Employer/employee Mutual Responsibility

[Sojourner]

We had a speaker over the lunch hour at school last week talking about predatory lending. For those who aren't aware, a brief synopsis of the situation, as explained by the speaker (and from my own experience reporting on the subject for several years):

About three years ago, across the country, mortgage foreclosure rates started to skyrocket. And by skyrocket, I mean that in 2006, rates in some places were more than three times what they had been in 2001. While there were a number of factors that were considered as possible reasons for the increase, but the one that has been definitively tied to it is an increase in the late 1990s/early 2000s in subprime loans (to people with less-than-stellar credit) and alternative loan options such as second mortgages. These loans were always considered very risky, but many lending institutions made them because of the high short-term returns.

Now, those returns are not looking so good, and all the mutual funds that are backing these loans are now on shaky ground as a result of the huge number of foreclosures. It is very, very bad, and so far only the subprime loans have started bottoming out. The alternative loans will start coming into play later this year, and when people start being unable to make those payments and defaulting on those mortgages, the bottom could very well fall out. Hopefully it won't.

Awful though this situation is, I am hoping to talk here not about predatory lending but about the culture that led to the decision-making that led to the financial disaster that has become the mortgage lending industry. 60 years ago, you'd get a job with a company, and expect to be working with that company for the duration of your career. This expectation ostensibly would lead to a sense of mutual obligation, for the long-term benefit of both the company and the employee. Although of course this did not always occur, there was still a cultural expectation of this mutual responsibility.

Over the years, however, that sense of mutual trust and responsibility has degraded, and instead of working together for mutual long-term benefit there is no longer the expectation of a commitment to the long-term success of either the employer or the employee. (Of course, this still exists in some employer/employee relationships, but I think there has been a cultural attitude shift.) Instead, the idea is that both parties mutually use one another ... each gets the most they can out of the relationship then parts ways.

I could see how this type of widespread attitude would lead to the type of situation now brewing in the mortgage industry. Rather than being concerned for the long-term health of the company, and the ramifications of risky lending decisions, employees making lending decisions were concerned with lining their pockets. They wouldn't have necessarily expected being with the company when and if the bottom dropped out. Of course, if the bottom does drop even further than it already has, we will all be paying the price for this in the form of abandoned neighborhoods, diminished home values, etc.

So does anyone else see this as a problem? Encyclicals like [url="http://www.vatican.va/holy_father/john_paul_ii/encyclicals/documents/hf_jp-ii_enc_14091981_laborem-exercens_en.html"]Laborem Exercens[/url] and [url="http://www.vatican.va/holy_father/john_paul_ii/encyclicals/documents/hf_jp-ii_enc_01051991_centesimus-annus_en.html"]Centesimus Annus[/url] talk about the value of work, and the mutual employer/employee responsibility. How can we encourage this type of mutual responsibility on a large scale?

[Thy Geekdom Come]

I don't have any input because I didn't even have the time to read the whole thing (busy these days), but here in Steubenville, there was a little too much of working in your whole career for one company...mostly because the steel mills would give you a loan to buy a house and pay you in credit at the company-owned grocery store. Naturally, it was a sort of legal slavery or serfdom, since the employee didn't make any money to pay back the loan and thus was essentially owned by the company.

Just thought it's an interesting view of the other extreme. Not arguing that either extreme is right.

God bless,

Micah

[Sojourner]

[quote name='Raphael' post='1240645' date='Apr 12 2007, 09:03 PM']I don't have any input because I didn't even have the time to read the whole thing (busy these days), but here in Steubenville, there was a little too much of working in your whole career for one company...mostly because the steel mills would give you a loan to buy a house and pay you in credit at the company-owned grocery store. Naturally, it was a sort of legal slavery or serfdom, since the employee didn't make any money to pay back the loan and thus was essentially owned by the company.

Just thought it's an interesting view of the other extreme. Not arguing that either extreme is right.

God bless,

Micah[/quote]
Totally true ... that is exactly the other extreme from where I think we are now, and lots of cities are paying the price for that in the form of job loss, abandoned polluted property, etc. Maybe it is still the same question, though, of the need for commitment to mutual benefit. A healthy (not exorbitant) profit for a business, and care for employees in terms of proper wages, proper training and development, etc.

[Anomaly]

I don't think the 'mutual responsibility' is as much as a factor as you think. I sometimes like to have talk radio on when I'm driving (a habit I picked up when I quit smoking). I listen to anything 'odd'. Mortgage shows, home repair, money market guys, Pentecostal preachers, the Bible Professor, Daniel Ruth who believes Bush is the worst President ever (seriously).

But this past week mortgage lenders were discussing the anticipated upswing in foreclosures and bankrupcies. Their contention is that homes are excessively luxurious and people buy homes larger and more expensive then they need. Different mortgage products came about because lenders became more attuned to 'special circumstances' of different people, such as the self employed, etc. But people chose to use these products to buy larger and nicer houses then they really need or can afford. I live in a neighboor hood where 90% of us have 3 car garages, yet none of us keep 3 cars there. When I grew up, a nice house did not necessarily even have a 2 car garage. Does a family of 4 need a 2,400 sf house, or would they be just as comfortable in a 1,800 sf house? Do you really need 3 bathrooms in a 4 bedroom house? Is the extra $5,000 for granit countertops really a need for the average person?

I think that people simply signed up for mortgages that were greater than they should afford, or could afford in the long term. It's human nature excacerbated by the conspicuous consumption society we live in today.

[Sojourner]

[quote name='Anomaly' post='1240770' date='Apr 12 2007, 09:45 PM']I don't think the 'mutual responsibility' is as much as a factor as you think. I sometimes like to have talk radio on when I'm driving (a habit I picked up when I quit smoking). I listen to anything 'odd'. Mortgage shows, home repair, money market guys, Pentecostal preachers, the Bible Professor, Daniel Ruth who believes Bush is the worst President ever (seriously).

But this past week mortgage lenders were discussing the anticipated upswing in foreclosures and bankrupcies. Their contention is that homes are excessively luxurious and people buy homes larger and more expensive then they need. Different mortgage products came about because lenders became more attuned to 'special circumstances' of different people, such as the self employed, etc. But people chose to use these products to buy larger and nicer houses then they really need or can afford. I live in a neighboor hood where 90% of us have 3 car garages, yet none of us keep 3 cars there. When I grew up, a nice house did not necessarily even have a 2 car garage. Does a family of 4 need a 2,400 sf house, or would they be just as comfortable in a 1,800 sf house? Do you really need 3 bathrooms in a 4 bedroom house? Is the extra $5,000 for granit countertops really a need for the average person?

I think that people simply signed up for mortgages that were greater than they should afford, or could afford in the long term. It's human nature excacerbated by the conspicuous consumption society we live in today.[/quote]
I think that is indeed part of the upcoming swing. While people did in some cases overreach in their loans, there is at the same time a responsibility on the part of the lender to be wise in lending. The loans they're talking about now are the alternative lending products that were increasingly available in the past five years ... adjustable rate mortgages, balloon payments, etc. Sometimes these products are appropriate, but sometimes the terms were not properly explained to borrowers. You can't borrow money if someone isn't willing to lend it to you. Lenders have a responsibility to communities and investors to do due diligence in determining when to extend credit. When that due diligence is thrown aside to make more money (i.e., an increase in no or low-documentation loans, or loans made without respect to income) ... you get the situation we're seeing now.

The current high rate of foreclosures is due primarily to subprime lending ... these aren't, for the most part, great houses. Often they're in not-that-great neighborhoods. Here's a map of foreclosures in one Minneapolis neighborhood in December 2006. Every dot represents a current foreclosure.
[img]http://img.photobucket.com/albums/v614/Sojourner/Foreclosure.jpg[/img]
This isn't that great a neighborhood. And there are neighborhoods like this in every metropolitan area. The concern is that when the option products you heard about start going south, we'll be seeing this same type of map pop up even in much nicer neighborhoods. And everybody's retirement investments on Wall Street will evaporate.

Edited April 13, 2007 by Terra Firma

[Mercy me]

I think that labor unions epitomize this. Look at the condition of the car companies. The unions got as much as they could possibly get for their members but it was detrimental the companies themselves. I think that we are all starting to get a wake-up call.

Anomaly I totally agree with you.

[cmotherofpirl]

The bottom line is always greed and self-interest.

[Anomaly]

Terra,
You may have a point. As a Floridian, my perspective is a different real-estate market. Lot's of people counted value appreciation greater than 10% per year so that they could buy a nice home w/ balloon payment or interest only loans now, but hoped to re-finance at a fixed 30 year in five years when their loan to value ratio was 80%. This was reasonable, but a flatter market appreciation did not raise their equity sufficiently. Basically, the speculated they could afford a 30 year fixed loan for a nice house 5 years later. But Florida (especially around here) still has a solid market, it just isn't the extrordinary increase we had in recent years. For example, my house doubled in value in 6 years, but hasn't increased more than 3 to 5% the last few years. If I took a mortgage product that allowed some negative equity to build up on the loan, expecting the house value to more than compensate on a refinance in 5 years, I'd be screwed.

But that map you have is shocking to me. I cannot imagine that here in Florida. I have family members who are in realestate here and know we have nothing that would approach a default rate in loans like that.

But the responsibility on both parties. There will always be people willing to take advantage of others. Major lenders have rules and principles, but you know that almost every web-site that has advertising, has mortgage lenders with the latest 'deal'. Alternative terms in loans are great if people are buying what they need and may be an answer to their prayers. But when people use them to buy more home then they need or afford, how do you regulate that?

[Sojourner]

Florida did have a really strong housing market for a number of years ... I wrote about it because there were so many Realtors in Indiana who were also selling properties in Florida.

However, as of this month [url="http://money.cnn.com/2007/03/23/real_estate/february_foreclosure_fall/index.htm"]Florida is leading the nation in foreclosures[/url]. The map you see above, if it hasn't already started happening in your area, is likely to be happening soon. It is very, very, bad, and people have been warning of this for years. I was writing about foreclosure in Indiana starting in November 2003, and rates were already very bad there. It hits poorer neighborhoods first, but all neighborhoods are vulnerable because of the types of products that are going into foreclosure: the subprime loans (to credit-challenged borrowers) and the alternative products to more well-off borrowers.

You're right that the responsibility is on both parties, but I think that the greater weight of responsibility is on the lender. A person may take out a mortgage a handful of times in their lives, but mortgage lenders are doing thousands of these a day. They are the ones who know what's going on, and should bear the burden of regulation and care in the situation because of being far more sophisticated. That's not to say that people shouldn't do their research when taking out a loan for a house, but again ... I think the bulk of the weight of the decision of whether or not the rests squarely with the lender.

[Anomaly]

[quote name='Terra Firma' post='1241542' date='Apr 13 2007, 02:41 PM']You're right that the responsibility is on both parties, but I think that the greater weight of responsibility is on the lender. A person may take out a mortgage a handful of times in their lives, but mortgage lenders are doing thousands of these a day. They are the ones who know what's going on, and should bear the burden of regulation and care in the situation because of being far more sophisticated. That's not to say that people shouldn't do their research when taking out a loan for a house, but again ... I think the bulk of the weight of the decision of whether or not the rests squarely with the lender.[/quote]Well, that's where we fundamentally disagree. If you are intelligent and responsible enough to be buying a house, you have to do your homework. I think that mortgage companies should not mislead or lie, but there is a market for people who need and want mortgage products that are out of the 'normal'. If you put the burden on mortgage companies, then they will only offer the safest type of mortgage and effectively eliminate mortgages for people on the margins or with special circumstances.

People are responsible to make their own judgement calls. There are plenty of sources provide free and solid advice regarding personal finances and getting a mortgage from the private and public sectors. You can lead a horse to water, but you can't make them drink. In Florida, I know of plenty of people who have speculated on real-estate. They got out when the market softened a year ago, but I can imagine the potential for people getting burned for over-buying their needs or ablility.

Lenders are naturally in the position to lend money only to people who will pay them back. Stupid lenders will get burned by having to foreclose on properties that more money is owed than what it's worth. Stupid borrowers suffer the financial damage of foreclosure. Both made poor decisions and failed to protect their interests. If anything, it's the borrowers who took advantage of the lendor by borrowing money for a house they couldn't afford and possibly, more than they needed.

[Sojourner]

(OK I really love debating with you. You actually read what I write ... it's refreshing.

I'm not denying that borrowers need to do their homework when taking out a loan, but I'll maintain that borrowers are very much at a disadvantage in this equation. It is the lender who drafts the mortgage contract -- borrowers often don't have much say in drafting the contractual terms. Lenders are trained in doing this type of work, they have attorneys drafting documents and accountants figuring out the numbers. A home buyer has only her own wits and education, along with whatever help they may or may not get from the Realtor (who, let's be honest, stands to gain from the sale and so is not without motivation to encourage a buyer to "just sign it now") and other friends who may or may not have expertise in borrowing.

There are resources out there for buyers, and they should go the extra mile to take advantage of them. But there are plenty of pitfalls for buyers, who may not even know to ask the right questions, or where to get answers that are biased in favor of protecting the interests of the buyer rather than the lender. I'd place the responsibility split at 65/35.

[Anomaly]

[quote name='Terra Firma' post='1241894' date='Apr 13 2007, 06:03 PM'](OK I really love debating with you. You actually read what I write ... it's refreshing.

I'm not denying that borrowers need to do their homework when taking out a loan, but I'll maintain that borrowers are very much at a disadvantage in this equation. It is the lender who drafts the mortgage contract -- borrowers often don't have much say in drafting the contractual terms. Lenders are trained in doing this type of work, they have attorneys drafting documents and accountants figuring out the numbers. A home buyer has only her own wits and education, along with whatever help they may or may not get from the Realtor (who, let's be honest, stands to gain from the sale and so is not without motivation to encourage a buyer to "just sign it now") and other friends who may or may not have expertise in borrowing.

There are resources out there for buyers, and they should go the extra mile to take advantage of them. But there are plenty of pitfalls for buyers, who may not even know to ask the right questions, or where to get answers that are biased in favor of protecting the interests of the buyer rather than the lender. I'd place the responsibility split at 65/35.[/quote]Oye. Of course I read what you say, even if it gives me a headache. LOL (j/k)
But people outsmart themselves constantly because they think they 'know'. I did when I bought my first house. I didn't listen to my parents, my in-laws, or real-estate agent friends. My wife and I 'knew already'. Luckily we didn't get burned too badly, but when I sold that house 10 years later, we didn't do too well. Ever since, I ask everybody I know questions, of course, giving more weight to my wife than anyone else. We've done super well on the next few houses, though we did tend to buy more house than we needed on this one, but we got such a 'deal'. What role or right would the mortgage company have in telling us that we shouldn't buy the house we live in. We don't need all the rooms in it. We don't need the upgraded flooring or cabinets. How could they make us buy a home for 20% less which would have eased a TON of stress when I was unemployed for an extended period of time 3 years ago. I was within weeks of reaching the 'tipping point' of deciding to sell the house or go into foreclosure. That was nobody's fault but my own. In retrospect, since I was able to keep the house and our finances have changed drastically for the better the last few years, the sacrifices worked out well and we have a nice chunk of equity so when we downsize when we retire, we can have a smaller place paid for.

The point is, we got lucky and it worked out. We aren't any smarter, richer, or harder working than the people who are getting foreclosed on now. We were just a little luckier. If we didn't get the mortgage years ago, sure, we may have had an easier financial time, but we wouldn't have had the financial benefits we have now. That should be my decision, not the Government telling the Lendor they can't lend me as much money as the two of us agreed could be lent and I felt I could pay back.

[Sojourner]

I agree that people need to take responsibility for their own loans, and for determining in their own budgets what they can and can't afford. And, a lot of these alternative products were sold with the idea that people could pay off high-interest credit card debt and roll it into their mortgage payments. Which people did, then ran up MORE debt on cards and ended up not just going into bankruptcy but losing their homes as well. Stupid. But, given the fact that these people often had poor credit history to start out with: TOTALLY FORESEEABLE.

But ... I think it's reasonable to require that loans of this type be based on some sort of ability to repay. Perhaps there's could be some flexibility with how "ability to repay" is figured out, but many of these loans are made totally without regard to people's ability to repay or income. That, in my view, is stupid. And while I'm all about giving people second chances when it comes to credit (believe me, ALL ABOUT it) I think that banks would be wiser just to say "no, you can't do this."

One other consideration: When an individual homeowner takes a risk in getting a mortgage that stretches them financially, they are putting themselves and their families at risk. Maybe not the best idea, but their decision on an individual level does not have a massive effect on the overall economy.

But, when mortgage lenders have policies across the board that represent unwise lending practices, those decisions have widespread economic impact. When you've got neighborhoods that look like the map I posted above, that is a MAJOR problem for the city, and for the state, for homeowners and their property values, and for all the people whose retirement is wrapped up in mutual funds that are backing these loans gone south. That potential for widespread harm on the part of mortgage lenders, in addition to the fact that they are much more experienced in making loans and doing up the contracts, is why I think that they deserve to bear more responsibility in this, and should be more closely regulated.