Readers need to read today’s op ed by Nicholas Kristof in the New York Times, and pronto. It is a former insider debunking of the idea that borrowers rather than bankers bear primary responsibility for the housing bubble and aftermath.
I’ve not been a big fan of the “greedy borrowers” theory of the mortgage crisis, particularly now, since the people who clearly bought too much house relative to their incomes defaulted quickly, in the 2007-2008 time frame, and are different than the people who are hitting the wall now. The current group in large measure is people who have suffered a setback, either as a result of the crappy economy (caused by the financial crisis, remember?) or personal disasters, such as a medical emergency.
But even for people who did stretch to buy a house, “greedy” is not necessarily the right moniker. The standard advice has long been to buy as much house as you can afford, with the assumption that people early in their careers will see income gains and have a comfortable margin in a few years. Another reason buyers strained to buy better homes, as Elizabeth Warren set forth long form in her book The Two Income Trap, is the competition for better schools. The premium for houses in decent school districts has gotten larger over time.
And a former Chase banker, as recapped by Kristof, gives the most fundamental critique: banks really were pushing borrowers into risky loans. It is critical to underscore that this is NOT an equal relationship. Borrowers throughout history are assumed to be greedy, stupid, or simply overly optimistic. The job of the lender is to protect himself from them, and by happenstance, them from themselves. And a lot of borrowers would therefore assume if the bank said they could afford a loan, then they must be able to afford it.
But Kristof’s source, one James Theckston, “fully acknowledges that he and other bankers are mostly responsible for the country’s housing mess.” And he describes a practice that has been well documented statistically but not discussed enough in polite company: the way minority borrowers who qualified for prime loans were steered into subprime products:
As a regional vice president for Chase Home Finance in southern Florida, Theckston shoveled money at home borrowers. In 2007, his team wrote $2 billion in mortgages, he says….
“If you had some old bag lady walking down the street and she had a decent credit score, she got a loan,”…
Theckston says that borrowers made harebrained decisions and exaggerated their resources but that bankers were far more culpable — and that all this was driven by pressure from the top.
“You’ve got somebody making $20,000 buying a $500,000 home, thinking that she’d flip it,” he said. “That was crazy, but the banks put programs together to make those kinds of loans.”..
One memory particularly troubles Theckston. He says that some account executives earned a commission seven times higher from subprime loans, rather than prime mortgages. So they looked for less savvy borrowers — those with less education, without previous mortgage experience, or without fluent English — and nudged them toward subprime loans.
These less savvy borrowers were disproportionately blacks and Latinos, he said, and they ended up paying a higher rate so that they were more likely to lose their homes. Senior executives seemed aware of this racial mismatch, he recalled, and frantically tried to cover it up.
Theckston, who has a shelf full of awards that he won from Chase, such as “sales manager of the year,” showed me his 2006 performance review. It indicates that 60 percent of his evaluation depended on him increasing high-risk loans.
Of course, Chase has a pious explanation of sorts:
When I called JPMorgan Chase for its side of the story, it didn’t deny the accounts of manic mortgage-writing. Its spokesmen acknowledge that banks had made huge mistakes and noted that Chase no longer writes subprime or no-document mortgages. It also said that it has offered homeowners four times as many mortgage modifications as homes it has foreclosed on.
Having worked in investemnt banking, where cutting numbers to tell a flattering story is a major part of the business, I’m plenty skeptical of Chase’s “We are trying to do better” tale, particularly when I hear regular reports from Florida of how Chase is one of the most abusive servicers. First, there are plenty of homes that have not been foreclosed upon but are beyond the event horizon. The foreclosures have been delayed due to a combination of: hopeless documentation mess (as in if the borrower fights, the bank knows it will have trouble foreclosing, or the foreclosure is in a jurisdiction like New York or Nevada where the parties involved in prosecuting the foreclosure are at serious risk if the chain of title isn’t clean); overloaded court dockets; huge foreclosure inventories (meaning the homes won’t sell anytime in the foreseeable future anyhow, so why not keep the borrower in the home for now and liable for property taxes).
Second, I’m also not terribly impressed with the “mods offered” part. Borrower attorneys have showed me mod offers that were jokes, proving minimal current relief and adding a ton of junk fees that the borrower contested to principal. In addition, I am certain this total includes HAMP trial mods, and as readers know all too well, many did not result in permanent mods (and those “permanent” mods were underwhelming, mere 5 year payment reduction plans, effectively a bet that housing prices would rise over that time frame).
I’m glad to see some bankers have a conscience, but Thecskston can afford to. Chase fired him in the downturn. How many who are still in the saddle have great rationalizations for the behavior that Theckston depicts as reckless and predatory?