert Cheeks
      Ignored
      says:

      You know, I might be able to go along with the public hanging thing, were provisions made for kicking them in the nads a few times pre-hanging.
      But the rotting flesh is just too much.
      I don’t do maggots, and I’m not real crazy about buzzards either.
      I’m beginning to think that I might be more pro-kicking than pro-hanging, actually.Report

      • Avatar Robert Cheeks in reply to Will H.
        Ignored
        says:

        Well, Will being a amatuer historian I do know that ‘hanging’s’ been us Westerners for a long time and it’s become something of a tradition (see ‘True Grit!’). While I understand the contemporary repulsion at seeing/smelling the rotting, bloated corpses/corpsi of some n’er-do-well bureaucrat/politician I think the lesson learned not only by school children and God-fearing, tax-paying citizens, but particularly by fellow bureaucrats/politicians is inestimeable.
        And, yes Will, before we hang ’em, let’s give ’em a taste of the cat-o-nine tails. My guess is we wouldn’t have to do it more than once a year or so.Report

  8. Avatar TycheSD
    Ignored
    says:

    Is this a closed site where only certain people comment – like members of the League?Report

  9. Avatar Collin Brendemuehl
    Ignored
    says:

    Not only were these huge, risky institutions bailed out by the government and shielded from the worst consequences of their recklessness, they also made a ton of money selling and re-selling mortgages that people never should have been able to afford in the first place.

    Reads like a political talking point. No mention of the Fannie Mae/Freddie Mac situation, or the fed demands for making these risky loans.Report

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