Those pesky banks and bankers are at it again. Yves Smith at nakedcapitalism, Mike Konczal, and others have been providing first rate, up-to-date documentation and descriptions of the mortgage morass that may tip our fragile economy into another downturn. A guest post at Barry Ritholz's blog provides the best metaphorical description I have read, one that I wish I had written. It's gotten me thinking about my own experiences with banks and mortgage lenders.
My first encounter with a bank was as a small child when I opened a "Christmas Club" account. I remember my businessman father carefully explaining to 8 year old me that Christmas Clubs were really bad ideas because they paid no interest. One had simply to exercise some self-restraint and foresight in order to accumulate money over time interest-free. He pointed out that there was the problem of where to store the accumulated funds and that for amounts to which one anticipated a need for ready access, banks were a good solution. He let me open the Christmas Club account because he thought it would be a good way for me to see that one could foresee one's future needs at Christmas and by putting a small amount away every week accumulate enough to buy presents. I think he hoped it would also encourage generosity of spirit.
My next encounter with a bank was as a teen, when my father introduced me to the president of the bank where he did business. We were there to open a checking account for me to deposit and manage my "income" from my after-school and summer jobs and to secure my first car loan, which I would pay with the income from my after school and summer jobs. ("Dad, I need a car." I said. To which he replied: "I'll say to you, Maxine, what my father said to me when I asked him for a car: 'You can have your own car, when you can pay for it' " That's when I got a car, when I could pay for it, and a nice little used Kharmann Ghia it was.) It was at this bank that I developed the (apparently) misguided notion that the bank and I were partners. That's because this bank treated me like a partner. They didn't want to lend me more money than I could reasonably expect to pay back. They didn't want to charge me endless fees. It was a simple arrangement: they provided banking services and I prudently took advantage of them.
Credit is a mixed blessing. Like saving, it allows us to "smooth" our income, to transfer money across time periods. Saving allows us to transfer income forward to the future for which we are rewarded with interest. Credit (or borrowing) allows us to transfer income from the future to the present, but at the price of paying interest on the borrowed funds. I've written before about how I came to have my first credit card. I got off to a rocky start with it, running up a not outrageous, but painful-to-pay-off balance. The pain was sufficient and the lesson was learned and learned well. "Live within your means, Maxine," I said to myself. And so I have.
But credit is the quintessential American capitalist thing most frequently experienced directly by consumers (IMO). I remember in grad school when one year my adjusted gross income was around $6000. Bloomingdales offered me a credit card and I took it. Never used it, but I took it. I remember feeling secretly pleased and amazed that someone so poor could carry around a credit card from an upscale, overpriced retail outlet at which one could not possibly afford to shop. I think I acquired a Neiman-Marcus card the same year. I did eventually use N-M once to buy a wedding gift for someone (after I graduated).
By my last couple years of grad school I was earning enough working part-time to qualify for an FHA mortgage on a small townhouse in the city where I was working and attending school. I cobbled together some small amount for the down payment and the closing costs and I was a homeowner.
I hit one rough patch about 8 years into my 10 year residence in the house. I was non-tenure track faculty, required to fund 100% of my salary from grants. I was about to be down 50% in salary support if a grant or two didn't come through in time. There was a real possibility that I would lose my job (or more likely drop to part-time while I looked for a new job).
Under the misguided notion that the corporation holding my mortgage was my partner (the loan had been sold several times), I thought I should probably phone them to find out what my (our) options might be. I was thinking I could make interest payments for 3-6 months and then structure some sort of "make up" payment once I was employed full-time again. It took me 3 weeks to track down a phone number for the company that owned the loan. No 800 number. Every time I was put on hold or phoned the wrong department, I paid for it. I finally got to someone who seemed responsible, laid out my situation, explained that there was a good chance I would not lose my job, that even if I did, I was a PhD economist and most likely would have a job rather quickly, that all I wanted to know was what my options might be if I did lose my job. The person on the other end of the line very kindly informed me that there were no options, that he was putting a flag on the account that if I missed one payment they should start foreclosure proceedings immediately. He thanked me for letting him know and saving them some time.
Well, there you are. Doesn't that make you feel better? I know it evoked some interesting feelings in me.
As luck would have it, a fairly large grant on which I was principal investigator came through, my job was saved and my house with it. Being no slouch at spotting losing propositions, I did two things...well, three things actually. I got married. I went on the job market and took a tenure-track position. And I (we) bought another house.
But this time, I knew what to avoid mortgage-wise. We found a local bank that holds all of the mortgages that it originates. We paid an extra half percentage point for this. Well worth it in my opinion. When I had cancer (and thanks to an extremely supportive employer) there was no worry that I would lose my job (at least not right away), but it helped immensely to know that if I had and we had to sell the house, the bank would have worked with us. And they did work with us in non-predatory ways on refinancing, home equity loans, and anything else we needed for the 10 years we owned the home.
Look. This is the heart of capitalism. I want to borrow money to own property. The bank wants to lend money for which it receives a return that reflects risk and the opportunity cost of what it lends. This is a marvelous arrangement for a lot of reasons. Not least, my ownership of said property is a near guarantee that it will be maintained and mowed, improved, and the loan paid off. The fact that all my neighbors face the same incentives to maintain and mow, improve, and pay off creates a web of interlinked well-being. As the neighborhood goes, so go we all.
No good can come from neighborhoods populated by home-owners who have devolved into squatters. Nor can any good come from neighborhoods wholly or mostly owned by banks, particularly large banks with no vested interest in the community. Moreover, capitalism, as experienced and lived by a population whose ancestors started out as squatters with "tomahawk rights," that evolved over time to homesteaders and, eventually, homeowners, is getting a very deserved bad name.
If capitalism has held a special place in the hearts of US citizens, it is almost certainly because most of the working and middle class have been able over time to acquire a little bit of heaven on earth: their own home, bought and paid for by them. Their homes are tangible evidence of their hard work, their prudence, their temperance, and their perseverance. Those homes and the loans that made them possible were also tangible evidence of the partnership between labor and capital; between homeowner and banker; between mini-capitalist and serious-capitalist.
I will say it again. They are tangible evidence of a partnership, a mutually beneficial contract between banker and home buyer. Not adversaries. Partners.
What makes this worse IMHO is that the current mortgage morass appears to be the result of capital's failure to observe and adhere to the rudiments of property rights: the proper and legal transfer and holding of a title and a promissory note; the proper and legal processing of said documents to initiate foreclosure; and a level of outright cruel and confiscatory behavior that until lately I had only associated with totalitarian governments. (If you doubt me, see here).
So this is a message to bankers and anyone else who at least putatively cares about capitalism and commercial exchange. I am probably among the most sympathetic to both and to the institutions that support them. I am losing sympathy. Nay, I have lost it. This is the stuff from which revolutions are born and you will have brought it on yourselves. The problem is that capitalism when done right yields real value, real benefits to us all. So when it dies, when you have killed it, as with all of your other financial chicanery, we will all pay the price.