Ethics and mortgages

Christian teachers know a lot about morality and ethics, but not so much about economics and related matters such as contractual obligations. Many secular writers are strong on the ins and out of current economic entanglements, but weak on matters of morality and ethics. For now it is up to us lay people to do what we can to sort through these issues for ourselves, both to be ready to help a brother who is even more in the dark than we are, and to keep our own blood pressure under control.

Most articles I’ve seen about the ethics of defaulting on a mortgage only mention the issue in passing, but just now I’ve run across two short ones that address it directly. The first one points out that the ability to walk away from a non-recourse mortgage is not some sort of obscure technicality, but a feature that was deliberately built into the system for a reason.

A bank that doesn’t want to get bogged down in a two year long morass has little option but to take back the keys, accept a huge loss, and call it even. Is this an "abuse" of the system? I don’t see how. The loss was something that lenders could have anticipated at least as easily as borrowers. The reality is that ordinary people are lousy at figuring out the ins and outs of real estate transactions. Relying on the one act rule to get out of a mortgage is not to abuse the system–it is to use the system in precisely the way it was intended to be used.

The reason that the one act rule exists is that lenders and developers have through the years shown a great deal of ability to maneuver unsophisticated buyers into crummy real estate deals. The reason that the one act rule exists is to put the risk of these deals on the lender, not the buyer. The purpose is to discourage bad underwriting, dishonest marketing, and unjustified price inflation by making it very, very hard for a lender to get back the money if they lent more on a mortgage than a house was worth.

The system is designed to let people walk away. California has a system that puts a higher premium on keeping people out of debt slavery than avoiding bank losses. I see nothing wrong with that legislative choice.

In the second one Felix Salmon responds to a complaint about a recent article in the San Francisco Chronicle where the writer advised her readers that deliberately falling behind on their payments would put them in a better position to avail themselves of the mortgage bailout funds that the government is making available.

An excerpt from the original article:

To qualify, you must be at least 90 days delinquent and live in the home as your primary residence. You must owe at least 90 percent of the home’s value. It’s fine if you owe more than it’s worth. Your mortgage must be owned or guaranteed by Fannie Mae and Freddie Mac or held by one of the participating loan companies. If you meet these requirements and can document your income, your servicer will reduce your monthly mortgage payment – including property taxes, insurance and association dues – to 38 percent of your gross income. […]

The streamlined process looks only at income, not assets. If you refinanced your home to buy a Mercedes or own another home, you won’t be expected to sell them to pay your mortgage.

Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again.

"This is a once-in-a-lifetime opportunity," Schiff says. "People are going to feel like complete morons if they don’t participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn’t afford."

The government is offering loan servicers $800 for every homeowner they get into the plan. Schiff predicts that loan agents "will be cold-calling people trying to get them into it. Just like they encouraged people to overstate their income to get a bigger loan in the first place, now they will encourage them to understate their income to qualify for a smaller loan."

An excerpt from the complaint:

In today’s "You’ve Got to be Kidding Me" moment, the San Francisco Chronicle advocated that folks who owe more on their mortgages than their homes are worth should stop making payments so they can qualify for a government bailout.

I’m not kidding.

Disgustingly titled "Are You an Idiot to Keep Paying Your Mortgage," the article actually instructed readers upside-down in their real estate the ins and outs of how they can transfer responsibility for their own investment mistakes to others.

Felix Salmon responds to the complaint:

If the government passed a bill giving $1,000 to anybody who asked, then it would be entirely responsible for every personal finance columnist in the land to give advice on exactly how to get that money. And the situation here is similar: The government is passing a bill which essentially gives money, in the form of greatly reduced liabilities, to people who default on their upside-down mortgages. Incentives matter: If you reward default in this manner, then people will be more likely to default, and quite rightly too. […]

If you can get your principal reduced by hundreds of thousands of dollars just by quitting your job for a few months, that’s a deal which makes a certain amount of sense. It’s a pretty perverse incentive for the government to give you, but that’s the hand that millions of Americans are now being dealt. And it’s entirely the fault of the people who dreamed this scheme up.

Remember that it’s not a crime to default on your mortgage. The banks are perfectly happy scraping around in the fine print of credit-card agreements to screw their customers; the customers should be perfectly happy similarly to optimize their own situation with respect to the banks. It’s an unfortunate situation all around, but it’s not something you can blame the financial press for.

No comment from me at this point on how a Christian ought to approach this situation. But I do think that a Christian who expresses moral outrage at the folks who walk down this path need to be explicit about what exactly such people are doing wrong.

Differences among the brethren

Dietrich Bonhoeffer’s book Life Together changed my thinking about Christian community at a fundamental level. You can read what I wrote about it here, here, and here. One of the most important things that Bonhoeffer taught me was that the distinctives that Christians treasure so highly are exactly the things that poison community at its root—because Christians are tempted to treasure those distinctions more highly than they do their bond in Christ with brothers who disagree with them.

I first read Life Together after many years spent in an atmosphere where the highest form of piety was to study, elaborate, and refine the many subtle points of disagreement one had with other Christians, so Bonhoeffer’s assertion hit me like a sledgehammer. But not only was it clear to me that he was right, it explained to me why what I saw as a diligent search for like-mindedness had actually led to progressive alienation from the larger Christian community.

No matter how promising a new relationship looked, no matter how much there was in common at the beginning, some difference would eventually emerge that we didn’t know how do deal with. It never occurred to us that the next step, as Bonhoeffer would have it, was not to eliminate that difference but to transcend it, for the sake of our common bond in Christ.

Easy to grasp, maybe, but very hard to translate into the practical matters of everyday life. Nobody I know is more skilled at this than Dave Black, who moves comfortably among Christians of all stripes without compromising his Dave-ness in any way. I’d been reading Brother Dave’s weblog for a long time before I read Life Together, and Bonhoeffer helped me understand many aspects of Dave’s thinking that until then had simply passed me by. Since then Dave’s writing has given me an ever deeper understanding of the possibilities and responsibilities of Christian community, all of it reinforcing Bonhoeffer’s message.

I was inspired to write this after reading this recent post on Dave’s weblog (scroll down to Thursday, November 20, 5:42am), which taught me something about transcending differences without resolving them:

I woke up at 5:30 this morning with this thought. What does the kingdom look like? It looks just like Jesus. It doesn’t look like you, or me, or anyone else. But the more you and I begin to look like Jesus, the more we begin to look like the kingdom. Our priorities become kingdom priorities. Secondary matters don’t matter so much to us any more.

O, we still have our convictions about home schooling and elder-led congregationalism, etc. But we don’t fuss and fight over them. We take Paul literally: "Let each man be convinced in his own mind." These have become matters of personal conviction to us.

Now, this is no excuse for sloppy thinking. Paul’s word means "be fully convinced." But we can give grace to those with whom we disagree. Grey matters are now grace matters to us. What matters is the kingdom, the scandalous way of Jesus, the Savior who loves losers like us. We pledge allegiance to the cross. We fly the banner of love. And we are — if you can believe this! — even willing to make genuine sacrifices for the sake of this kingdom, a kingdom that transcends culture, tribe, and even nationality (this means no more bumper stickers that say "jesUSAves").

Can I get an Amen?

Amen, Brother Dave.

Some never stopped living the agrarian life

Here’s a brief profile of a couple in Lynchburg, Virginia still living a mostly premodern life.

Kinkle and Grace Campbell’s modest white house is still heated from a wooden furnace in their bedroom. The Campbells still get their water from a backyard well, despite their proximity to a public water line. They even still grow much of their food in a large garden just footsteps from the roar of U.S. 460 near Jumbo Family Restaurant. While they have a few modern conveniences such as electricity, the Campbells still mostly live like they were raised. […]

Life in the country back in those days wasn’t easy, but it was straightforward. “There was no such thing as getting a job,” he said. Families grew their food and sometimes sold various items for a small amount of money to purchase coffee, sugar, clothes and shoes. Campbell’s family made money by selling moonshine, which his daddy made in copper stills. “We used to make some good stuff,” he said. “It was white, not brown like that other stuff.” His father also made apple brandy, which he sold for $1.25 a gallon. The money went to buy clothing and shoes, though Campbell said his britches still had plenty of patches.

Food was grown on their land, including vegetables from the ground, fruit from the trees and various animals for meat, eggs, milk and butter. Whatever produce that wasn’t eaten during the peak of ripeness was canned for food in the winter, Campbell said.

I love this thought: “Life in the country back in those days wasn’t easy, but it was straightforward. ‘There was no such thing as getting a job,’ he said.”

Downward mobility

David Brooks writes about one potential aspect of the Great Unwind, namely downward mobility.

At the beginning of every recession, there are people who see the downturn as an occasion for moral revival: Americans will learn to live without material extravagances. They’ll simplify their lives. They’ll rediscover what really matters: home, friends and family.

But recessions are about more than material deprivation. They’re also about fear and diminished expectations. The cultural consequences of recessions are rarely uplifting.

He notes that we are likely to see something not seen before in the United States, namely a reversal of the trend to move up the class ladder over time.

This recession will probably have its own social profile. In particular, it’s likely to produce a new social group: the formerly middle class. These are people who achieved middle-class status at the tail end of the long boom, and then lost it. To them, the gap between where they are and where they used to be will seem wide and daunting.

The phenomenon is noticeable in developing nations. Over the past decade, millions of people in these societies have climbed out of poverty. But the global recession is pushing them back down. Many seem furious with democracy and capitalism, which they believe led to their shattered dreams. It’s possible that the downturn will produce a profusion of Hugo Chávezes. It’s possible that the Obama administration will spend much of its time battling a global protest movement that doesn’t even exist yet.

This downward movement will force many people to once again endure deprivations that they worked long and hard to leave behind as they worked their way closer to living the American Dream.

In this country, there are also millions of people facing the psychological and social pressures of downward mobility.

In the months ahead, the members of the formerly middle class will suffer career reversals. Paco Underhill, the retailing expert, tells me that 20 percent of the mall storefronts could soon be empty. That fact alone means that thousands of service-economy workers will experience the self-doubt that goes with unemployment.

They will suffer lifestyle reversals. Over the past decade, millions of Americans have had unprecedented access to affordable luxuries, thanks to brands like Coach, Whole Foods, Tiffany and Starbucks. These indulgences were signs of upward mobility. But these affordable luxuries will no longer be so affordable. Suddenly, the door to the land of the upscale will slam shut for millions of Americans.

The members of the formerly middle class will suffer housing reversals. The current mortgage crisis is having its most concentrated effect on people on the lowest rungs of middle-class life — people who live in fast-growing exurbs in Florida and Nevada that are now rife with foreclosures; people who just moved out of their urban neighborhoods and made it to modest, older suburbs in California and Michigan. Suddenly, the home of one’s own is gone, and it’s back to the apartment complex.

Dmitry Orlov points out that due to their grossly inefficient and corrupt work environment, Russians were well prepared to endure one particular aspect of economic collapse—the lack of anything to do. Post-collapse Russians were happy to idle away the hours, having never learned to find their fulfillment in work. But Americans have a very different attitude. Spending extended periods enjoying the company of friends and family is not their idea of a good time. Americans find their satisfaction in doing something, or at least in deluding themselves that they are doing something.

Finally, they will suffer a drop in social capital. In times of recession, people spend more time at home. But this will be the first steep recession since the revolution in household formation. Nesting amongst an extended family rich in social capital is very different from nesting in a one-person household that is isolated from family and community bonds. People in the lower middle class have much higher divorce rates and many fewer community ties. For them, cocooning is more likely to be a perilous psychological spiral.

Unfortunately, as we moderns ascended the social heights, when we reached a new level we often kicked out the ladder we climbed to get there. And now when we find ourselves forced to reverse direction, we find that the things that allowed us to exist comfortably at lower levels are no longer available to us. Mother and Dad and that comfortable home equipped us to venture out into the wide world, but now that the wide world has turned us away we return to find that Mother and Dad and home are no longer there to welcome us back—and that it was our leaving that destroyed them.

What’s in a name?

It probably wasn’t original with him, but I remember laughing when I once heard Hank Hanegraaf say that attending a church doesn’t make you a Christian any more than sleeping in a garage makes you a car. Aside from the obvious meaning of the joke, it made me laugh for a second reason: why would anyone who wasn’t a car want to sleep in a garage, and why would anyone who wasn’t a Christian want to be attending a church?

Most of us probably know people who call themselves Christian and would be quite upset if you suggested otherwise, even though they show no evidence of being one. Often I torture my family with an old riddle. Q: If you call a tail a leg, how many legs does a donkey have? A: Four, because calling a tail a leg doesn’t make it one. Similarly, calling yourself a Christian doesn’t make you one. But why would someone who wasn’t a Christian want to call themselves one? It’s not likely to boost your social status or open any doors for you.

Years back I spent a summer being visited by Mormon missionaries. One thing that surprised me was that they were very insistent on referring to themselves as Christians, since they clearly weren’t Christian in any sense that I understood the word, and they definitely agreed that they weren’t the same kind of Christian I was. This came up early in our talks, and the first thing they did was point to their badges, which underneath their names read “The Church of JESUS CHRIST of Latter-day Saints”, with “JESUS CHRIST” in much larger letters than the rest. They insisted that anyone belonging to a church with “JESUS CHRIST” in the name was entitled to be called a Christian.

Eventually we settled on calling my kind of Christianity historical protestantism, just to have some essential vocabulary for continuing our discussions. Later as I did some research I discovered that Mormons had proudly insisted that they were not Christians until the early 1960s, and there were many writings by apostles which dwelled on the distinction. The only explanation I could find for the change was that the church had found it expedient to begin calling itself Christian, finding that it reduced resistance to the rest of their pitch. But it’s not a very satisfying explanation.

Last night while preaching about churches that name the name of Christ but seem to have had their candlestick removed, our pastor Mike Slone mentioned this passage:

And in that day seven women shall take hold of one man, saying, We will eat our own bread, and wear our own apparel: only let us be called by thy name, to take away our reproach. (Isaiah 4:1)

Interesting thought: let us eat our own bread and wear our own clothes, i.e. do things our own way, but still let us be named as one of you so as to avoid disgrace. Sometimes I think the power of disgrace is weakening as the culture is coarsening, and then I look around and see that churches (or at least outfits that call themselves churches) are still packing them in, bestowing the name of Christian on anyone who asks.

Still, it’s only a name, not an especially complimentary one, a name that believers picked up in Antioch, and I wonder if we aren’t fighting the wrong battle when we try to proclaim who is or isn’t entitled to be called a Christian. Perhaps believers could save some time and animosity, and be able to move on to more important things, if we just ceded the name to anyone who wanted it and called ourselves something else. Brother Dave Black says that he only introduces himself as a follower of Jesus anymore, and that simple phrase gets right to the heart of what I think of as the Christian life.

I’m looking for other words that followers of Jesus might be better off donating to the unbelieving culture. “Marriage” is one possibility.

Financial oligarchy

Two articles I read this week were forceful reminders that, although we all participated to some extent in the foolishness that brought on the current crisis, most of the blame can be placed on a very few people who have been vested with, or have simply taken, vast amounts of power over the world’s financial affairs.

The first was a poignant letter from Iceland, by a British journalist who married an Icelandic woman, which explains in brief how the insanely greedy actions of a few financial types managed to destroy the country’s economy.

Give it a population of 300,000, about the same as Coventry, 70 per cent of them in the cities of Reykjavik and Akureyri. Ensure they are all related and give the majority the ability to trace their ancestry back to the times of settlement, more than a thousand years earlier. Endow these people with industry and ambition. Give them their own language – all but unchanged for a millennium – a literary tradition, three national newspapers, two television channels, free universal healthcare and education and close to zero unemployment. Give this country a consistently high ranking in the world standard-of-living charts and you have the Iceland of the recent past. Not a bad place, all in all.

Now allow this country’s banks – virtually unregulated – to borrow more than 10 times their country’s gross domestic product from the international wholesale money markets. Watch as a Graf Zeppelin of debt propels its self-styled "Viking Raiders" across the world’s financial stage, accumulating companies like gamblers hoarding chips. Then sit on the sidelines as the airship flies home and explodes, showering its blazing wreckage over this once proud, yet tiny, nation.

There you see the Iceland of today – the victim of an economic 9/11 and one of the very few places in the world where the words "financial meltdown" can be used without fear of exaggeration.

The second was a long article by Michael Lewis, essentially a 20th anniversary coda for his great book on Wall Street finance, Liar’s Poker. (Warning: frequent profanity.) The story he tells is complicated and obscure—I’ve read a lot about modern finance and still couldn’t follow some parts of it—but it is by far the clearest explanation I”ve seen of how Wall Street created the current crisis, and Lewis makes it painfully obvious that the entire system was built on fraud. If you really want to know how it happened, study this article until you understand the story that Lewis tells.

The funny thing, looking back on it, is how long it took for even someone who predicted the disaster to grasp its root causes. They were learning about this on the fly, shorting the bonds and then trying to figure out what they had done. Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.

But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.

The following passage, where Eisman finally figures out the game, is critical but difficult to understand. Still, even without understanding how the financial sleight-of-hand plays out, the cynicism and immorality of the players is palpable.

His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.’s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, “the equivalent of three levels of dog s— lower than the original bonds.”

FrontPoint had spent a lot of time digging around in the dog s— and knew that the default rates were already sufficient to wipe out this guy’s entire portfolio. “God, you must be having a hard time,” Eisman told his dinner companion.

“No,” the guy said, “I’ve sold everything out.”

After taking a fee, he passed them on to other investors. His job was to be the C.D.O. “expert,” but he actually didn’t spend any time at all thinking about what was in the C.D.O.’s. “He managed the C.D.O.’s,” says Eisman, “but managed what? I was just appalled. People would pay up to have someone manage their C.D.O.’s—as if this moron was helping you. I thought, You p—-, you don’t give a f— about the investors in this thing.”

Whatever rising anger Eisman felt was offset by the man’s genial disposition. Not only did he not mind that Eisman took a dim view of his C.D.O.’s; he saw it as a basis for friendship. “Then he said something that blew my mind,” Eisman tells me. “He says, ‘I love guys like you who short my market. Without you, I don’t have anything to buy.’ ”

That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with [bad] credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them.

Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs.

Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”

I think that anyone who champions the laissez-faire idea that private vices can result in public benefits needs to explain what went wrong in Iceland and on Wall Street—that is, how is it that the free market didn’t work its magic on the unfettered greed and immorality of these few people to transform their evil deeds into a good result.

Folk economics: pay as you go

I’m old enough to remember when putting a large purchase on layaway was a common thing to do. Things changed, of course, and since then when I wandered in the back parts of an older KMart or Sears or JCPenny in search of a bathroom and stumbled upon the layaway counter, I thought “How quaint!” and wondered if anyone still actually brought in an item to be stored while they came in to make regular payments on it.

Well, layaway seems to be back. I’ve seen this noted by a number of people, but here’s a mention by one of my favorite economic thinkers, Harvard professor Elizabeth Warren.

K-Mart has a new ad: Pick out your Christmas presents today, pay a little now and a little as you go along, then pick up your paid-for presents in time for holiday giving. […]

Could this ad be an early sign of how purchasing will change in America? A Pay-Now, Buy-Later plan will undoubtedly constrict spending in the short term, but in the long-term it would mean that the money that now goes to interest, fees and interchange fees (about $107 billion in 2007) can be used to buy socks, haircuts, prescription drugs and a million other goods and services.

This is a good example about why I like Elizabeth Warren so much. Not only does she point out the obvious part, namely interest and fees on credit cards, but she catches the less obvious one, interchange fees. What are those?

Retailers pay about $23 billion in interchange fees so that their customers can use credit cards.

It doesn’t always occur to consumers that using a credit card costs the merchant around 3% of the transaction cost. And credit card companies explicitly prohibit merchants from passing that cost along to the customer in the form of a surcharge for using a card. So instead merchants hide the cost elsewhere, usually in a higher product price. Which means that not only do card users come to see card usage as being free, i.e. same as cash, but cash customers end up paying an unnecessary additional 3% even though they aren’t using a card.

This situation developed in such a way that few people ever counted the cost. At this point we depend so heavily on cards that we might think that 3% is a fair price for the convenience, but if we had been presented with this cost up front (or if it had been made visible through a surcharge) would we have been so willing to accept it? Would it be worth the trouble to you to bring cash or write a check if it meant saving $6 on a $200 grocery bill?

Today’s retailers say they have no choice: so long as their competitors take credit cards, they must do the same or see their customers migrate elsewhere. But if credit availability contracts across the board for consumer, the long-term fallout for K-Mart and thousands of other retailers may not be all bad.

A similar situation evolved with merchant hours. I’m old enough to remember when stores were open at most forty hours a week, sometimes even less, and those hours coincided with the rest of the world’s working hours. But once someone got the bright idea of getting a leg up on their competitors by staying open longer, those who began losing customers to that bright fellow felt the pressure to match his hours. The result was not that customers bought more or that more total customers enter the marketplace, but that a given amount of business was stretched over additional hours, requiring more hours worked and more utilities utilized, adding expenses to the seller that were passed back in the form of higher prices. We all pay for the convenience of that one fellow who wants to be able to walk into a Wal-Mart at 3am and buy anything they sell.

(And don’t get me started on how much more your produce costs you at a supermarket for the sake of customers who expect to walk into the store at 8:30pm and find abundant quantities of any vegetable might take a mind to buy.)

In the early 80s I took a trip to the Netherlands. I watched Princess Diana get married on Dutch television. I drank some excellent beer and ate good, fresh food. And I quickly learned to be very conscious of store hours, which by law were not only limited to forty hours per week, but the same forty hours for everyone, 9am to 5pm Monday through Friday. There were some exceptions—bakeries could shift their hours earlier in the day, and restaurants and bars were exempt. But otherwise shopping was very inconvenient—by American standards, anyway.

Not long before I arrived there had been a major innovation, namely Thursday evening shopping, with stores remaining open until 8pm. But this required that the hours be reduced somewhere else, so stores now opened at noon on Monday. Americans can hardly imagine such encroachments on their convenience. But I thought it was quite humane and still do, both for the customer and for the merchant. Is it really so difficult to plan our lives to get our shopping done within such limits? Is the minor convenience that 24/7 brings worth the cost in terms of higher prices and the need for third-shift jobs?