19 April 2011

How to Not Reduce Your Household Debt

Deficit hawks (or “deficit peacocks”  as many on the left prefer to call them, since they plainly have no actual interest in doing what needs to be done to reduce the deficit) are always asking the American people to look at the budget and spending of the Federal Government in terms of your own household budget.  “You can’t responsibly run up these kinds of deficits and borrow against the future in the way that the government does in your own home or business,” they say (I won’t get into how businesses ACTUALLY operate in this country).  So I decided to look at how the current proposals to reduce the deficits and national debt would apply to my own home finances.

I’m a middle-class father of 3 making a decent salary that allows me to support my wife and children, but we certainly aren’t putting much away in savings or investments, and we don’t have much discretionary income for wasting on fun and games.  We have some credit card debt, not a lot, but a few thousand dollars that eats up a couple hundred bucks of interest every month.  I’d LOVE to be able to pay off all of that credit card debt.

WHY do I want to pay off my credit card debt?  The simple answer is that if I were to pay off the debt, I would be saving all that money I spend on servicing the debt, and it would mean a couple hundred bucks more every month that could go to buying things for myself and my family that would make our lives better, or to saving for the future.  I mean, why the hell else would someone want to pay off their debts?

Perhaps we should ask that question to Paul Ryan and the Republican Party, because they don’t seem to have an answer to this question that makes any sense.  They appear to want to reduce the deficit/pay down the debt for the simple sake of doing it, as if that “virtue” will somehow translate into something good for people.  No matter what you believe, you can’t run a government based on the belief that God will magically reward you if you are righteous and virtuous enough.  Some right-wing leaders may actually believe this, and many more proclaim this to be true, but the “serious” people know that there are other factors involved.

The real goal is to reduce the size of the government, and to reduce taxes on the very rich.  Perhaps if I were exceedingly generous, I would say that they wish to reduce taxes on all of us, but the vast majority of those reductions will benefit the very rich, and the vaster majority of the reductions in government will hurt the poor and middle classes.  In fact, in Paul Ryan’s plan, the deficit isn’t even reduced in any meaningful way for MANY years to come, and the projections are based on assumptions that have been panned as unrealistic by virtually every legitimate economist in the country.  So let’s just call it a wash, and say that Ryan’s plan doesn’t actually reduce the deficit at all, and just shifts the cuts in spending directly to cuts in taxes for the rich.  It’s pretty close to the truth no matter who you ask.

Back to my household finances metaphor.  Here is what Ryan proposes YOU do to reduce your credit card debt! 

You are going to make significant cuts in your grocery bill, medical costs, vacations, clothes for the kids, and other such budgetary items that you already don’t spend as much as you’d like to be able to spend in order to give yourself the quality of life that your parents’ generation had.  Now, we’re going to ask you to make those cuts to essential expenditures (but we're going to call them "discretionary spending"), and use that saved money to pay down your credit card debts, but we’re also going to cut your salary at the same time.  We’re not going to wait until after the positive results of paying down the debt start to accrue to make that salary cut, we’re going to cut your salary first.

Now, if you somehow manage to actually pay down your debts in any significant way, which would be a minor miracle under this plan, any savings that you are able to make from reductions in interest payments to your creditors will NOT be shifted back into your household budget.  No, they will be offset by further reductions in your salary, because you have now shown that it is possible for you survive on less, so you must need less.  Forget about the idea of making your quality of life any better, because you deserve a better quality of life much less than the rich man who pays your salary deserves to have that small amount of money added to his already vast holdings.

Get it?  Now you understand the Republican plan to reduce your personal debt!  And by the way, if you happen to have any money left at the end of your life, they plan on instituting a 100% Estate Tax on all estates UNDER $1 million, so that “extra” will be swept up for your boss’s benefit as well!

12 April 2011

A Fictional Tale of the Mortgage Crisis (c. 1985)

Beginning on April 12, pre-orders will be accepted for Neil Young's latest release from his Neil Young Archive Performance Series (NYAPS).  A Treasure (NYAPS #09) is a collection of 12 live recordings from his 1984 and 1985 tours with The International Harvesters, a top quality country band that Neil assembled for this period in his eclectic career.  I may be "punk" david, but the Harvesters period has long been among my favorite of Neil Young's, and by far my favorite of his genre-hopping 80s experiments.  In part, it's because this band was so talented and tight.  Also, Neil Young has a gift for writing really great country music, a talent that few in modern country music can even fathom, and one that Neil has drawn from far too infrequently throughout his career.

From the spring of 1984 through the end of the summer of 1985, Neil fully immersed himself in country music and the surrounding Nashville culture.  His fake country accent was only slightly less contrived than Hillary Clinton's, but his music was as genuine as could be, and during this time Neil collaborated with such venerable country legends as Waylon Jennings, Bela Fleck, Rufus Thibodeaux, Anthony Crawford, Ben Keith, and Willie Nelson, with whom Neil and John Mellencamp founded Farm Aid in 1985.  On that note, the Harvesters were the band that Neil performed with at the Live Aid concert in July of 1985 before a TV audience in the hundreds of millions.

My favorite thing about this period in Neil Young's career however, is the large number of songs that he wrote and performed and recorded that did NOT appear on his 1985 country album Old Ways.  I consider Old Ways to be kind of a middling album in the Neil Young canon, but he probably could have released two full albums of additional material written and recorded during this period, with much of it superior to the material that did make the album.  Fortunately for the Rusties, there are many circulating concert recordings and a few circulating studio recordings to give us an idea of what Neil held back.

In addition to the ten songs released on Old Ways, there were a whole crop of new country songs that Neil premiered on these tours that either appeared later on other albums in a slightly less country flavor or have never seen any official release.  These include:

Amber Jean (a heretofore unreleased song about his baby daughter)
Razor Love (released on Silver & Gold, 2000)
Let Your Fingers Do the Walking (heretofore unreleased)
Hillbilly Band (unreleased)
Silver & Gold (released on Silver & Gold, 2000)
Nothing Is Perfect (to date released only on the Live Aid DVD in 2004)
This Old House (released with Crosby Stills & Nash on American Dream, 1988)
Interstate (released as a solo acoustic b-side in 1996)
Grey Riders (heretofore unreleased, and long considered one of Neil's greatest unreleased songs)

Several other studio outtakes that were never performed publicly have also reached trading circles and have become well known.  Right there you have more than enough material to complete another album of new songs in 1985.  But that doesn't even include several songs that Neil had performed earlier but had not been released in the mid-80s and could easily have made their way to a country album if Neil had decided to issue a second at the time.

The Ways of Love (premiered in 1978, released later on Freedom, 1989)
It Might Have Been (an old cover tune that Neil had played with Crazy Horse in 1970, and which only gained its first release in the form of a live recording from 1970 that appeared on Neil Young Archives Vol. 1, 2009)
Too Far Gone (premiered in 1976, released later on Freedom, 1989)
Soul of a Woman (a song that Neil played in four distinctly different styles in the 80's, but which never found a release until now, it is Neil's most often performed unreleased song)
Don't Take Your Love Away From Me (another genre-hopper, which had limited release on the Solo Trans LaserDisc in 1984, but didn't find an album release until Lucky 13 in 1993)
Country Home (premiered with Crazy Horse in 1976, and ultimately released on Ragged Glory, 1990)

And to top it off, there were several of Neil's older released songs that really came into their own, often for the first time, when played by The International Harvesters:

Motor City
Hawks and Doves (2 songs from the early 80s that were a little country, but really needed to be much more so to work)
Southern Pacific (released on the 1981 Crazy Horse album Reactor, the Harvesters make this song truly sound like the train that is the songs subject.  AMAZING.)
Roll Another Number (from Tonight's The Night, 1975, I believe this song comes off better as "country & western" than the drenched in feedback-drenched rendition that appears on 1991's live album Weld)
Are You Ready For the Country? (from 1972's Harvest, country-folk becomes pure country, and is better for it)
Down By the River (2 live staple Crazy Horse jams that saw some of their most powerful performances of his career with the Harvesters.  DBTR from New Orleans in 1984 is jaw-dropping)

There's so much more that could be written about Neil Young and the International Harvesters, but I've gone on long enough.  As for the title of this post, here is a song that didn't make the cut for A Treasure, but tells a story that is as timely and poignant today as it was in 1985 when it was first written and performed.

"This Old House"

Midnight, that old clock keeps ticking,
The kids are all asleep,
and I'm walking the floor.
Darlin', I can see that you're dreaming,
And I don't wanna wake you up,
When I close the door.

This old house of ours is built on dreams,
And a businessman don't know what that means.
There's a garden outside she works in every day
And tomorrow morning a man from the bank's
Gonna come and take it all away.

Lately, I've been thinking 'bout daddy,
And how he always made things work,
when the chips were down.
And I know I've got something inside me,
There's always a light there to guide me,
To what can't be found.

This old house of ours is built on dreams,
And a businessman don't know what that means.
There's a swing outside the kids play on every day,
And tomorrow morning a man from the bank's
Gonna come and take it all away.

Take it all away,
take it all away,
take it all away.
Take it all away,
take it all away,
take it all away.

Remember how we first came here together?
Standing on an empty lot, holding hands.
Later, we came back in the moonlight,
And made love right where the kitchen is,
Then we made our plans.

This old house of ours is built on dreams
And a businessman don't know what that means.
There's a garden outside she works in every day,
And tomorrow morning a man from the bank's
Gonna come and take it all away.

Take it all away,
take it all away,
take it all away.
Take it all away,
take it all away,
take it all away.

01 April 2011

True Anecdotes of the Mortgage Crisis Part II: Who's the Customer Here Anyway?

Previous Installments:
True Anecdotes of the Mortgage Crisis Part I: Negotiating from a Position of Power

After leaving Chicago in 2001, I settled in Milwaukee for a few years and went to work at a small local title agency.  It was pretty menial and low-paying for a licensed attorney, but this was the business that I'd decided I wanted to be in, so I started at the bottom.

My first job was as a recordings clerk, where I learned about how long your deed or mortgage might sit around on some idiot's desk before someone with half a brain finally comes along and gets it sent to the courthouse.  Even worse is how long it can sit at the courthouse before it gets entered in the records, and then how long it can take for the recorded documents to become indexed and searchable by the next title agent to come along and look for them.  Ten years ago, when everyone was refinancing once or twice a year and the courthouse technology was not exactly 21st century, that could all add up to as much as 4 to 6 months.

But, recordings are boring, and they have nothing to do with the mortgage crisis, so let's move on.  Within a couple months I started doing closings, which is what I had originally signed on to do.  If you've never bought a home, this is what the closer does.  I greet you, the buyer/borrower in the lobby of the title office, and escort you to a small conference room.  Then, over the course of the next 20 or 30 minutes, I walk you through a big stack of documents, which have mostly come from your lender.  About 4 or 5 of them are really critical, such as the HUD-1 settlement statement, the note, the mortgage, the "Truth In Lending" disclosures, and maybe a couple others.  The large majority of the documents are a variety of state and federally mandated disclosures regarding your type of loan, privacy policies, ID requirements, and various waivers to make your eyes cross.  I had a shpiel that I could do in my sleep where I explained the meaning of each and every document in the stack.  Most lenders had 90% the same docs, with minor variations in forms, so eventually, like all closers, you figure out what to say, what to not say, and how to say it just right.

This is not to imply that I was hiding anything or trying to deceive anyone.  I took my responsibilities under RESPA seriously, and I felt that I always owed my first duty of loyalty to the borrower, as it is supposed to be under the rules.  These are the least informed persons in the entire real estate and mortgage lending process, and I was for a short time their advocate.  It's also important to understand that in Wisconsin, unlike Illinois, attorneys are rarely present at residential real estate closings.  The title closers assume most of the duties that attorneys handle in other states.  I really had to be looking out for these people's interests, because no one else in the process was.  The thing is, people have a lot of stupid questions, and they get worried about the silliest things, so I did try to avoid those conversations by saying everything just right.

Then there are the other people in the process.  Who are they, and more importantly, what are their motivations?  First, you've got the real estate brokers (realtors).  Their motivation is to make sure the deal closes, because they don't get paid until the papers are all signed and the money disbursed.  They get paid by a percentage of the sale price, and so they are motivated to get the sale price as high as possible.  The seller pays the brokers' fees, both the seller's agent and the buyer's agent, which is fine for the seller.  But if you are a buyer of real estate and you are working with an agent to find a property, you must always remember that "your" agent is paid more the higher the price you pay.  They are not interested in helping you get the best deal.  They will find you a house that is a good fit for you personally, but although they legally act as your agent in negotiations, they have a practical conflict of interest built into their relationship with you.  Their interest is to make a deal, and the highest number you will accept is their implicit goal.

The other major players are the mortgage brokers, or front-end lenders.  The mechanics of the mortgage loan, who finances it, who ultimately buys it, and who services it are very complicated, but the motivations of the parties are devastatingly simple.  If you can understand the role of the mortgage broker, then you can understand the basic building block of the global financial crisis.  I am not shy about saying that I believe that mortgage brokers are as responsible for the collapse of the global economy in the past few years as anyone.  Wall Street financiers may have invented all of the securities that ultimately tanked the economy, but mortgage brokers sold the banks the shit mortgages that got thrown into those packages.  As you will see as this series continues, I have dealt with some sleazy, dishonest, slimes in my career, but the worst individuals and the worst in the aggregate have been independent mortgage brokers.  Some were good people just trying to earn an honest living, but when interest rates are falling, the scumbags set up shop to pull in the free-flowing money.

The motivation of the mortgage broker is to get you into a new loan.  There are subtleties involved regarding the amounts they are paid by the banks who actually lend the money depending on the mortgage loan "products" that the broker is able to sell, but what it ultimately comes down to is getting a new loan for you to buy or refinance your home.  The critical element is that the mortgage broker gets paid at the closing or very shortly thereafter.  Once you are closed, you are no longer a concern, and he has moved on to his next client.  He is not going to be servicing your loan, collecting your monthly payments for years into the future.  If you default in a year, he doesn't care at all.  He got his payment up front, and you are now the bank's problem.

The root of the mortgage crisis is that the lenders started doing the same thing.  Your mortgage would get sold and resold and packaged into mortgage-backed securities, various pass-through certificates, and sold to investors and financial managers who would then sell shares of funds that held billions of dollars worth of these securitized instruments.  Each time your loan was sold, the seller would take a small profit.  You see, if you look at that Truth In Lending disclosure from your closing, it will say that your $200,000 mortgage at 7% is going to cost you something like $450,000 in payments at the end of 30 years, or about 125% total interest.  By holding the note for a few months and taking 5% or 10% on a sale, it was a good, smart deal for the initial lender, and their hands were clean of you as well.  Next customer.

The real problem with this system happened after I was out of the title business in the mid-2000s, but I did see some early signs of it when I was still there.  By 2004 or so, interest rates had hit rock bottom, and every person in America who should have legitimately owned their own home had bought a house, and probably refinanced it a couple of times.  These mortgage-backed securities had become the hottest item in the financial markets, and investors from all over the world saw investing in the American mortgage market as the best bet on earth.  The problem was, the supply was not endless, and the lenders needed to find more loans to package.  You were left with people who should not have owned their own homes being even further enticed into investments that they could not afford, with zero margin for error, just so the banks would have more securities to sell to eager investors.  These mortgages were total shit, and sold to be much lower risk than they actually were.  The people at the front end took their upfront commissions and washed their hands, and the investors ended up dumping billions into garbage paper.

Dozens of writers with more knowledge and experience than I have written about this aspect of the mortgage crisis in much more detail and with greater authority.  However, if you want a very basic primer on the mortgage crisis in language that anyone can understand, I can't recommend this broadcast by This American Life and NPR News entitled "The Giant Pool of Money" highly enough.  You will "get it" after this.  There have been a couple of follow up programs as well.

I want to say a couple of words at this point about a popular boogeyman in the mortgage crisis that I believe gets maligned somewhat unfairly.  "MERS" is the Mortgage Electronic Recording Service, and from the perspective of a title closer/examiner/agent, I think the idea is brilliant and very useful.  The idea behind MERS was that it would enable banks and other investors in mortgages to sell and resell the note and underlying indebtedness to each other without having to record an assignment of mortgage document every time with the county recorder of deeds.  It makes the market for secured debt more fluid and therefore more efficient and profitable, and there's nothing wrong with that.  From my perspective as a title examiner, I wouldn't have to dig through several recorded assignments to figure out who owned a particular mortgage, I'd just find the original mortgage, go to the MERS website, and enter the MIN (Mortgage Identification Number), and voila!  It gives me the name and contact info for the current servicer.  As a closer, it made ordering payoff letters easy.  As a bonus, it saved money in recording fees.  A super system, right?

The problem with MERS is that once investors were able to skip the step of filing assignments with the recorder, they started to get lazy and skip other critical steps as well.  Like assigning and delivering the original note document to the new investor.  Hell, MERS would have served as an excellent repository for all of the original documents as well, but storage space is expensive, and that wasn't their primary purpose, so it wasn't done that way.  It also doesn't appear to have been designed to accommodate the mortgage-backed securities market, or if it was, it wasn't designed well for it.  In later chapters, I'll get into what lenders are doing today when they need to foreclose on their mortgages and the documentation needed to do so is substandard.

Anyway, back to mortgage brokers.  The worst part about mortgage brokers, as far as I was concerned as a title closer, was that they were the ones that brought in the business.  I don't know if every market was like this, but in the early 2000s, Milwaukee was completely oversaturated with title agencies.  The competition was so strong that the going rate for a loan policy was $200, and the closing fee was about the same.  If you didn't give the best rates, and the best service, there was another agency right down the road where the brokers could take their business who would give them what they wanted. 

I could spend pages writing about how this business model screws up the title agents and causes cutting corners and errors, but more critically was the basic conflict of interest that I felt as a closer on the occasions when I could recognize that a borrower was being taken advantage of by an unscrupulous mortgage broker.  I can recall several times when I was sitting in a closing room with a borrower and a broker where I could tell from the looks I was getting that the broker did not want me to explain the documents the borrower was signing as well as I was. 

What?  Why should you have any problem with me explaining to this woman who looks like she smells like pee that a 2-year ARM at 11.99% with a 2-year prepayment penalty is not a good deal, and that if she doesn't refinance this loan in exactly 2 years, she will be hit with either a six-months interest penalty or a 7 point rate hike?  Sure ma'am, $4,000 is a perfectly reasonable broker's commission on a $40,000 loan.  Oh, yes yes.  I'm certain that this broker will be there two years from now to help refinance you into a 30-year fixed, just as soon as you get your credit score up 200 points by making every single one of you mortgage payments on time for the next two years, without missing any car payments, or credit card payments, or electric bills or any other payments.  She smells like a perfectly responsible person, and clearly her $47,000 row house will appreciate dramatically in that time as well.

But I would never be able to even imply any of the things I was thinking.  Never would I jeopardize the company's relationship with the broker by causing a deal of his to fall apart at the table.  Hey, most of the time the mark was too stupid to know the question she could have asked me that I would have been bound to answer and which might dissuade her from closing the deal. 

This is the conflict that I was thrown into as a title closer.  Shit, at least I had a moral conflict about it.  I'm sure others didn't even think it that far.

In the next Chapter:  Condo Conversions and How to Keep a Costco Out of Your Fancy Suburb