The Moral Hazards of Blaming Homeowners

Andrew Sullivan takes a shot at the Obama administration’s plan to help homeowners, noting that he’s diligently paid three mortgages and now is expected to bail out people who gave in to “greed, wishful thinking, and recklessness.”  His comments follow on the heels of the now-famous Rick Santelli rant on CNBC, which — mistakenly, in my view — is being hailed as a populist screed against the unfairness of the government bailing out people who don’t pay their mortgages.

As I said before the plan came out, the Obama administration should have stepped up and acknowledged right off the bat that some people will get help who don’t deserve it, and that there’s a certain unfairness to the plan. But with foreclosures killing the economy — and all of our home values — there aren’t many alternatives.  That didn’t happen. Instead, as Slate’s John Dickerson notes, White House Press Secretary Robert Gibbs attacked Santelli. That only added to his fame.

The problem is that Santelli and Sullivan are tapping in to something that’s real, a resentment of being forced to pay for someone else’s mistakes. I’ve heard the same sentiments from friends who rented or  remained cramped in smaller houses as their families grew — and now feel they have to pay for people who bought houses bigger than they could afford. The point is not to ridicule those feelings, but to draw the larger picture.

We’ve spent billions of taxpayer dollars to bail out banks that profited from all this, and yet, the resentment toward homeowners in trouble outweighs that anger.  The often egregious, if not outright illegal, lending practices that went on during the boom haven’t always received the attention they deserve. It would help, I think, to fully lay them out: The targeting of minority neighborhoods for high-rate loans. The deregulatory zealots at the Office of Thrift Supervision who sought banks to regulate by offering easier oversight. The use of the government-chartered Federal Home Loan Banks to provide low-cost money to banks like IndyMac Bankcorp to continue  ”unsafe and unsound lending practices,” as one financial analyst put it, even as they teetered on collapse. The meth addicts at Washington Mutual who frantically processed loans as OTS examiners looked the other way.

During the bubble years beginning in 2006, underwriting standards went out the window, and anyone with a pulse got a mortgage, with few or no questions asked. Many of those  Alt-A “liar’s loans” don’t deserve modifications. But banks for years also made  huge profits in subprime  mortgages — the most sophisticated of loan products, sold to the people least likely to understand them. There’s a reason it’s called “predatory lending.” Banks and mortgage firms proved they could make money by bringing in customers who signed up for loan terms they clearly didn’t understand and that trapped them in debt, from prepayment penalties to “exploding” adjustable rate mortgages that increased to unaffordable payments.

When you shopped for a subprime mortgage, you couldn’t just lock in a rate and shop around, a basic tenet for consumers looking for prime loans. It was all risk-based pricing, meaning you had to apply first for the loan, and find out your rate when you were approved. And, of course, the brokers were adding on hidden fees and points as fast as they could. Lenders actually paid brokers extra for bringing in borrowers at higher rates than what they actually qualified for.

All this is to explain that “irresponsible” homeowners is a too-broad term. Yes, some people bought houses beyond their reach or used them as ATMS for vacations and cars. But many others didn’t – they were reaching for the home ownership dream as a responsible path to wealth, and got trapped in loans they didn’t understand and couldn’t afford. The problem with the childish rant of a cable TV talking head is that it can’t grasp the complexity of all this. Neither can any plan to help homeowners, since some of the irresponsible will get help. But banks and lenders profited for a long time by preying on and exploiting many others — and those borrowers do, in fact, deserve  a break.

In Andrew Sullivan’s neighborhood, I somehow doubt that brokers knocked on doors at all hours, attended churches to gain the trust of members and sell them subprime loans, or staked themselves out at community centers to find customers. But that happened all too often in places like Prince George’s County, Md., the nation’s wealthiest majority-black suburb, where housing counselors as early as 2005 complained about a proliferation of subprime loans, and which had almost twice as many  subprime mortgages as the national average.

In Sullivan’s world, there might not be a lot of people who didn’t realize that they could have an attorney at their real estate closing, who didn’t know that it wasn’t standard practice for a broker to come to their office and tell them if they didn’t sign their loan papers right away, they would lose their homes. Some may have understood the interest rate on the loan they were applying for; others may not have. Either way, it didn’t matter, because their broker was assuring them they could refinance out of the loan — the broker they had met at church or in their community, the one they trusted.

The key thing in the Obama plan, and in the idea for national standards for loan modifications, is that you have to verify your income and assets to qualify. In other words, if you lied to get your loan, you won’t get it modified. That takes a lot of unfairness right off the table.

Still, it’s hard for people to swallow the fact that some degree of unfairness will likely be necessary to achieve the greater good of stabilizing the economy — especially when they see a neighbor who blew their home equity on vacations or a nice car getting federal assistance. But it’s what they don’t see that should also trouble them, and that should cause all of us to recognize that irresponsibility in lending didn’t start or end with homeowners alone.