Whether the rubes were wise to enter into the pyramid scheme or not is beside the point. By originating, purchasing, re-packaging and marketing mortgages that they knew or should have known were fraudulent, the mortgage dealers aided and abetted a pyramid scam. Either knowingly or through gross and wilful negligence in their obligation to carry out due diligence.

The deal between banks and the rest of society is that the banks are permitted to operate as clearing houses under sovereign guarantees in exchange for exercising due diligence. When they so signally abscond from their end of the deal - particularly when their antics end up creating an extremely costly money market panic - they should be told to take a hike.

- Jake

Friends come and go. Enemies accumulate.

In a sense, financial education might be poor by design. It's already three decades that people are pushed quite shrewdly into stock or real estate markets with the norm of intuitive or herd knowledge. Lay people succeed or fail there more by dumb luck than by their earnest knowledge. Asking (tellingly too late) people to overcome the "uplifting" noise of financial analysts, media cheerleaders and political clowns is like asking all first-grade schoolchildren to learn to play piano or chess without any hints or coaching. Yeah, a few Rahmaninoffs or Kasparovs can do that - but this is not education.

Even at universities, the popular economy or business courses probably prepare (for the crises times) more suckers than really knowledgeable investors. It's not science, but fashionable brainwashing for business cycles. Did you try to take a course on financial derivatives? Goldman Sachs gladly needed you.

And one more thing. Comparing mortgage with borrowing a toy is very unsound. It's more like you borrow a shovel and you are asked to return an excavator.

 

Unlike gold or equities or the currencies of countries you never plan to actually visit, housing isn't optional, and renting isn't always possible (itself a signal failure of government planning, but that's a different story).

Of course, you could delay buying out your former spouse after a divorce. You could delay moving to a place closer to the job you just got. You could do a lot of things. But is it reasonable to demand it?

- Jake

Friends come and go. Enemies accumulate.

"Cheating" that any company company incorporated in North America would do. Legally, of course, please refer to bankruptcy law.

Context is everything and all that is said usually in this regard in North America is that at is good for the goose (banks, e.g. corporations) is good for the gander (the rest of us).

In Europe, the rules don't apply quite the same way.

The Hun is always either at your throat or at your feet. Winston Churchill

Another perspective is that jinglemail rules simply confer on homeowners a privilege that stockholders already have, namely limited liability in part of their business ventures. If a company is underwater, the stockholder can (and indeed is expected to) walk out of his commitment for no other reason than the fact that it is underwater. Stockholders are not asked whether they are in actual financial difficulty when they do their equivalent of jinglemail.

I don't think that limited liability is inherently counterproductive in the mortgage market (though the mortgage market itself may well be, because the pwnership society it promotes is counterproductive). Similarly, I don't think that exercising limited liability as a matter of convenience rather than necessity is inherently immoral, whether in the stock market or in the mortgage market.

- Jake

Friends come and go. Enemies accumulate.

Sorry for being late to the discussion, but I, too, am taking exception on your characterization of "breach of commitment".
I have these interesting tidbits in my bookmarks on this very subject:

First, about "norm asymmetry": I have already posted that snippet before, but it bears repeating:

Economic View - Will More Borrowers Walk Away From Their Mortgages? - NYTimes.com

Some homeowners may keep paying because they think it's immoral to default. This view has been reinforced by government officials like former Treasury Secretary Henry M. Paulson Jr., who while in office said that anyone who walked away from a mortgage would be "simply a speculator -- and one who is not honoring his obligation." (The irony of a former investment banker denouncing speculation seems to have been lost on him.)

But does this really come down to a question of morality?

A provocative paper by Brent White, a law professor at the University of Arizona, makes the case that borrowers are actually suffering from a "norm asymmetry." In other words, they think they are obligated to repay their loans even if it is not in their financial interest to do so, while their lenders are free to do whatever maximizes profits. It's as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical.

Note the jab aimed at the "investment banker" calling strategic defaulters "speculators" (no, this was not for you Jerome :-)).

So, shocker #1: The Poor are Honest! (who would have thought?)

Then, this:

Walking Away From Million-Dollar Mortgages - NYTimes.com

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.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

"The rich are different: they are more ruthless," said Sam Khater, CoreLogic's senior economist.

Shocker #2: "The rich are different than you and me." (F. Scott Fitzgerald quoted by Yves Smith)

And what is my own opinion on this "moral issue"?

To me the one thing that is truly reprehensible, morally and practically, is that famous "norm asymmetry" described by Brent White of the the University of Arizona: the social expectation that the less well-off people keep up their commitment more often (and at greater cost and suffering) than the richer individual or corporations.

Truly, if there is one cause for outrage in my book, this is it.

And I'll note that, in your reaction to strategic defaulting, you definitely are on the same line as the less well-off. Too bad your norms are so asymmetrical...

Prices went up because they went up. Galbraith put it well in The Great Crash of 1929:

However, the time had come, as in all periods of speculation, when men sought not to be persuaded of the reality of things but to find excuses for escaping into the wide new world of fantasy.

- Jake

Friends come and go. Enemies accumulate.

Oh, it certainly has prevented multiple housing bubbles.

But then banks stopped holding most of the mortgages they originated and in many sectors non-bank lenders became the dominate lenders.

In the main areas of the housing bubble, the presumption was that the housing prices were only going to go higher, so if you found you could not afford a payment, you could always borrow against the capital gain in the interim, or if you found that you could not afford the mortgage entirely, you could always sell out again at a profit.

Now, why were the lenders lending when surely they should have realized that the presumption is nonsense: that when the house price was so far out of line with rental prices that house prices were almost certain to experience a downward correction?

Because they were not expecting to hold the mortgage long term. With CDO's, they bundled the mortages into a stream of repayments, and sold off positions in line to get the money used for repayments. If not enough CDO's attracted an investment grade rating, they were put into a pile and positions in line to get their earnings were sold off.

Since the mortgage originators were not holding the mortgage long term, but rather making their money as income to create the loans, they started acting like shonky used car salesmen.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

Interestingly enough, Germany is one country in Europe that has not experienced the housing bubble seen in France, the UK, Ireland, Spain,...
Causes are not entirely clear: some people think this is due to the brief asset bubble post-reunification in the early 90's.

In an environment where cheating is more profitable than any other activity, those who do not cheat go bust or are bought out. Either way, they cease to exist as independent economic actors. Call it a variant of Gresham's Law.

Individual homebuyers do not have enough market power to resist this mechanism, even if they don't get caught up in the speculative frenzy. Large financial houses may have that power, and the sovereign certainly has, should it choose to exercise it. So "cheating" is the wrong sort of framing for this - it is a political failure, first on the part of a deregulation-obsessed sovereign, then on part of quasi-sovereign banking houses.

- Jake

Friends come and go. Enemies accumulate.

I think you're fundamentally misunderstanding how this works.

Finance and politics do not have the same morality that ordinary people do. Certainly not ordinary decent people.

The whole point of finance and politics is to screw everyone else for personal advantage to the maximum extent possible. That's the basis of Wall St and Washington morality.

The problem isn't that this 'isn't fair' - of course it's not fair.

The problem is that most people in Western democracies don't appreciate how systemically dysfunctional these cultures are, and they expect moral standards from so-called leaders, experts, and powerful people which those people have absolutely no interest in.

As for mortgages - this kind of creeping immorality corrupts everything it touches, so it's not difficult to understand why people will do the strategic default thing.

But a lot of people in strategic default have no choice, because they'll have lost jobs they would have preferred to keep, or suffered pay cuts they would have preferred not to suffer, and they haven't been given an affordable housing option.

There's a clear difference between that and someone who has no financial issues simply walking away from a debt because they can, and don't care to repay it.

If we brought in some medieval usury laws and gave whippings - with the number of lashes depending on how much you got - to everyone involved in a speculative bubble, maybe people would think twice. (Or the rich would become bloody pulp.)

When it comes to the houses I have no problem with people using their limited liability on mortgages. The bank gets the collateral that was put up, ie a house. The bank can then sell it or rent it out or build something else on the lot. If they absolutely did not want a house, they should not have made a loan with it as collateral.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

The trick was that the implications of a NINJA loan were built into the system. I remember reading the trades at the time telling us what a blessing it was to be living in times that these new financial tools were able to give the AmericanDream to so many people down the ladder, that we were being racist and unkind to say that it was a fraud, that the mirror of spreading the wealth was spreading the risk.To not take a loan, especially after your friends had taken loans and had them re-financed several times as the notes became onerous ('promised' by several of the conn artists) or refi'd when the value of the house when up -- these conditions, nor the people who were not as financially clever or honest as you, should not be sneered at.

Back just after the dinosaurs left, loans defaulted routinely at a small rate. Adjustments were made (such as insurance for the loan payer) to mitigate against some percentage, But always within the cost of any loan is some percentage betting on default.

What the CDOs did was pre-bet that this cost could be spread about, so that looser money could be spread about. But there was a mistake made, in that too many people were cross betting. All the cards that we supposed to be supporting the other cards turned out to be reliant upon upper cards.

And thus it is called a ponzi scheme...though that tends to dilute the rank and number of people involved.

I just hate this 'holier than thou' attitude when discribing those who were buying in with offers that got them out of the economic cycle they were in.

That this was part of the disguise and repercussions of the Savings and Loan bailouts from 15 years before is a whole 'nuther tangent.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland