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In the Name of Love

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  • In the Name of Love

    In the Name of Love

    by James Scurlock

    James Scurlock is author of the book Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders and the movie maxedoutdvd movie about the consumer credit bubble and what's in store for the US economy as it ends.

    We interviewed James earlier this year.

    It has long been obvious that the modern financial industry floats high above us normal folk, untethered from the laws of classical economic theory or basic mathematics. How else to explain that as defaults, foreclosures and bankruptcies skyrocketed over the past decade, so have banking profits. The faster their customers go broke, the more money the banks and credit card companies rake in.

    Which is what made the past couple of weeks so promising. Wall Street's sudden refusal to buy "garbage" mortgages originated by Countrywide and the nation's other home lenders signaled a return to common sense–a bold declaration that if the Fed wasn't going to remove the punch bowl than the Wall Street bankers would. But no sooner had Wall Street stopped serving than Ben Bernanke declared happy hour at the Fed and encouraged the banks to drink up as much cheap, easy credit as they needed–an act of recklessness not seen since Alan Greenspan encouraged Americans to take out adjustable-rate mortgages when he should have been pushing fixed rate mortgages at their lower rate three years ago. Meanwhile, Countrywide, the company that proved itself so effective at maxing out its customers, maxed out its own credit lines and then borrowed $2 billion more from the Bank of America–at 7.25 percent, more than half a percentage higher than the rate it can charge its customers on a 30-year fixed mortgage.

    It gets weirder. Hillary Clinton, who two years ago abandoned middle-class Americans in order to stand by her man in the hospital during the lending industry-sponsored bankruptcy reform vote, is now talking loudly–and piously–about rescuing homeowners, thus joining an unlikely chorus that includes virtually all of the Democratic presidential contenders, as well as self-professed stock manipulator Jim Cramer and billionaire bond guru Bill Gross of PIMCO.

    Gross wants a bail-out of his funds. Cramer wants a bail-out of his billionaire hedge fund buddies (and maybe himself). Hillary, of course, wants the presidency. Cramer is easily the smarmiest of the bunch but still the most honest of the three, because he understands that any bail-out is a gift to Wall Street, not to those Americans who have been swindled into taking on mortgages that Kirsten Keefe, founding director of Americans For Fairness in Lending, correctly points out were "designed to fail."

    Hillary's idea for a $1 billion "mega-fund" to help people renegotiate their mortgages and get financial "counseling" reveals her misunderstanding of both the size of the home mortgage market ($8 trillion) and why lenders have been so willing to lend in the first place. More defaults plus more foreclosures plus more bankruptcies equal more profits–and even more so if there is a bail-out.

    Yes, it's counterintuitive. Clearly, it's not sustainable. Obviously, the solution to the mortgage mess (and the coming credit card mess) must be to realign the financial industry's interests with those of its customers, not just allow the customers to get screwed a little less.

    Several years ago, when the attorneys general of several states investigated Ameriquest, the nation's largest subprime mortgage lender, they discovered that Ameriquest's ideal loan officer was a male used car dealer in his mid-20s, in other words someone willing and able to sell a piece of junk that would ultimately blow up in the customer's face. Read through Countrywide's training material and you'll find an interesting phrase they call "the oasis of rapport," a euphemism for ingratiating yourself with a customer so that you can sell them anything. A vice president for Mastercard cites something called "a taste for credit" to explain why customers who have recently been through bankruptcy are such profitable customers. In other words, the modern credit business is not about selling the American Dream, it's about selling very profitable time bombs, and then another even more profitable one after the last one blew up on the borrower, leaving him or her with worse credit and therefore needing to pay even higher rates of interest. What is needed it not longer fuses but a wholesale dismantling of the bombs.

    This, of course, is more easily said than done, not only because the products themselves have become so convoluted that Harvard Law professors and M.I.T. math geniuses can't make sense of them, but because these mortgages have long been pooled together in huge funds that make the "bad apples" indistinguishable from the good ones–an extraordinarily profitable scheme that one consumer advocate aptly calls "mortgage laundering." What spooked Wall Street two weeks ago is that consumers are realizing they were sold lemons and they have stopped paying for them–not out of anger but out of pragmatism. If you have a family, you need a roof over your head that's not in danger of being detonated by an investor halfway around the world.

    Bill Gross, the bond guru, correctly observed that we haven't witnessed home deflation of the sort we're headed into since The Great Depression. Inexplicably, he blames George W. Bush for not doing something about it, as though the White House or the Federal Reserve can suddenly make the past three decades of irresponsible lending disappear. The Japanese, who are just now climbing out of their own real-estate bubble collapse hole two decades later, understand that no policy change can mitigate the hangover of easy credit excess. That excess has to be worked off and that takes time. If Hillary Clinton wants to help cash-strapped Americans, she should unwind the draconian bankruptcy reform bill that she, as First Lady, encouraged her husband to veto in 2000 and then, as New York Senator, allowed to pass four years later without a word.

    The bad news is that millions of Americans will abandon their homes over the next several years and that these unfortunate folks will become poster children for billionaire hedge fund managers demanding bail-outs and politicians making a pious display of their empathy–politicians who have milked rising home "ownership" rates as proof of the American Dream's vitality. The good news is that the financial industry's dysfunctional relationship with its customers–what economists like to call a "market failure" when it's not making everyone rich–may finally run its course, if only the Federal Reserve and the politicians will allow it to happen.



    Last edited by FRED; 09-03-07, 08:01 PM.
    Ed.

  • #2
    Re: In the Name of Love

    Foreclosure + Rent = Solution

    This formula works for anyone worth sympathizing for. Anything else is just a waste of time and money.

    What is the purpose of trapping a (relatively) poor person in a (relatively) rich person's house even if it is with lower payments? If you make the lender eat part of the principal repayment all you are accomplishing is a lowering of the defacto value of the house. How is this any different than letting the house sell at auction for an actual lower value? In the latter case at least the home is owned by someone who can afford it instead of a debt slave. And the former debt slave is free to rent something in their price range with at least a chance of accumulating some savings.

    This may not be perfect logic but I don't even see it touched on in the mainstream press. It's very frustrating to see all the crocodile tears for the poor subprime borrowers with all the proposed solutions completely missing the point. Prices are too high relative to incomes.

    John

    Comment


    • #3
      Re: In the Name of Love

      Originally posted by JKD View Post
      Foreclosure + Rent = Solution

      This formula works for anyone worth sympathizing for. Anything else is just a waste of time and money.

      What is the purpose of trapping a (relatively) poor person in a (relatively) rich person's house even if it is with lower payments? If you make the lender eat part of the principal repayment all you are accomplishing is a lowering of the defacto value of the house. How is this any different than letting the house sell at auction for an actual lower value? In the latter case at least the home is owned by someone who can afford it instead of a debt slave. And the former debt slave is free to rent something in their price range with at least a chance of accumulating some savings.

      This may not be perfect logic but I don't even see it touched on in the mainstream press. It's very frustrating to see all the crocodile tears for the poor subprime borrowers with all the proposed solutions completely missing the point. Prices are too high relative to incomes.

      John
      Good point. Chances are, a refinanced, revalued mortgage for borrowers in trouble would still be higher than the eventual market price of the home. If at any point between now and the bottom a homeborrower needed or wanted to sell the house, they would still find themselves underwater. Those who support this idea of helping people refinance either have not thought this through or, more likely, are feigning concern for stressed-out mortgagees while actually hoping for a bailout for the lenders and Wall Street.

      Sometimes the pundits worry out loud about what foreclosure will do to these people's credit rating. Hello, they were subprime borrowers to begin with! How much lower can their rating drop? Even as people with previously good credit ratings default on their mortgages, Scurlock and others have shown they will likely have little trouble acquiring new access to credit. Well, at least until/unless this credit bubble really bursts.

      Originally posted by Fred View Post
      A vice president for Mastercard cites something called "a taste for credit" to explain why customers who have recently been through bankruptcy are such profitable customers.
      It's interesting that years of marketing and social acceptance have taken most of the shame out of being in debt rather than owning things outright, yet there remains a certain stigma about making monthly payments to a landlord (i.e. "renting") vs making monthly payments to a lender (i.e. "owning"). The tax breaks and investment gains over the long term account for part of this, but the fact is you are renting the home either way. Taking on a mortgage is just rent-to-own.

      I suspect this will begin to dawn on more people in the years to come.

      Comment


      • #4
        Re: In the Name of Love

        Originally posted by zoog View Post
        Good point. Chances are, a refinanced, revalued mortgage for borrowers in trouble would still be higher than the eventual market price of the home. If at any point between now and the bottom a homeborrower needed or wanted to sell the house, they would still find themselves underwater. Those who support this idea of helping people refinance either have not thought this through or, more likely, are feigning concern for stressed-out mortgagees while actually hoping for a bailout for the lenders and Wall Street.

        Sometimes the pundits worry out loud about what foreclosure will do to these people's credit rating. Hello, they were subprime borrowers to begin with! How much lower can their rating drop? Even as people with previously good credit ratings default on their mortgages, Scurlock and others have shown they will likely have little trouble acquiring new access to credit. Well, at least until/unless this credit bubble really bursts.



        It's interesting that years of marketing and social acceptance have taken most of the shame out of being in debt rather than owning things outright, yet there remains a certain stigma about making monthly payments to a landlord (i.e. "renting") vs making monthly payments to a lender (i.e. "owning"). The tax breaks and investment gains over the long term account for part of this, but the fact is you are renting the home either way. Taking on a mortgage is just rent-to-own.

        I suspect this will begin to dawn on more people in the years to come.
        We spoke with a couple of press and government contacts today. Safe to expect the bail-out of homeowners to go with the same expedience as Katrina government assistance.
        Ed.

        Comment


        • #5
          Re: In the Name of Love

          Originally posted by zoog View Post
          Sometimes the pundits worry out loud about what foreclosure will do to these people's credit rating. Hello, they were subprime borrowers to begin with! How much lower can their rating drop? Even as people with previously good credit ratings default on their mortgages, Scurlock and others have shown they will likely have little trouble acquiring new access to credit. Well, at least until/unless this credit bubble really bursts.
          From the Boston Globe:

          As subprime borrowers began to default on their mortgages in rapidly growing numbers this year, credit card issuers increased their efforts to sign up such customers with tarnished financial histories, according to a market research firm.

          Direct mail credit card offers to subprime customers in the United States jumped 41 percent in the first half of this year, compared with the first half in 2006, according to Mintel International Group. Direct mail offers targeted at customers with the best credit fell more than 13 percent.

          As home values decline and lenders balk at writing subprime mortgages, these customers can no longer refinance and tap into home equity for cash. That leaves credit cards as their only option, said Lizer.
          And my favorite part:

          "The companies are seeing a market need, and filling it by increasing mail to these consumers," said Lizer.
          Um, no, this is not a "market need".

          Comment


          • #6
            Re: In the Name of Love

            Originally posted by Fred View Post
            We spoke with a couple of press and government contacts today. Safe to expect the bail-out of homeowners to go with the same expedience as Katrina government assistance.
            In other words if any homeowner actually gets bailed out, it will be so late and so poorly done that it will have almost zero effect on any local real estate market - let alone the national RE and international MBS/CDO markets.

            One of the things that keeps lifting my spirits is when I read the housingbubbleblog, the proprietor of that site keeps reassuring everyone with very convincing arguments that any bailout will not work and will not stem the tide of the RE crash. The main argument is that whenever a politician tries to rattle the "bailout" drums, when they are presented with numbers for solutions, the numbers are so outlandish they realize there is really nothing they can do that would be economically and politically feasible.

            I saw the thing with 80,000 potential homeowners being bailed out. oooooh, 80,000. That's pretty much akin to one mouse peeing on a million-acre forest fire.

            Comment


            • #7
              Re: In the Name of Love

              "Sometimes the pundits worry out loud about what foreclosure will do to these people's credit rating. Hello, they were subprime borrowers to begin with! How much lower can their rating drop?"

              Telling these folks to become renters is easier than it sounds. Most rental management companies, and many individual landlords as well, will not rent to folks who've been foreclosed. The only way many of them will be able to rent is by putting down many months of rent money in advance, cash that many of them are not likely to have. Even then, they are going to have a very tough time getting rental housing, especially in high-demand areas.

              Comment


              • #8
                Re: In the Name of Love

                Originally posted by tree View Post
                Telling these folks to become renters is easier than it sounds. Most rental management companies, and many individual landlords as well, will not rent to folks who've been foreclosed. The only way many of them will be able to rent is by putting down many months of rent money in advance, cash that many of them are not likely to have. Even then, they are going to have a very tough time getting rental housing, especially in high-demand areas.
                Hm, I see, I wasn't aware of that, though it seems obvious now that I've heard it.

                Maybe the kind of "bailout" we need is the government coming in and "guaranteeing" these people into their rentals, promising to pay three month's rent or something to the landlord if the renters aren't making their payments. It would be along the lines of how the Veterans Administration guarantees mortgages, and Section 8 housing.

                Comment


                • #9
                  Re: In the Name of Love

                  Originally posted by zoog View Post
                  Hm, I see, I wasn't aware of that, though it seems obvious now that I've heard it.

                  Maybe the kind of "bailout" we need is the government coming in and "guaranteeing" these people into their rentals, promising to pay three month's rent or something to the landlord if the renters aren't making their payments. It would be along the lines of how the Veterans Administration guarantees mortgages, and Section 8 housing.
                  In our update to Housing Bubble Correction, we predict large numbers of real estate developments will be bought by public/private companies 2009-2010 with public housing rental terms offered to millions of Americans who will not be able to find housing in the free market.

                  Comment


                  • #10
                    Re: In the Name of Love

                    Originally posted by JKD
                    Foreclosure + Rent = Solution
                    You are forgetting that for most mortgages, even if you can qualify for Chapter 7, you would end up owing taxes on the amount of loan "foreclosed" or "forgiven".

                    Thus rent itself won't necessarily even work.

                    This is why I am watching to see if government changes this provision.

                    All the rest is sound and fury and political posturing - which is the point!

                    Comment


                    • #11
                      Re: In the Name of Love

                      Do you know the specific reasons why loan forgiveness on a reduced-worth asset is not classified as a capital loss?

                      Originally posted by c1ue View Post
                      You are forgetting that for most mortgages, even if you can qualify for Chapter 7, you would end up owing taxes on the amount of loan "foreclosed" or "forgiven".

                      Thus rent itself won't necessarily even work.

                      This is why I am watching to see if government changes this provision.

                      All the rest is sound and fury and political posturing - which is the point!

                      Comment


                      • #12
                        Re: In the Name of Love

                        Taking very large deposits for rent is illegal in many parts of Canada, If I Remember Correctly.

                        In Europe, with higher fractions of the population being renters, and thus having more political power, I would assume it's even more illegal.

                        And, with so many houses coming on the market as rentals (since they can't be sold), and under amateur management (unlucky flippers who never intended to be landlords) lots of landlords will be desperate to just get someone into the house and get help in paying part of the carrying costs.

                        Originally posted by tree View Post
                        "Sometimes the pundits worry out loud about what foreclosure will do to these people's credit rating. Hello, they were subprime borrowers to begin with! How much lower can their rating drop?"

                        Telling these folks to become renters is easier than it sounds. Most rental management companies, and many individual landlords as well, will not rent to folks who've been foreclosed. The only way many of them will be able to rent is by putting down many months of rent money in advance, cash that many of them are not likely to have. Even then, they are going to have a very tough time getting rental housing, especially in high-demand areas.

                        Comment


                        • #13
                          Re: In the Name of Love

                          Originally posted by Spartacus
                          Do you know the specific reasons why loan forgiveness on a reduced-worth asset is not classified as a capital loss?
                          There was a New York Times article on it - but from what I remember it is because all forgiven debt is considered income by the IRS.

                          Thus it is not the price of the home, it is the amount of the (unpaid) loan.

                          The debt can be canceled through bankruptcy, but of course doing so through bankruptcy is much more difficult these days.

                          Basically you need to file bankruptcy, then get foreclosed on.

                          Comment


                          • #14
                            Re: In the Name of Love

                            In 1992, my wife and I filed for Chapter 7 bankruptcy in Massachusetts after my first start-up failed, and in the midst of a real estate collapse. I owed $115,000 on the house, which sold at auction for $90,000. My tax adviser told me no tax was due, as did the bank.

                            On a happier more recent note, I've been buying up residential apartment buildings (as a limited partner) since the late 90's. The prices ave been low ($40-60k/unit) and credit obviously cheap. This was universally called "stupid" since everyone would soon own a home. One never forgets his first bankruptcy.

                            Needless to say, vacancies are at an all time low, and we're able to raise rents in most markets. Values are way up. The competition to buy more units is high as are prices, but we've got them to sell.

                            Repeat after me, "The conventional wisdom is wrong."
                            "The test of our progress is not whether we add more to the abundance of those who have much it is whether we provide enough for those who have little." - Franklin D. Roosevelt

                            Comment


                            • #15
                              Re: In the Name of Love

                              Jeff -

                              Kudos to you for what you have accomplished.

                              Comment

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