Financial degenerates
To all the foreigners who loaned Americans your savings, we thank you. Besides propping up our economy for the last five years, you have helped us buy stuff we could otherwise not afford - stuff that you could have bought yourselves considering that you probably produced it to begin with. Now, you can kiss your savings good-bye. It was a fun ride. When we party again like it’s 1999, we’ll call you… assuming you bring all the booze and party favors.
For all the talk of swindled homeowners and manipulative lenders, my only comment is that it takes two to tango. Sure the borrowers lied, but they couldn’t get any money if the lenders weren’t so eager to give it to them. The lenders certainly put people in risky loans, but it was ultimately the borrowers who wanted to get some money for consumption.
There’s a real mental and moral disease in all layers of American society today. From government to business to consumer, it’s all about getting what I can from the system with consequences be damned. The most optimistic of us hope there’s a way to continue the shell game through future re-financing, the worst of us do not care one bit. Here’s an extreme story that probably doesn’t describe most Americans, but it describes enough:
The case of Karenn and Steve Oropeza from down the street shows how Inland Empire buyers complicated their lives by overextending themselves.
The Oropezas arrived at Calle Canon Road in 2004. Corona appealed to them because of its quality of life and regional cachet. “It was labeled as the new Orange County,” Mrs. Oropeza says. Public records show they paid $557,000 for a four-bedroom house and took out a $500,000 mortgage. Her husband is an area manager for an auto-parts retailer and she is a purchasing manager for a firm that sells dietary supplements.
As property values skyrocketed, they refinanced three times, most recently in late 2006, for $835,000, Mr. Oropeza says.
The couple say they used some of the money they pulled out of the house for home improvement, such as a backyard waterfall. But Mr. Oropeza says the bulk was used to pay off credit-card arrears. “We were in a vicious cycle of refinancing our home to get out of debt,” he says. “We banked on selling the house, but that’s where we failed.”
The couple listed the house several times, even before the final refinancing, which raised their monthly payments to about $6,300. Earlier this year, they were asking $839,000 for the house. But it just sat. Elsie Cambone, the Coldwell Banker agent who had the listing, says prospective buyers were put off by the vacant home next door.
Meanwhile, Mr. Oropeza expected to be transferred to Texas, so the couple began house hunting there in 2006. In June, they bought a 3,600-square-foot home for $283,000 in the Houston suburb of Katy, Mrs. Oropeza says. “It was easy. We had good credit. The deal was done in seven days.”
In the run-up to their move, she says, the couple lived off credit cards to “make sure we had cash for the house payments” in Corona. They packed up in June, and then took their 9-year-old son and 2-year-old daughter on a long-planned Caribbean vacation. They returned to Calle Canon Road, “got in our cars and drove to Texas,” Mrs. Oropeza says.
Neighbors Ms. Lefranc and Mr. Saffold are dismayed over the Oropezas’ departure and note that shortly before leaving, the couple bought a new Lexus. “I think they took money out of their house and split,” Ms. Lefranc says.
Mrs. Oropeza says that she and her husband recently bought a Lexus and a Chevrolet Suburban with no money down. She denies that the family intended to abandon the house. The choice was straightforward, she says: “It was easier to keep the house in Texas than the one in California.”
“We’re sad because there goes our credit, and because people think we are a bunch of flakes who walked away from the house and tried to make money,” Mrs. Oropeza says.
Flake is not the word I would use to describe the Oropezas. I’m frankly surprised their credit wasn’t shot a few years back. Where do we start? Let’s see:
- Two middle-class professionals.
- Three refinancings in the same home within three years.
- Paying debt by taking on additional debt.
- Borrowing to purchase such necessities as a backyard waterfall.
- Buying a house before selling the existing one.
- Buying two (new?) cars while facing imminent foreclosure.
- Living on credit cards to preserve the cash for a down payment.
- Went on a credit card-funded vacation to top it off.
- Dereliction of mortgage obligations in spite of expecting to keep the second house.
- In spite of all this, they had good credit.
If someone did pay the Oropeza’s asking price, I can’t help but pity him as he helped fund their $280,000 worth of re-financing. Oh I forgot, hundreds of thousands of home buyers committed this very act of generosity over the last four years. The Oropezas are the very people Hank Paulson, Ben Bernanke, and Hillary Clinton want to save because they’re “victims.” Yeah, victims of their own overindulgence.
Is it any wonder the credit markets are in such a mess? Not only did they abet this behavior, they still rewarded these faithful debt slaves with a good credit rating. No financial system can survive if it rewards moral hazard, and that’s exactly what it did. I’m sure many Americans did not engage in the Oropeza’s reckless behavior to that extreme, but I’m also sure a majority of Americans can check off one or more of the items I listed above.
With incomes declining, cost of living rising, and unsatisfied desires, the only way to keep this going is through the reckless expansion of debt. When you look around, you’ll see that everyone and every entity does it. Five refinancings. Credit card shell games. Leveraged buyouts. Iraq War funding. Social Security tax games. They’re all just symptoms reflecting our diseased culture.
And the beat goes on.
December 18th, 2007 at 12:02 am
Great post Juan Carlos! You really nailed it here.
December 18th, 2007 at 3:45 am
Very illuminating. Thanks!!
December 18th, 2007 at 6:09 am
Telling it like it is!
December 18th, 2007 at 10:35 am
The part that REALLY Pisses me off about this:
Everyone who works hard, tries to save and stay out of debt will get screwed, while all the idiots like the people in the story above get a gub’ment bailout with my tax dollars.
Its pathetic.
December 18th, 2007 at 10:59 am
It isn’t so cut and dry… I run a variety of sites and other intake vehicles where there continuously very harrowing stories of people being defrauded by LOs and brokers (often including forgery unbeknownst to the borrower).
People like the Oropezas are obviously not the ones the bailout-niks want to help; the problem is separating the truly defrauded from borrower-abusers.
I suspect the “good credit” category contains a lot more of the culpable than true subprime. A feature of this bubble, as you point out, was using scoring as a veneer of legitimacy to borrowers who in reality did not have very good prospects or were in over their heads.
The great non-subprime (”prime”) Alt-A collapse is going to be bigger than subprime and more difficult to deal with. That is what the media and authorities still don’t get. As you point out, overall the whole culture has become prodigal… with no way out that leaves us as “wealthy” as we just were.
December 18th, 2007 at 11:13 am
Although I would agree that there were a few people such as Mr. Krowne mentions. However, as a loan officer since 1997 the sob stories of people absolutely defrauded by a scum bag LO are very small in comparison to the habitual debt recyclers mentioned in this article. It is absolutely sickening seeing what I did over the last few years and now wondering if my tax dollars are going to bail these same idiot debt recyclers out of their troubles.
Horrible!
December 18th, 2007 at 11:41 am
… Isn’t this just another example of how American’s work? This family had an opportunity to live the good life and they took advantage of it. They will see the horrors of their ways when their Houston TX house has does nothing and they are forced to pay back their debts. The fact of the matter is that home values for refinance are based on current sales prices in the area– which means that the real ’stupid’ people were the ones that paid $850,000 for that SoCal split-level. If done correctly, this family should have stripped the equity and placed their investments in an emerging markets fund– Then they could have paid off both houses in cash… Or really lived the high life in ths South of France.
December 18th, 2007 at 12:53 pm
Take a look at the Ford Corporation’s financials, 170 Billion in debt, Our Federal Government debt over 9 Trillion.
What can be expected from the small debt slaves living the American dream.
December 18th, 2007 at 12:59 pm
and the beat goes on. For every poor sap who really got taken there are ten of these greedy folks out there. I have no sympathy for them and their smug, non caring attitude makes me wish bad things happen to them. I feel sorry for the children but their role model fiscally responsible parents are no one to follow!
December 18th, 2007 at 1:12 pm
To be fair one reason why so many average folks were ready to scam the system is that decades of globalization and offshoring has put a tight lid on real wages and incomes while enabling those at the top to accumulate riches beyond the dreams of Midas.
Unless the growing wealth and income gaps between the top 1% and the rest of us is addressed soon, we will have far more to worry about than mortgage scams in the years ahead IMHO.
December 18th, 2007 at 1:32 pm
Juan,
Just like mobile home parks cause tornadoes, the cause of this mortgage crisis is the flat screen HDTV.
I know of a real estate company that specializes in “Short Sales” and 9 times out of 10, homes that they go into to discuss a short sale have a large flat screen HDTV.
Before any bailout or rescue plan is implemented, there should be a little more scrutiny into the borrower’s past purchases. Why are we putting a bandaid on a gash?
December 18th, 2007 at 2:11 pm
If these middle class, educated (?), parents of 2, can make dumb move after dumb move, just think whats happening in the lower economic levels of everyday people.
December 18th, 2007 at 7:19 pm
The burgeoning proportion of our society that has become sociopathic is what saddens and worries me. I won’t go so far as to say that we have become a sociopathic society, but considering the people we have been electing to lead us over the past 40 years, and the behavior of our institutions, both public and private, I’m not so sure. People are just following their lead, and they teach their kids the same amoral value system.
December 24th, 2007 at 10:57 pm
I am embarrassed by the actions of my fellow Americans. The irresponsible financial behavior is only a symptom of a much larger social ill - that of being self entitled, spoiled brats on a massive scale. Americans have developed an incredible number of defense mechanisms against dealing with the truth including hiding behind the “victim” syndrome and of course a public favorite, fake politicial correctness where nobody can ever say the truth aloud without being booed down. We vote for politicians who support this ridiculous behviour and those who tell it like it is (AKA Ron Paul) get laughed at and treated by the media as if they aren’t even serious about running. America is a shell of its former self, of its former glory which was earned by hard working, innovative, and dedicated people in the 1st 3/4 of the century. Since then it has been hollowed out from within by the lawyers and bankers and others seeking to achive not only a living but indeed massive wealth without doing any work. The first step to recovery is to fix the system so that no banking CEO gets a 68 million dollar bonus because folks, there is simply no amount of work that a bank or a banker can do to be worth 68 million. It’s a BANK, folks. It’s a tax.