Greed: “An excessive desire to acquire or possess more than what one needs or deserves, especially with respect to material wealth.”
The term “negative equity” has found its way into common parlance today. And it is sure to hang around for a while. That’s because many people have it – that unpleasant experience of owning a home worth less than the mortgage – or mortgages – encumbering it. The more graphic expression for having “negative equity” is being “underwater.”
Based upon my many conversations with clients about the negative equity in their homes, most are forthright and honest how it came about. While there are a variety of reasons for their particular circumstance, it is rarely what some cynics have unfairly characterized as “greed.”
Here’s what I’ve learned from my clients:
- Some were first time buyers who were wooed by the siren song of lenders offering too-good-to-be-true loans – up to 100% (or more) of the purchase price. This opportunity, combined with rapidly rising housing prices, almost demanded that they get off the sidelines and into the game. The conventional wisdom was that surely home values would rise and real equity would build up….
- Some were folks who already had a home, but saw a chance to “buy up”. With expanding families and seemingly secure employment, it was a natural decision. And with banks and mortgage companies touting creative and custom-made financing terms, the issue of “risk” never crossed lips or minds. If there was anything “risky” about buying a home or financing one, certainly the Fed’s Alan Greenspan, or Secretary of the Treasury, Henry Paulson, would have told us. After all, they’re the experts. Right?
- There were many who just wanted to put their growing paper equity to a more immediate use: A kitchen remodel, a car purchase (after all, the IRS permits interest deductions on home loans, not car loans), college education, debt consolidation, etc. All of these decisions appeared rational and reasonable at the time. It wasn’t exactly like they were doubling down in Vegas.
- In 1986, the federal government had even changed the tax code to exempt the first $250,000 of gain on the sale of a primary residence for single tax filers and $500,000 for joint filers. And this was not just a one-time opportunity. Homeowners could do it as frequently as every two years if they wanted. If this wasn’t an attractive inducement to frequently buy and then sell your home, nothing was. Cable network programs glorified property “flipping”. It was a skill to be admired, not disparaged. More art than artifice.
- And then there were the older Americans, who viewed their home equity as a resource to help fund their retirement when they later downsized.
Of the many folks I have spoken with about their borrowing decisions between 2004 – 2008, I cannot think of one who was motivated by what I would call “greed.” Not at least by what I would call the conventional definition of greed: “An excessive desire to acquire or possess more than what one needs or deserves, especially with respect to material wealth.” If you scour the Internet for definitions of “greed” you will note the reoccurring concept of “excess.”
Yet, when I think of greed – that unabashed, unrepentant, and unashamed avarice that borders on financial gluttony, I don’t think of consumers – I think of Big Banks. This includes the big lender banks and the big investment banks. During the credit boom, neither industry could exist without the other. It was this symbiotic relationship – like the con artist and his shill – that was the singular cause of our country’s slide into the Great Recession.
Big Banks made prodigious amounts of money during the easy credit days of 2005 – 2007. As lenders, they made loans that were not only risky, but in some instances, destined to fail. But did they care? No, because the paper was immediately sold after the loan closed. This was what has been characterized as the “originate to sell” lending model of banks such as Countrywide (now B of A) and Washington Mutual (now Chase). Loans that were made by many banks were not retained on their books. They were pooled and sold to investment banks such as Goldman Sachs, Morgan Stanley, and others, into a toxic brew of high risk securities that were given triple A ratings, leading investors to believe they were safe. So the lending banks had no accountability for their poorly underwritten loans – they became someone else’s problem. Thus, the lenders got paid for making bad loans, and the investment banks got paid for securitizing them.
And just to hedge their positions, Big Banks actually bet against the success of the products they were selling their customers, by using an insurance-like product called “credit default swaps.” So while the investment houses made money selling junk to their investors, they made even more money when their clients’ investments in the junk failed. [Goldman’s Abacus deal is a recent example. – PCQ]
When Lehman collapsed in 2008 and the entire financial industry began to teeter, the government stepped in and rewarded the same culprits with billions of TARP dollars funded by the American taxpayer. [For a list of the recipients of TARP funds, and records on what has been repaid, go to the ProPublica website here. – PCQ] And as icing on the cake, the banks that had created or participated in this securitization Ponzi scheme, doled out huge bonuses to their top executives.
Now that’s “GREED.”
After this house of cards collapsed on itself, real estate values dropped by nearly half. The little guy who originally borrowed money secured by his home, found that he now owed more to the bank than the home was worth. What’s worse, it would likely be a decade or more before he would ever see a dollar in equity.
So, before anyone characterizes the little guy as “greedy” for borrowing money to acquire a piece of the American Dream, think about the Too-Big-To-Fail Banks, who created, stoked, and profited from the loans they gave the little guy.
