Greed, Tragedy, and Myths of the Subprime Crash
I read an excellent piece at Rod Dreher's blog yesterday about the housing crash. The media is looking for easy targets to turn into villains as well as creating tragic heroes as part of this story. But the truth is much more complicated as evidenced by a friend of Dreher commenting on a recent ABC News piece:
I tell you what's absolutely maddening about this whole sub-prime mortgage crisis. It's the issue of entitlement. I'm sorry, but this couple had no business buying a $172,000 home on less than $80,000/yr. combined income. Nor did some loan originator have any business giving them a 100% (no money down) Adjustable Rate Mortgage (ARM) at a 9% introductory rate. Are you kidding me? But because they wanted the house, and the mortgage loan originator wanted the hefty fee that goes with creating such a mortgage, the deal is done. And then this piece-of-crap debt is bought and pooled together with other piece-of-crap debt by companies like mine, and sold as Mortgage-Backed Securities (MBS) on Wall Street to pension fund managers, insurance fund managers, and the like. "Hey," the big mortgage companies say to themselves, "we can make big money by purchasing these crap loans, convert them to securities, mark them up, and then sell them to investors. We'll take our cut and still there's enough $$$ to go around! Let's do it!" And the pension fund managers who invest in these MBSs think to themselves, "Hey, it's a good investment! It's backed by good collateral - mortgages - right? That's a pretty safe stream of good, steady income for us. Let's get while the gettin's good!"
And that's when the bottom falls out of the whole. damn. thing.
People like Susan and Michael Walker start to not make their payments, because they did not understand, before signing on the dotted line, what happens to a mortgage payment when the interest rate goes from 9% to 14%. They were probably barely making ends meet when their rate was at 9%. It's unbelievable to me that anyone would have signed on the dotted line when faced with this very real possibility. They either didn't understand what could happen, or they just didn't care. I guarantee you what the originator told them. "Hey, don't worry about it. Property values are going up. You'll grow equity that way. And besides, rates will probably go down in a few years, and then you can refinance at a lower rate. You'll be ok."
So ABC News calls the company that holds their mortgage and says, in effect, "What gives? Why won't you help these poor people? They're just trying to live the American dream." What could any company do in the face of that? Refuse to modify the loan on principle that they shouldn't have entered into the agreement in the first place? Of course the loan got modified, like ABC reported. Makes things affordable for the Walker family, that's for sure.
The thing is, everyone in this cycle is implicated in this mess. It's greed, and entitlement. I want what I want and I want it now - from the borrowers who have no business borrowing, to originators who have no business lending the money, to the mortgage companies who have no business buying the crap loans, to the investors on Wall Street who have no business purchasing these Mortgage-Backed Securities.
It's all about to come crashing down, and hard.
Why is it always businesses that are greedy? Aren't businesses made up of people just like you and I? If we are honest with ourselves, aren't we often greedy too?
There is way too little introspection and way too much finger-pointing in this debacle to be of any use going forward.
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The subprime mortgage crash
The subprime mortgage crash is a social problem, and no amount of blaming the individual will change or fix that. You can say all you want that these borrower's should have known better, but what's the implication? That we suddenly have more greedy home buyers than we did before? Acknowledging the guilt of businesses does not mean that individuals won't pay the price. Any former homeowner who is now in foreclosure will tell you about the price they've paid. The problems at the lender level can be addressed with regulations and better business policies. But if you say this is a result of greed across the board then you've rendered the problem unavoidable and unfixable.
And no, businesses aren't made up of people just like you and I, not entirely. They have plenty of people but they also have practices and policies that supersede the people. The practices and policies often allow the businesses to behave greedily even if the individuals within them are not.
Dustin Kidd
I guess it is not surprising
I guess it is not surprising to find it reported this way (Corporations evil, consumers helpless, etc.) given that it comes from the mostly liberal press corps. I find a similar attitude among activist organizations and some researchers. There is a strong desire to suppress the role that individual choice plays. It is evil corporations, or corrupt (or insufficiently funded) institutions, advertisement, or other cultural forces that cause the problem. I guess it makes the problem easier to wrap your mind around, and the solution obvious--more government intervention! An external force that we can observe is driving the behavior, so attack the force.
I do not think external influences are unimportant causes, but too much faith is placed in the notion that government intervention can change human behavior.
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