Debtors Prisons 1

While I was looking at the headlines this morning, I remembered this building:

It’s an old debtors prison. It’s where persons who couldn’t pay their debt used to go until they could pay their debts. A student of the dialectic will immediately recognize the internal contradiction in that practice. Persons in prison generally aren’t in a position to earn money so as to pay off anything.

This is a new debtors prison:

Today’s New York Times sees two basic groups in mortgage trouble: Those who cannot pay their mortgages and those who can pay them, but whose houses are now worth less than the value of the mortgage.

The first group is made up of people who cannot afford their mortgages and have fallen behind on their monthly payments. Many took out loans they were never going to be able to afford, while others have since lost their jobs. About three million households — and rising — fall into this category. Without help, they will lose their homes.

The second group is far larger. It is made up of the more than 10 million households that can afford their monthly payments but whose houses are worth less than what is owed on their mortgages. In real estate parlance, they are underwater. If they want to stay in their homes, they will have no trouble doing so. But some may choose to walk away voluntarily, rather than continue to make payments on an investment that may never pay off.

Spread across these categories are three types of mortgage trouble: Persons with ARMs that have reset to principal and interest payments that they can no longer afford, persons with houses that the “free hand of the market” had seriously overvalued, and persons with a combination of both.

I’m not sympathetic to persons who got themselves into trouble by trying to “flip that house” (or ‘these houses’), nor to those who kept milking their houses for spending money by continually remortgaging it, whether through new mortgages or home equity loans.

I am thinking of the many first-time house buyers who, I am certain, did not have the financial background to understand that

• Real estate agents are not on your side. Real estate agents are on the side of making sales. This does not mean that real estate agents are dishonest; most of them, certainly the ones I’ve dealt with over the course of buying four and selling three houses, are persons of integrity. It means that their best interests and the customers’ best interests are not the same. In an overheated market, this can lead to false beliefs, such as, “Property values will never go down.”
• Adjustable rate mortgages are evil. They were evil when they were introduced in the 1970s and they are evil now.
• Any loan with a “teaser rate” is evil. The “bait” is out in the open; the “switch” is hidden somewhere in 20 pages of six point type that the real estate agent or the settlement officer doesn’t want you to read thoroughly at settlement.
• Securitizing loans relieved lenders from having a stake in the loans’ soundness, because they dumped the loans off on someone else three months after selling them. (PDF here)

In some cases, the loans have been dumped and sliced and diced so much that original mortgage paperwork has disappeared (via Susie).

So now persons are being thrown out of their houses, while the bucket-brigade is passing buckets of money to the masters of the universe who created the whole mortgage-backed security scam.

It somehow doesn’t seem right.