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Wall Street’s bankers are today’s demagogues…

WE’RE TOO BIG TO FAIL!

“Far too many Americans believe the “irresponsible borrower” stereotype caused the foreclosure crisis.

people do not knowingly buy homes they cannot afford.  No, they do not.  They don’t.  It’s a preposterous thought.  Like telling me that there are millions of people somewhere in the USA that like to buy cars with payments they can’t afford… because I suppose they like to hide them around the block every day and night until they get repossessed.  Then they wait 7-10 years until they can buy another one with payments they can’t afford so they can enjoy the experience all over again.”

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How the foreclosure crisis impacts our country’s standard of living from this point forward will all come down to how we handle ONE thing.  We either change that one thing, or most assuredly we will at best continue to experience in the future more of what we’ve experienced to-date.  It will not get better.  It will only worsen and worsen significantly… unless we change the ONE thing.

A country’s “standard of living” includes such factors as income, quality employment, class disparity, poverty rate, quality and affordability of housing, gross domestic product, inflation rate, availability of education, life expectancy, infrastructure, economic and political stability and personal safety. Our country’s standard of living is what dictates our quality of life, and while money can’t buy us love, it does buy our standard of living.

There is nothing capable of destroying the wealth of our country’s 99 percent faster or more permanently that the foreclosure crisis, so there’s nothing capable of lowering the 99 percent’s standard of living more dramatically than the ongoing wave of foreclosures.   Zillow’s report published in December of 2010 showed that U.S. homeowners have lost $9 trillion since the housing market’s peak in 2006, and $1.7 trillion of that total was lost in 2010 alone.  And that same report showed that it’s getting worse.

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Evidently, the pace of the decline in residential property values is accelerating.  If consumer wealth was wiped out at the same pace in 2011, we’d be just under $11 trillion in lost wealth today, but we’ve probably already passed the $11 trillion mark, because the decline in values escalated in 2011 over 2010.

So, how about for 2012… should we assume $2.5 trillion lost for the year?  Based on those numbers, by the end of 2012, U.S. homeowners will have lost right around $15 trillion in accumulated equity, an amount that, at 50 years old, won’t be made up in my lifetime… and three times the amount of equity created between 2001 and 2006.

In addition, it’s important to consider that our country has had a very serious problem with income and wealth inequality for a long time, and the wealth lost due to the foreclosure crisis is making that problem exponentially worse.  According to IRS data, in 1988, the average American made $33,400 adjusted for inflation, and in 2008, nothing had changed… the average American still made $33,000.  Meanwhile, if you made $380,000 a year, then your income increased by 33 percent over the last 20 years.  And, of course, stock market gains make the disparity much worse.

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You see, during the ‘Roaring 1920s,’ bankers had become America’s royalty, but when Pecora finished questioning them, the way people viewed the bankers changed dramatically.  Sen. Burton Wheeler of Montana compared their acts with those of Al Capone and the American public began referring to them as “banksters.”  (And here I thought we came up with that last year.)

The Pecora Moment created the political support that allowed FDR’s administration to hold Congress in session in order to pass laws that the bankers opposed, like the Securities Act of 1933, the Glass-Steagall Act of 1933, the Securities Exchange Act of 1934, creation of the FDIC, Tennessee Valley Authority, et al, all of which were designed to prevent the abuses brought to light by Ferdinand Pecora.  He made the cover of Time Magazine, by the way, on June 12, 1933.

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Far too many Americans believe the “irresponsible borrower” stereotype caused the foreclosure crisis.

You know the stereotype… we all do… reckless and greedy people who bought homes they could never hope to afford by signing their names on nothing down, 80/20 “liar loans” with negative amortization and teaser rates of 1%.  And the property flippers looking to make a quick buck, gambling that home values would only go up forever.  They gambled and they lost and as a result today’s foreclosures are appropriate and deserved, so let’s get on with it.

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people do not knowingly buy homes they cannot afford.  No, they do not.  They don’t.  It’s a preposterous thought.  Like telling me that there are millions of people somewhere in the USA that like to buy cars with payments they can’t afford… because I suppose they like to hide them around the block every day and night until they get repossessed.  Then they wait 7-10 years until they can buy another one with payments they can’t afford so they can enjoy the experience all over again.

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The quickest way to end up underwater is to live in a neighborhood that is plagued by foreclosures.  … As homes go into foreclosure, they create a domino effect, lowering home values throughout a neighborhood in a cascade beyond homeowner’s control.” Anna Maries Andriotis (2009) in Smart Money

It should occur to more people, in my opinion, that we are experiencing a national decline in housing values unlike any we’ve experienced in the past.

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Negative equity today impacts the housing market tomorrow…

Housing prices fell drastically between 2006 through 2009, at the same time that credit and then employment markets tightened.

In 2006, about 7 percent of United States’ homeowners owed more on a single family residential mortgage than what the property could have sold for (Calculated Risk, 2007).  By 2010, estimates of those “underwater” on their home mortgage had risen to between 20 and 25 percent (Streitfield, 2010 and The Economist, 2010).  And Haughwout and Okah (2009) calculate this percentage to be even larger in some metropolitan areas in the United States.

In numerous cities more than half of all homes with mortgages are underwater, including Phoenix (66.2 percent), Atlanta (58.7 percent), Riverside, California (51.4 percent), Tampa (56.5 percent) and Sacramento (50.9 percent). Other big metro areas with a high percentage of underwater homes include Miami-Fort Lauderdale (46.7 percent), Chicago (46.2 percent), Cleveland (41.5 percent) and Denver (38.5 percent).

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We must stop the free fall in home prices or no economic recovery is possible…

Unlike other investments, homes are both a consumption and investment item.  No other purchase or investment contributes to our economy like houses do, because we spend money to maintain and improve our homes year after year throughout our lives.  Homeowners are constantly purchasing goods and services to make their homes prettier, more comfortable, safer, sounder, bigger and newer.

Yes, a home provides a family’s shelter, but it is also a forced savings account in the form of mortgage payments that pay down principal, and an investment because financial returns are realized as a home’s value rises.  And homeowners have always been able to access their accumulated wealth without having to move, through home equity loans or replacing a smaller mortgage with a larger one.

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The cost of foreclosures to our society…

It shouldn’t be difficult to imagine that the foreclosure crisis is having a devastating effect on our society monetarily and otherwise, however, until recently it was difficult to quantify these effects, beyond lost equity, in monetary terms.  We all need to recognize that the unacknowledged victims of the foreclosure crisis are those who haven’t lost homes to foreclosure, but nonetheless are paying the price that foreclosures impose on all of our communities.

The Massachusetts Alliance Against Predatory Lending (“MAAPL”) and the Harvard Legal Aid Bureau published a report in June of 2011, titled: “VACANT SPACES – The External Costs of Foreclosure-related Vacancies in Boston.” The report presented findings from a comprehensive and very well documented study of only three specifically quantifiable costs paid by the public-at-large that result from foreclosure-related vacancies in the City of Boston:

• The costs of securing vacant homes.
• The costs associated with the increased crime caused by vacant homes.
• The drop in property values and property tax revenues for whole neighborhoods when a nearby house goes vacant.

The Vacant Spaces study concluded that, “a single foreclosure costs Boston and its citizens somewhere between $157,058 and $1,028,862.”

When you break it down, here’s what it looks like for the citizens of Boston:

• Taxpayers lose $20,723 to $32,053 per vacancy (Based on a 22 percent reduction in value when sold after foreclosure.)
• Crime victims lose $12,813.
• Criminal investigations, trials and incarcerations cost $16,316
• Homeowners lose equity totaling $157,058 to $1,028,862.

And this is in addition to the costs to families losing homes to foreclosure.  The study showed that if every one of the 821 foreclosure deeds filed in the City of Boston last year created a vacancy, the cost to the city would have been $844,695,702… almost a billion dollars.  Unquestionably, the foreclosure crisis’ impacts are many and varied reaching far beyond the lives of those losing homes.

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There’s another factor that makes the “irresponsible homeowner” stereotype so easy for those not yet affected by the foreclosure crisis to accept.  It’s a cognitive bias, meaning it affects how we’re predisposed to think, and behavioral economists would refer to it as “the just world hypothesis.”

You see, especially in this country, we all very much want to believe that we live in a just and fair world… it makes us feel relatively safe.  As a result, when we see something bad happen to someone else, we look to believe that they did something to deserve or at least cause their misfortune to occur.

For example, when someone tells us about someone diagnosed with cancer, we’re prone to ask whether they were smokers, or whether they were healthy eaters, or whether they were overweight or exercised enough, or whether cancer runs in their family.  We’re trying to attribute the cancer to something about the person or what the person did to the the diagnosis.  If we can’t make such a connection, we may still believe there must have been something that caused it to happen.  In simple terms, random hardships are scary.

It follows, therefore, that when we hear of people losing homes to foreclosure, we want to believe that they did something to make such a thing happen.  And so when we hear someone on television say that they borrowed irresponsibly, we accept it without questioning whether it makes sense, because we want it to be the case.

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the ongoing perpetuation of the “irresponsible borrower” stereotype is not accidental, it’s a coordinated and highly sophisticated communications initiative being implemented by motivated experts.

The homeowner side of the fight, on the other hand, is comprised of individual homeowners and a relative handful of attorneys, each engaged in individual battles to save their own homes… along with a growing number of journalists and independent bloggers who appear to be sharing the same audience.

On the homeowner side of the fight, nothing is organized.  And as a result, the stereotype of the “irresponsible homeowner” remains safely ingrained, and with over 3,000 homeowners being evicted every single day, 365 days a year, homeowners are losing the war.

It’s true that in the past year, more court decisions are favoring homeowners, but 3,000 people being evicted as the result of a foreclosure every single day of the year means the banks are still securely driving the foreclosure bus, and they’re not nearly as worried about a decision in Massachusetts or Ohio as some would like to think.

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Scapegoating is the practice of blaming a group for the failure of others. It is not uncommon that a group is blamed for the mistakes or crimes of others, especially when the blame is being placed on a group unable or unwilling to defend themselves against the charges.

Minorities are often the targets of scapegoating, and today’s homeowner in financial distress, as minorities go, makes for an easy target.  Those in the majority are more easily convinced about the negative characteristics of a minority with which they have no direct contact, and homeowners at risk of foreclosure live in a sort of self-imposed isolation, bound by shame and fear, and capable of vacillating between unreserved sadness and unqualified rage.

Quite often, they tell no one of their situation, quietly enduring inconceivable stress for years, in some cases, and ending up afraid to answer the phone or even go outside, in the most extreme examples.  Some have described their time spent at risk of foreclosure as being akin to spending that time in solitary confinement.

When a minority is blamed for some social ill, violence, persecution, and in the most extreme examples, genocide can result.  In our history, unemployment, inflation, food shortages, disease, and crime in the streets are all examples of social ills that have been blamed on scapegoats comprised of various minority groups.

Today’s stereotypical “irresponsible borrower” is being made into the scapegoat for the financial and foreclosure crises.

Demagogues exploit latent beliefs, fears, emotions, vanities and expectations of the public to achieve their own political objectives.  They depend upon propaganda and disinformation.

Most demagogues achieve their success because people want to believe that there is a simple cause of their problems.  Through the use of propaganda, persuasive arguments are made that one group is to blame for problems being faced by the majority.

Wall Street’s bankers are today’s demagogues…

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So, here’s what Abigail Field and I need from you…

Homeowners… I know you’re stressed and busy and overwhelmed.  And I know you don’t know what’s going to happen next and if you’re not scared to death these days, then you’re not breathing.  But you have to do more.

At the very least, we when you see an article that’s intended to shatter the stereotype of the “irresponsible borrower,” like this one for example… don’t just read it… forward it to people you know that aren’t at risk of foreclosure.  Post it on your Facebook page… email it to your congressional representative… If you’re a member of an online group, post it there too… for God’s sake, drop copies of it from your helicopter, if you have a helicopter.  Help spread the message far and wide.

Bloggers… We don’t compete with each other, Abigail and I write articles, we don’t sell advertising, so cross post this article and ask your readers to send it to everyone they know.  And get in touch, because we’re building a list of “thought leaders” and we need your name and contact information on that list.

That way, when we produce an article or research report intended to address the “irresponsible borrower” stereotype, we can email it to you so you know to post it.  We need to get this one message out as far and wide as possible.

Lawyers and other industry professionals… You have Websites and blogs, but more importantly you have clients you talk to everyday that are a part of this fight.  I know how busy you are, but I need you to spend the extra 10 minutes it takes to not only post this and other articles to come, but to tell your clients about what we’re doing over here… tell them to read it on Mandelman Matters or on your site, or anywhere else for that matter.

It’s all going to come down to how we handle ONE thing… the “irresponsible borrower” stereotype.  Oh, I know it’s going to change eventually, but we can’t wait until eventually… we need to do it this coming year… a year that politicians are paying attention.

Because otherwise, and this much should be clear to all of us… we will lose… and lose BIG… and the truth of the matter is that WE… the people… WE’RE TOO BIG TO FAIL!

Tags: bankruptcy, borrower, countrywide, disclosure, foreclosure, foreclosure defense, foreclosure offense, foreclosures, fraud, LOAN MODIFICATION, modification, quiet title, rescission, RESPA, securitization, TILA audit, trustee, WEISBAND
Posted in bubble, Corruption, Eviction, securities fraud |