The REAL ‘Victim’ In All This Mess

October 23, 2008

Sorry to keep harping on the subject of the housing/mortgage/credit/bailout crisis but I keep reading stuff that just makes cringe. The latest comes from an article I read this morning in the Wall Street Journal about protests at the annual convention for the Mortgage Bankers Association that was held this week in San Francisco.

Here is the part of the article I want to focus on:

“The main point, and the main issue for everyone, is there should be a stop to foreclosures and evictions, and the government should be assisting the victims of the crisis and not the people who created it,” said Richard Becker, spokesman for the Party for Socialism and Liberation. The group picketed outside the convention center on Sunday and Monday.

Mortgage bankers should be punished if it’s found that they knowingly put people into mortgage loans that people couldn’t afford, Mr. Becker said. “Jail them, don’t bail them” was a popular rally cry outside the convention center.

Side note: The Party for Socialism and Liberation? Do those two words belong in the same title? I found their website and they actually have a presidential candidate. But, I digress.

I’m tired of people throwing around the word “victim” to include anyone experiencing the consequences for bad decisions. According to Merriam-Webster.com, the definition of victim is:

2: one that is acted on and usu. adversely affected by a force or agent the schools are victims of the social system: as a (1): one that is injured, destroyed, or sacrificed under any of various conditions a victim of cancer; a victim of the auto crash; a murder victim (2): one that is subjected to oppression, hardship, or mistreatment a frequent victim of political attacks b: one that is tricked or duped a con man’s victim

Those who purchased homes they couldn’t afford are not victims of anything other than their own poor decisions. The REAL victims of this crisis are all of us who CHOSE to do things the right way and live within our means and buy houses we could afford and those of us who are STILL saving up for a house.

Finally, I’d like to challenge Mr. Brecker’s comment that mortgage bankers should be jailed if they knowingly put people in loans they couldn’t afford. What about those who took on mortgage loans they KNEW they couldn’t afford? Can we jail them too?

13 responses to The REAL ‘Victim’ In All This Mess

  1. To your final paragraph, I say YES!!!!!

  2. How ’bout that, another post of yours that I totally agree with! Let’s jail everyone who screwed all of us responsible people.

  3. Every politician keeps talking about giving these houses away to people who can’t afford them. They want bankruptcy judges to rewrite mortgages to make them “affordable”. Seeing how arbitrary judges are with the law, affordable means whatever the judge feels like that moment.

    I am tired of seeing “poor” people walking around with iPods, texting away on their cellphones. I am tired of reading about people who can’t afford to pay for the gas in their humongous SUV.

    Liberals hold no one responsible for their actions and expect everyone to pay for the results. Too bad we can’t earmark our taxes to pay for the services we want to support. That would be very instructive.

  4. I was happy to stumble across your post – it is surprising few people point this out. You would think it would be part of the mainstream discussion really, as one of the problems that needs fixing.

  5. I’m glad to know other people are as irritated by the “victim” talk as I am. Everyone seems to be trying to forget that while Stated-Income loans were a terrible idea, the applicant (ultimately) had to sit down and say “Yes, I make $xxxx a month.” So let’s not pretend that the lender is the only party at fault.

  6. Hmmm… How do you put a handle on the temptation of thousands/millions of people to commit calculated fraud across the nation. The answer… REGULATION.

    Deregulation is for the birds.

  7. Ken,

    I thought the birds were ALREADY deregulated????

  8. i believe what you said..Government should protect someone that really suffer esp victim of crisis since they know nothing from the crisis

  9. The main point, and the main issue for everyone, is there should be a stop to people not paying their mortgages. Government should convert the mortgage liability to tax liens and force the borrowers to pay. When the borrowers see they *have to* pay, they will pay. That will end the financial crisis for all responsible citizens.

  10. I want to thank you once again JLP for exposing what SHOULD be common sense, which is unfortunately something our country seems to be lacking these days.

  11. “The Party for Socialism and Liberation? Do those two words belong in the same title? I found their website and they actually have a presidential candidate. ”

    Barack Obama?

  12. “Let’s jail everyone who screwed all of us responsible people.”
    There are lot of those responsible. It’s not just mortgage bankers. If it had been just failed mortgages and not the whole mess with derivatives – mortgage backed securities and credit default swaps – banks would have been able to write off mortgage losses within a couple of quarters. As to regulation and deregulation – there are mistakes on both sides that contributed: e.g. exception to leveraging limits rule on mortgage backed securities granted to 5 major investment bankers in 2004 and lack of oversight (deregulation) was one of the main reasons for this crisis. At the same time “mark-to-market” rule that requires companies to report losses in market value of commercial paper as if it is a real loss may have contributed as well (regulation) as it forced banks to try to sell these securities even below potential value of mortgages they represent just to avoid having further right downs.

    So here is the list of those responsible in no particular order. It’s not even complete – most likely I’ve forgotten a few:

    – Congress that pushed to give mortgages to low income people and to relax the rules.

    – Whoever came up with the idea of mortgage-backed securities. Allowing mortgages to be packaged and sold removed incentives from mortgage bankers to verify that borrowers can repay. After all, if you plan to sell the mortgage, do you really care if it’s going to default or not? Incidentally, in 2003 Warren Buffett called these new type of securities: ‘”financial instruments of mass destruction” which were creating “mega-catastrophic risk” for the economy’.

    – SEC, specifically Christopher Cox deregulation 2004 decision that gave exception to limits on leveraging rule to 5 largest investment bankers. BTW, three of 5 major investment bankers that got this exception are out of business now; remaining two are Goldman Sacks and Morgan Stanley. Some of these companies ended up leveraged 40 to 1 i.e. for every dollar they had in reserve they could borrow $40 and use the money to buy mortgage-backed securities. This amplified the problem with defaulted mortgages exponentially. Additionally, SEC decided to trust the risk models these companies used, i.e. it essentially allowing them to police themselves.

    – rating agencies that gave inflated rating to mortgage-backed securities relying on mathematical models that failed to consider all the risk. As hearing last week showed, some of them suspected the models didn’t allow for half of the risk, yet they gave some of these securities AAA rating. Many companies all over the world bought these securities thinking they are buying AAA rated commercial paper.

    – Mathematicians that came up with these models and failed to consider falling real estate market. The idea was spreading the risk i.e. if you have 100 mortgages and the probability of one defaulting is 10%, the probability of two defaulting is .1*.1=.01 i.e. 1%; if you get 3 mortgages it is only .1%, etc. Of course, this assumes that these are independent events which is not true when the real estate market start declining, but they haven’t thought of that. As a result, when mortgages started to default, the value of these securities dropped, then nobody could even trust AAA rating, so the market value on all MBS dropped even more; even those MBS that contained a fair amount of good mortgages.

    – Insurers and investment bankers selling credit default swaps – an “insurance” on mortgages backed securities in case of default. Except for as it wasn’t called “insurance”, it didn’t need to follow the rules for insurance such as having enough capital to cover the losses.

    – Bankers who gave mortgages to people who cannot afford including mortgage bankers who came up with idea for all those fancy mortgages.

    – Borrowers who took on more mortgage they can afford sometimes lying about their income.

    – mark-to-market rule for mortgage backed securities. This rule may have contributed to banks being forced to get rid of these securities further driving their price down. Here is a good explanation I found on how mark to market rule contributed to crisis: http://www.parapundit.com/archives/005597.html

    As to victims, I think the real victims aren’t the people who bought houses they couldn’t afford. The real victims are those of us who managed our finances responsibly, never bought more then we could afford, but lost money in this crisis; those whose neighborhoods are destroyed by foreclosures even if they themselves were responsible; those who have already lost or will lose their jobs in this crisis; businesses that suffer because of bad economy.

  13. There is no way of classifying an entire class of American as the victim in this case, the details are too convoluted. In that I agree with Kitty.

    Jail them? Why not just fine them? Make them scrape up the funds to recover us out of this mess some.

    You people who think you are the REAL victims can’t be classified as such by the definition JLP cites. Are you injured? Aside from the balance of your 401K and investments (which will rebound if you invest intelligently and for the long run)? Have you been mistreated? Were you tricked or duped in any way? Are the terms of your mortgage (if you have one) changing on you? Are you less likely to be able to afford a home?

    As long as you invest for the long term and stay in your house through this crisis, home values will go back up and neighborhoods with lots of foreclosures will recover. If you ask me this just gives you “victims” another leg up. If you want to buy a new home you are the ones with the credit scores, savings and incomes to take advantage of buying foreclosed homes or getting your next house at a reduced cost.

    Investments in the stock market are volatile. Are you saying that you are not smart enough to understand “Past performance does not guarantee future results.”?