The American Wet Dream

By the time I bought my first house in 1973, I was a college grad, had just spent three years as an Army officer, had a full-time job, had a growing family and was attending graduate school. Even so, some would say that what I knew about buying a house and getting a mortgage was "diddly". Others might say that I didn't know "squat". So, in an effort to please all, let's just say that I didn't know diddly-squat. The process was quite scary and the real estate agent and mortgage broker led me around, had me sign things, patted me reassuringly and told me that everything was "going to be all right". Three years later I sold house number one and bought house number two. I wasn't much sharper on the mortgage issues the second time around. Terms like "equity", "bridge loan", "mortgage insurance" and "title deed" would bring a slightly dazed look into my incredibly limpid blue eyes.

By the time I moved to the deep south and bought house number three I should have been a real pro. Need I say, "not so", or was the set-up too transparent? The house I bought was brand new. The builder had been sitting on the house for so long that he was preparing to move into it. In spite of that, the real estate agent convinced me that on "new construction it was inappropriate to make an offer lower than the asking price". And so it went.

When it came to buying the American dream, I remained as ignorant as a bag of hammers for quite some time. The real estate professionals and mortgage brokers were the "experts", they had the knowledge and experience. I took their advice because it seemed like the right thing to do. I've since learned somewhat better, regarding mortgages. However, I'd bet that some shark could still talk me into something unwise, unless, of course, my wife was there, in which case she would gut 'em like a carp and throw the chum to the other sharks.

In recent days I have seen the video of the CNBC meat puppet, Rick Santelli, do his outraged riff on "responsible taxpayers forced to subsidize losers' mortgages" and asking, theatrically, a room of Chicago stock traders whether they wanted to "pay their neighbors mortgage" (the answer was a mob-rule, "NO"). I have also received a number of e-mail jokes and comments indicating that the sub-prime mortgage debacle and subsequent world-wide financial meltdown can be blamed almost entirely on the overreaching, conniving, greedy and scheming homeowners, Santelli's "losers".

This viewpoint implies that nearly everyone who received a sub-prime mortgage--and subsequently found themselves underwater on their American dream--completely understood what they were doing. In fact, these messages and jokes imply that these borrowers were at least mildly larcenous or just incredibly stupid and stupid doesn't deserve a break.

With several million homeowners already booted out of homes for non-payment and millions more now facing foreclosure, there's little doubt that some of them were and are larcenous. The great majority, however, were simply ignorant as a box of dirt and, just as I did (three times), took the word of the real estate agent and mortgage broker (probably a former pizza delivery guy who bought two cheap suits at The Men's WearHouse and presto). Those "experts" told the buyers that everything "will be all right; sign here".

Assured by these experts that the American dream was now within their reach because of "new mortgage products", never mind the niggling details of equity, balloon payments, the LIBOR rate tied to adjustable interest rates, flapperschnapple, quirkenblanks, prasquattle, blah, blah, blah and then, "the house can be yours, sign here." Where's my pen?

Before you sit down with venom in your heart and fire in your fingers to write me, let me assure you that I do not hold these homeowners blameless. Most of these homeowners were ignorant and that is a fault that can be cured. I was ignorant about the mysteries of mortgages some time ago, but, and you will have to trust me on this, I wasn' t larcenous. Those of you without faults of ignorance about something in life please report to the Vatican.

Millions of potential homeowners were manipulated; O.K., O.K., let themselves be manipulated. Their desire for owning their home was stronger than their ability to overcome ignorance. My perspective is this: the manipulators shoulder far more of the blame than the manipulated. The manipulators weren't ignorant, they knew what was what.

Frankly--and I'm sure you all remember Frank--the mortgage brokers, the real estate agents, the mortgage companies and most of the the banks with mortgage divisions were themselves ignorant of the risks associated with sub-prime lending. Most of these people did not really understand the complex new derivatives that gave rise to sub-prime mortgage lending. Their collective fault was in not raising a hand, at the risk of embarrassment, and saying, "Wait a second, I don't understand this, please 'splain it to me." There was money to be made, Wall Street's quarterly expectations to be met, the risk was being passed on and the gravy train was leaving the station. All aboard.

There is much blame to parcel out. To conclude, however, that the bulk of it should be given to those least able to sort through the tangle of terms, promises and nuances is a very cheap shot, especially when it was the carrot of the American dream that was dangled before the wide eyes at the bottom end of the mortgage food chain. It's like blaming over-fishing on the fish.

So, who, you ask, should shoulder the bulk of the blame? Wall Street; a place where the moral compass is unusually wobbly thanks to the pull of money being stronger than magnetic north.

Some whiz with a math degree, a computer model and no experience in mortgage lending came up with a way to "securitize" (combine) mortgage debt and, mathematically, "take the risk out of it". Ha! That's like saying that you can mix a bit of fecal matter with a larger amount of clean water and it all magically becomes clean water. Also, the model only worked when housing values climbed INDEFINITELY or at least until the January bonuses were paid, whichever came first. The math whiz's boss knew that the model was shaky, but what the hey, bonus time was just around the corner. With the "no risk" mentality driving the industry, lots of folks who couldn't really afford the American dream were convinced that they could. After all, there was money to be made and the gravy train was constantly leaving the station. So, fog up a mirror, here's your loan. Everything will be "all right"; pat, pat.

Then, to cover their bonus larded butts, the Wall Street bosses sent out linguistically double jointed sales folks and they sold these "safe, mortgage backed, AAA rated securities" to town councils, retirement funds and other entities around the world. The rating agencies were in on the deal. The gravy train had room for them too. "Stringent regulation," said the bright bulbs in Washington, would strangle the economy and besides, everyone is entitled to own their own home. And so, lax regulation was the order of the decade leading up to the bubble pop.

When you assign blame for the current sorry state of the economy, I suggest that you parcel it out with some semblance of fairness. In my opinion, the great bulk of the homeowners who are in trouble and now need help are the least at fault, not blameless, but not the drivers. They had no idea that the American dream was (supposedly) within their reach until somebody, only marginally less ignorant, came along and convinced them so. The town councils also made their investment decisions based on trust. If you can't trust anyone, life is nearly unliveable.

If you have hard data that proves that a majority (or even a plurality; heck, I'd settle for anything above 10%) of the defaulted and defaulting homeowners in America are larcenous and cunningly taking advantage of those civic-minded paragons on the southern tip of Manhattan, please forward it to me. If the data are convincing I'll write a corrective blog. It's the least I could do.


Bruce

Observoid of the day: A bag of hammers and a box of dirt are equally ignorant. Neither, however, is as ignorant as a carton of sludge.