Republicans and other economic free marketers have always adhered to what I call the Fernando Corollary. Fernando was the unctuous pseudo-Latino lounge lizard talk show host played by Billy Crystal on SNL, who always told people "You look mmmmmahvelous" and said that it was better to look good than to feel good. The Republican Fernandos have long understood that for Americans, it is just as good to look rich or to feel rich as to be rich, and that's why they have been able to make political hay out of token gestures like $300 advances on next year's tax refunds and handing middle- and working-class Americans the financial gun with which to shoot themselves.

I wanted a house for a long tiime before we bought one. I wanted a house the way most women want babies. There were a number of reasons for this, few of them financial. I wanted to be able to paint whatever colors I wanted. I wanted us to be able to crank up the stereo without disturbing anyone. But most of all, I wanted to be assumed to be an adult, and not have to beg a landlord, "Please, please, PLEEZ, Mr. Landlord? Can I PLEEZ have a kitty? I promise I'll take care of it" -- in my thirties.

We started looking for a house in 1995, looking at a particular price range. When houses in that price range turned out to need mid-five-figures of work, we decided to wait another year and save some more money so we could go up to the next price point. At that point, when we went to pre-qualify and be pre-approved for a mortgage, we were told by the mortgage company, "You know, you CAN go higher. We can qualify you for X dollars" -- which was $60,000 more than the amount we had figured out we could afford.

We had about as good a rental deal as it's possible to get at that time. Our apartment wasn't very big, but it had an open floor plan with a kitchen that had moe countertop/workspace than I have now. It was on the first floor and we had use of the yard. It was in great condition, the landlord always called in people to fix things that broke, and in eight years he never raised the rent. But he had a heart condition and was fading noticeably at the time we moved out, and had we not bought when we did, we'd be having to move in another year anyway. It also happened to be close to the bottom of the market.

Still, you don't go from paying $650/month for rent to buying a house without figuring out exactly how you're going to do it, especially when you have a reluctant spouse, as I did. There weren't the kind of online financial calculators then that we have now, but I knew my way around an HP-12C calculator, and I was able to figure out exactly how much the mortgage would be and what the "net" after the tax deduction for mortgage interest and property taxes would be. So we knew exactly what our price range was and we were not going to go one penny over that. And when we finally bought, it wasn't a house with a spanking new kitchen and new bathrooms, but what is known as a "POS Cape" where nothing had been updated since 1975, the bathrooms were both original, the basement family room was from the 1970's, and the carpet in the living room was red. But it was on a dead end street, it had "good bones" and plaster walls" and Mr. Brilliant, who is 6' tall, didn't have to duck anywhere.

We were lucky because however inadvertently, we timed the market right. In the late 1980's, we were told by friends to buy, buy, buy -- that real estate only goes up. One friend bought a house at the 1980's peak and ended up selling at a loss one step ahead of being foreclosed. It was nearly two decades before she was able to buy again. I never forget this, largely because when I look in the cabinet where I keep "the good dishes", I see the remains of her boyfriend's grandmother's stemware that I bought at their garage sale so that if he ever wanted it back, he'd know where it was.

Eleven years after buying, the kitchen is still a work in progress, the basement still has the same cheap paneling the previous owners put up in the 1970's, and the downstairs bathroom is still original. We've put on new sidiing and a new roof and new windows after saving enough to pay for them, because we are practical and cautious and not about to put ourselves in a precarious financial positiion by taking equity loans.

I recognize that the housing bubble made the $200,000 house a thing of the past in northern New Jersey (even if only temporarily), but the concept remains: If you can't afford it, you can't afford it. Period. And you wait till you can.

The problem is that Americans have come to believe that they deserve what they want when they want it. I blame Ronald Reagan for most of this, with his bogus supply-side economic doctrine which said that you can cut taxes, increase spending, and still balance the budget. You can have anything you want, and it's all free. Americans bought the bullshit because it takes the notion of deferred gratification and throws it out the window. Reagan's legacy can be seen in some of the houses in my neighborhood: former POS Capes that have been remodeled into McMansions with soaring entry foyers, bridal staircases, and cavernous kitchens with Jenn-Air appliances and granite countertops in which no one cooks. You may have leveraged yourself to the hilt, but dammit, your daughter will be able to come down a nice staircase when she goes to the prom -- assuming you keep your job and can keep paying the mortgage after the rate adjusts.

It's rare that I don't agree 100% with Paul Krugman, but in his op-ed today, he paints those who took out mortgages they couldn't afford as hapless and helpless dupes of a predatory mortgage industry:

Apologists for the mortgage industry claim, as Mr. Greenspan does in his new book, that “the benefits of broadened home ownership” justified the risks of unregulated lending.

But homeownership didn’t broaden. The great bulk of dubious subprime lending took place from 2004 to 2006 — yet homeownership rates are already back down to mid-2003 levels. With millions more foreclosures likely, it’s a good bet that homeownership will be lower at the Bush administration’s end than it was at the start.

Meanwhile, during the bubble years, the mortgage industry lured millions of people into borrowing more than they could afford, and simultaneously duped investors into investing vast sums in risky assets wrongly labeled AAA. Reasonable estimates suggest that more than 10 million American families will end up owing more than their homes are worth, and investors will suffer $400 billion or more in losses.

So where were the regulators as one of the greatest financial disasters since the Great Depression unfolded? They were blinded by ideology.

“Fed shrugged as subprime crisis spread,” was the headline on a New York Times report on the failure of regulators to regulate. This may have been a discreet dig at Mr. Greenspan’s history as a disciple of Ayn Rand, the high priestess of unfettered capitalism known for her novel “Atlas Shrugged.”

In a 1963 essay for Ms. Rand’s newsletter, Mr. Greenspan dismissed as a “collectivist” myth the idea that businessmen, left to their own devices, “would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings.” On the contrary, he declared, “it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product.”

It’s no wonder, then, that he brushed off warnings about deceptive lending practices, including those of Edward M. Gramlich, a member of the Federal Reserve board. In Mr. Greenspan’s world, predatory lending — like attempts to sell consumers poison toys and tainted seafood — just doesn’t happen.

But Mr. Greenspan wasn’t the only top official who put ideology above public protection. Consider the press conference held on June 3, 2003 — just about the time subprime lending was starting to go wild — to announce a new initiative aimed at reducing the regulatory burden on banks. Representatives of four of the five government agencies responsible for financial supervision used tree shears to attack a stack of paper representing bank regulations. The fifth representative, James Gilleran of the Office of Thrift Supervision, wielded a chainsaw.

Also in attendance were representatives of financial industry trade associations, which had been lobbying for deregulation. As far as I can tell from press reports, there were no representatives of consumer interests on the scene.

Two months after that event the Office of the Comptroller of the Currency, one of the tree-shears-wielding agencies, moved to exempt national banks from state regulations that protect consumers against predatory lending. If, say, New York State wanted to protect its own residents — well, sorry, that wasn’t allowed.

Of course, now that it has all gone bad, people with ties to the financial industry are rethinking their belief in the perfection of free markets. Mr. Greenspan has come out in favor of, yes, a government bailout. “Cash is available,” he says — meaning taxpayer money — “and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this.”

I'm all for practices that make it easier to buy a home, for those who otherwise have the means to pay a mortgage. We were the beneficiaries of modifications to the old 20% down/30 year fixed doctrine that allowed us to put down 10% and pay PMI until the house's value rose enough to increase our equity to 20%. That kind of modification is reasonable. But it's hard for me to imagine sitting in a mortgage broker's office while he presents you with proposals for a $400,000 first mortgage and another $100,000 second mortgage to cover a down payment and a new gourmet kitchen when you make $60,000 a year, and not walking away from the table saying "We just can't do it now." It's hard for me to understand looking at a house like mine, priced at close to a half-million dollars, and not thinking "This price can't possibly hold." A 30-year fixed rate mortgage builds equity slowly enough; I can't imagine making payments on a mortgage that builds no equity at all. You don't have to know your way around an HP-12C to ask "What happens after the rate adjusts?"

Making it easier for qualified buyers to purchase a home is an unmitigated good. Singing Ronald Reagan's old song of having whatever you want and it's all free is another story. Industry has proven time and time again that nothing trumps profits. Health insurers are willing to let people die rather than pay for treatment. Auto manufacturers that make bad decisions about the vehicles they choose to manufacture will lay off tens of thousands of employees -- and then give the CEO a seven-figure bonus. Manufacturers of pool filters will allow a child to have her intestines sucked out by their product rather than fix a defect. Regulation is necessary, and we are now seeing the result of deregulating the mortgage industry. Telling a home buyer that the rate will adjust to 8% and then raising it to 12% is fraud and should be treated as such. Not making perfectly clear that the adjusted rate may very well be higher than it is today because rates fluctuate is a bait-and-switch.

Krugman is right that this should be a campaign issue, and he's right that consumers deserve protection from predatory lending practices. But home buyers have an obligation to their own lives and their own futures to educate themselves before signing on the dotted line. Even if home prices drop to what they were in 1996, a six-figure mortgage is one hell of a lot of debt into which to enter without knowing damn well what you're doing.

Labels: housing bubble, mortgage crisis