Guest Post: Kate (Not Your Sister) on the Housing Implosion
Kate (Not Your Sister) is a friend of mine here in Philly. I think we get along so well because we both like to rant.
Kate doesn’t blog (she should), but asked if she could submit a guest post regarding the subprime mortgage debacle and the housing collapse.
I don’t agree with everything Kate says below, but her points merit consideration. I think she’ll be bopping around the comments this week, so please engage!
I’ve been hearing a lot about the “impending crisis†resulting from the bursting of the housing bubble. If characterizing the housing market in that way disturbs some readers, then I can back off. But I think we can all agree that house prices are dropping from the highs a few years ago, and in all likelihood will drop more in the future – at least here in Philadelphia.
The other “coming crisis†is the problem of the balloon payments coming due on adjustable rate mortgages (ARMs). I don’t know anyone personally who’s done one of these, but my understanding of how these work is that there’s a low rate for the first few years of the loan, at which point the rate – and the payment – increases. I think this is further complicated when buyers get no-money-down loans, because the payment in the first few years is interest-only (therefore the “homeowner†is building zero equity), then the payments switch to principal plus interest, at a higher interest rate to boot.
These types of mortgages might actually make sense for some buyers. I myself am not a homeowner. My husband and I looked into buying in early 2003. We did find a house that we really liked, but it was just out of reach for us at that time. We had no down payment, and though I was earning a reasonable salary, my husband was in his first year of law school. Now, in 2007, I’m making considerably more money, and my husband passed the bar and is making pretty decent money himself. We would have been in great shape with one of those 2/28 ARMs. It would have been a struggle for the first two years even to make the reduced payments, but after those two years, we had every reason to expect that our financial situation would improve dramatically.
So why didn’t we buy?
Because we are adults. We recognized that there were a lot if “ifs†in the plan. Sometimes things don’t turn out the way you expect. What if something had happened and my husband didn’t finish school? Didn’t pass the bar exam? Didn’t get a job right away? Decided to work for Legal Aid for very little money? Sometimes things don’t go according to plan, and it’s a really bad idea to make a $200,000 commitment that’s contingent on everything falling into place as planned. Plans change. I suspect that many people taking these loans didn’t even have a reason to expect their financial situation to change drastically over the two or three year “honeymoon†period. For us, the risk was too great, and the consequences of something going wrong were enormous.
Ahh, there’s a word. Consequences. Why do Americans believe that there should never be consequences? Mistakes engender consequences – even when it’s “not your fault.†Anyone who has ever had a car accident should be able to understand this. Life is unfair. It’s unfortunate, but true.
I’ve been accused of being hard-hearted by my friends (including, at times, my blog-host). But really, it’s not that. A bailout for people who gambled (and lost) on their decision to get into the housing market infantilizes adults. It sends the message that we really can’t be expected to be responsible for ourselves and our decisions.
I have two examples that I hope illustrate my point. The first comes from my husband’s work. As I’ve mentioned, he’s an attorney. He is currently representing a pro bono client – let’s call her Alice. In short, Alice was manipulated by a sleazy car salesman. According to Alice, the salesman quoted her a figure for the monthly payment that was considerably lower than the figure listed in the loan agreement that she signed without reading. Because an oral contract “isn’t worth the paper it’s printed on,†combined with the fact that she took possession of the vehicle, Alice is on the hook for the higher car payment. My husband is doing his best to work something out for her, because a lawsuit simply isn’t an option. Legally, she doesn’t have a leg to stand on. She didn’t read the contract she signed. Indeed, most contracts have an explicit clause that states something to the effect of “I have read this document.†This is basic adult responsibility 101, and the law recognizes it as such. I do feel badly for Alice. She’s in a situation where she can’t make her payments, and from what I understand, she needs a car to get to work. Without a doubt, the car salesman behaved badly and took advantage of her. But, see, you need to read things before you sign them. It’s a hard lesson, and one she should have learned years earlier, but hopefully she’ll read things before she signs them from now on.
A more lighthearted example is from several years ago. Again, it comes from my husband’s experience. He and some friends went out to a strip club for a “boys’ night out†sort of thing. One of these fellows – let’s call him Jake – had never been to a place like that: he’s younger and a bit sheltered. Anyway, Jake accepted an offer of a lap dance. To the chagrin of his companions, he didn’t return for quite some time. After the guys checked to make sure nothing terrible had happened, he finally emerged, holding a credit-card receipt and looking rather ticked off. Apparently, the dancer inquired at the end of the song if he’d like her to keep going. Young Jake enthusiastically agreed – for about five more songs. This decision ended up costing him about $160, which was a good deal more than he’d planned on spending that evening.
Jake’s little mishap was unfortunate, sure, but if you’re old enough to go to a strip club, you’re old enough to be expected to understand how things work. In both of these examples, the protagonists made errors in judgment, and had to face the consequences. With respect to people who bought “too much house†with an ARM that they can’t make the later term payments on – too bad. If you can’t pay for it now, you don’t get to keep that house. I recognize that this is likely to affect lots of people who bought “ordinary†houses. However, the phrase “too much house†doesn’t just apply to people in McMansions. If you can’t afford it, it’s too much house. A bailout tells these people that they’re not really adults - not really responsible for the consequences of their decisions.
To anyone reading who thinks this tirade is “sour grapes†because I didn’t get in on the great real-estate circus, you couldn’t be more wrong. For a variety of reasons, I value the freedom renting gives me and am delighted with my current living arrangements. I might well buy a cheap foreclosed home at some point in the future, but even that doesn’t drive my indignation at the very thought of bailing out people who overextended themselves in the housing market. The reason this infuriates me is simple: I’m disturbed by the premise that underlies a bailout – the premise that adults who voluntarily entered into legally binding contracts should be second-guessed by a government that claims to know what’s best for them. If the intrusion results in a favorable outcome for most, you can expect people to go along. But what about the next time? What’s the next thing about which the government will assert claims of “we know best�
A bailout infantilizes the adults who bought houses in a volatile market. It’s as simple as that. If you want all the potential benefits that come with a society that values capitalism, free will, and democracy, you’ve got to be prepared to roll with the punches.
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