Lecture Hall

Lecture Hall

By Tony Ortiz | June 27th, 2015

Will the great recession be on the Midterm Professor?

Absolutely, and here’s the type of essay I’m looking for folks.  Show the understanding that the catalyst was the burst of the tech-bubble in the early 2000’s.  People began to search for safer investments, and settled on real estate.  In turn home demands rise while supply falls.  And what does that do to the price, class?

It drives it up, responded a student from the back of the lecture hall.

Correct, whoever that was, responded the Professor.

It drives the price up, which artificially inflates home values.  So what then?  Houses across the nation are now “worth” more than ever before –in recorded history. And here’s where individual greed comes in.  People owe less than what their homes are now artificially inflated to be worth.  That spread, between the value and what is owed, is called equity.  And what do they do?  They can’t leave well enough alone, no.  They borrow against that equity.  They buy other houses, cars, boats … luxury items that they don’t need.  Greed is good, huh?  Not in this case.

But Professor –

Hold on David, let me finish this point first.  As the spread continued to increase, some of these people took out second mortgages and lines of credit, using their homes as ATM machines.  We were in the midst of the next bubble folks, and most of us didn’t see it.  Values kept going up.  Skyrocketing in some regions.  But we missed the forest for the trees.  Then Wall Street which was fueled by their own greed, created financial instruments known as Mortgage Backed Securities.  Think of them as stocks or bonds that were made up of a collection of mortgages that were all bundled up and sold by the share to the general public.  The thing is that these Mortgage Backed Securities weren’t just made up of mortgages that were in good standing.  They’d also include these doomed to fail sub-prime mortgages.  They bundled them up together and sold them to the world.  Infesting the globe.

This leads to the next point that your essays should cover.  What exactly is the sub-prime mortgage market?  Well, Wall Street wasn’t satiated with the millions of dollars this market was generating.  Nope.  They wanted even more.  Their greed needed to be fed.  So the Banks that you and I go to for a Mortgage, began to loosen up their guidelines for mortgage qualifications.  This way they’d have more mortgages on their books to feed Wall Street with.  You no longer needed a 720 Credit score, a 680 score would do.  You didn’t need 20% down payment plus closing costs, just come up with 10% plus closing costs.  If you build it, they will come, and so they (the borrowers) came.

But why is that the consumers’ fault, blurted out a student from the back of the lecture hall.

Because there’s something called personal responsibility, that’s why!  Nobody can exercise that for you.  As I was saying, after the banks lowered mortgage qualifying requirements and Wall Street successfully sold off those securities, they lowered requirements even more.  Soon you didn’t need a down payment, and closing costs weren’t required either!  They rolled up all of your costs into your mortgage loan.  Can’t pay for the appraisal out of pocket? – Don’t worry.  We’ll roll that cost in too.  Some big banks like Countrywide, which to give you a bit of context; In 2006 Countrywide financed 20% of all mortgages in the United States, at a value of about 3.5% of United States GDP, as well as a handful of lesser known fly-by-night banks that popped up to exploit, even offered up to 106% financing.  I’ll say that again. One-hundred-and-six-percent financing.  That means that in some cases you were paid to take a mortgage!  They paid you, to buy a house!  I shit you not.  But we the consumer, kept taking and taking and taking.  Word to the wise folks, if it seems too good to be true … it is!  Questions?  Comments?

David raises his hand again; “I have a question.”

Go ahead David, said Professor Nachman.

You say that consumer greed is at the root of this issue, right?

Not just consumer greed, responded Professor Nachman but greed in general.  Bank greed.  Wall Street greed.  Human greed.  The blame goes all around.

Well, I don’t’ think I agree with you Professor. 

Fair enough, tell us why you don’t, responded Professor Nachman as he leaned on the front of his desk to listen.

I guess greed does play into it, David continued, a general ‘people wanting what they can’t have’ coupled with being told that they can now have all those things … but I wouldn’t blame it solely on greed.

There are absolutely other factors at play young David, just none as strong or as underlying as greed.

That’s just it, I don’t think every one involved is necessarily being greedy.  There’s plenty to say about predatory lending.  About lack of regulation, about manipulation and exploitation of a weak system.

David.  If you’re a minimum wage worker at the local supermarket for example, you should have the common sense that you have no place purchasing a four hundred thousand-dollar home.  And then, on top of that, an additional hundred thousand dollar line of credit against that same home, which you use to buy a new car and big screen T.V.  That’s living beyond your means.  That’s exercising zero personal responsibility. 

But don’t Banks have a fiduciary responsibility to be truthful?  Don’t Banks have a personal responsibility not to fuck over their customers?

Watch that tone.

I’m sorry Professor, it’s frustrating.  That mentality.  My aunt for example, came to this country 12 years ago.  She worked 10-12 hour days, 6 days a week.  Making sure my cousins never wanted for clothes on their backs or food in their mouths.  She even took me in for a year when my parents died in their accident.  And she did it alone.  But I guess she should have had the personal responsibility to pick a better husband right?

What’s your point David?

The point is that she is a hard worker that scraped together her life savings of $10,000 to buy a house.  She put all her eggs in one basket because that’s all her local mortgage Broker told her she needed.  She would finally be able to fulfill the ‘American Dream’ for her and her family.  He told her that her mortgage would be even less than she was currently paying in rent, because of an interest rate special he could get her for being a first time homebuyer and for being a single hard working Latina woman.  He even told her that he could get her a line of credit for a new car too … but she didn’t’ bite on that one.

She got the house with only 10K down on the sales contract.  Closing costs were rolled into her new loan.  He didn’t tell her however, about the several hundred dollars more per month, that she would have to pay for PMI (Private Mortgage Insurance) because she didn’t make a down payment of 20%.  And of course didn’t mention the taxes and insurance because everyone, including 1st time homebuyers, should know that right?  Instead he misleads her by quoting only the principal and interest payment and conveniently leaving out the rest.

But it’s ok; she’s hard working and knew things couldn’t just go 100% smooth.  Fine.  She picked up a part time job on Sundays, to make ends meet.  In her mind, working 7 days a week is worth her children having a taste of the American Dream.  You want to know what he didn’t tell her though?

What’s that?

That the type of loan he gave her was a 6-month arm.  She had an introductory teaser rate.  Meaning her interest rate/mortgage payment was locked in for only 6 months.  Thereafter it would more than double!  She went back to the Broker thinking surely this has been some kind of mistake.  He told her he’d look into it, strung her along avoiding her calls for over two weeks.  After that when she showed up at his office again, he told her that there was nothing he could do, except refinance her into a 30 year fixed rate loan but it would cost her another 10K in closing costs, and her total monthly payment would go down by only about $150.  Long story short, the Bank foreclosed and she lost the house.  She lost it all.  Now she’s back in the Dominican Republic with her 2 kids.  And her story is far from unique by the way.  What happened to the Bank having a fiduciary responsibility to their customers?  What happened to walking into making the biggest investment of your life and not having to worry about snake-oil salesman?

Let me ask you something David.  What happened to your aunts’ personal responsibility?  What happened to your aunt knowing the limits of what she could afford?  Folks … there are bad people out there.  They’ll always be there.  We can’t nerf the world in order to shield the rest of us from them.  That’s not how we win.  We win by being accountable for our actions.  For knowing what we’re getting ourselves into.

You’re being disingenuous professor.

Excuse me?

And unrealistic too.  What you’re saying makes sense for us.  The younger generation.  Those of us lucky enough to be learning this stuff in College.  But what about my aunt?  What about the immigrants that are preyed upon?  What about the hard working Americans even, that left school because they chose to nobly put their families needs’ before their own and went to work in order to provide for them.  They obviously don’t have the same information.  So fuck them?  Survival of the fittest basically?

Watch your language in my classroom.

Sorry … I guess I just don’t know any better.  But you know what professor, it shouldn’t be ok to screw over the less fortunate and squeeze out every last dime out of them just because you can.  And what’s worse, is that they continue to do so without repercussion.  That’s the issue.  You say that bad people will exist.  Agreed.  But we shouldn’t have to write that off as the cost of doing business.  Assholes need to be checked.  Bad business practices, regulated.  In a direct and unilateral way.  Attacking the root of the issue instead of hacking away at the symptomatic branches, to paraphrase Thoreau. 

Big Government and regulation stifles progress and ingenuity.

Does it always?  Can’t it also allow progress and ingenuity to be free to thrive without corporate special interest intervention like the New Deal did with Social Security and other programs after the Great Depression?

In the long run, the invisible hand prevails and the markets balance themselves out.  So long as people remain content with knowing that ditch diggers and maids can’t buy mansions.

I agree with personal responsibility to a degree, but the underlying issue with that is that everyone can’t know everything.  The maid that walks into a bank with her life savings, shouldn’t leave thinking she has a home and find out 6 months later that she barely has a shirt on her back.  And her children shouldn’t have to decide between either breakfast or lunch because some unregulated Banker wanted to add a diving board to the pool at his family’s summer home.

Tread lightly on that regulation slippery slope that you’re on David.  You may regret it in the future.

Your generation doesn’t get to tell ours what to do anymore. 

Ok that’s enough, said Professor Nachman.

No it isn’t enough, responded David.  We still have skin in the game.  You played it your way and lost.  Now it’s on us to clean up the mess we’ve inherited, in order to survive.  And it starts here, with this conversation.  With doing what we can to help shift the collective consciousness into a space where we don’t have a ‘pass the buck’ mob mentality.  Where personal responsibility is balanced by unilateral repercussions.  A dash of good old common sense could go a long way. 

Bell Rings. Class Ends.