The Mortgage Crisis

Ten years ago, when we bought our house, I was surprised to find that our realtor wanted us to work with a financing company, not a bank, to obtain a mortgage. Since we were moving across the country and did not yet have a local bank, we trusted her advice and got our mortgage. Then the next surprise came in a few months when our mortgage was sold and a new payment booklet arrived. And within a year it happened again. So we took it into our own hands and went to our bank and negotiated moving the mortgage there, allowing us to get a rate discount for automatic payments directly from the checking account. I felt much more comfortable being once again in a relationship that I understood.

It seems that I had been introduced to the early stages of the mortgage meltdown, and I didn't like it. I had been left without control over who I dealt with. Since that time, while I was wondering who was buying all of those houses that I saw being built in huge developments. We speculated about people who were buying second and third houses and congratulating ourselves for buying an older home. We continued to watch with dismay as land was scraped clear by bulldozers and cookie cutter McMansions were built on tiny lots to extract as much profit as possible from a piece of land. But these new houses seemed to collect occupants and I just continued to marvel at the explosion.

Well over a decade ago we began to get inundated with credit card offers that seemed to be too good to be true: 0% interest for a specified number of months. The interest rate that the card would jump to at the end of this period was always hidden deep within the fine print. Over time, the number of these offers increased until a day couldn't pass without the receipt of 3 or 4 of them in the mail. All of your favorite non-profits wanted you to get a credit card with their logo on it, promising to donate some small percentage of your purchases on the card to their cause. All want you to transfer your balance from one or more credit cards to the new card. I finally found the website where you can opt out of receiving these offers. They seemed like a very easy way to get int a lot of trouble fast. In concert with this explosion of credit offers was the barrage of advertisements for organizations that will help you get rid of your credit card debt for only a fraction of the total. One could almost believe that they were two divisions of the same company, drumming up business for each other. Didn't anyone else believe this was crazy?

Then came the attack on 9/11. I was stupified to hear the President's brother tell us "to respond quickly so people regain confidence and consider it their patriotic duty to go shopping, go to a restaurant, take a cruise, travel with their family? Frankly, the terrorists win if Americans don't go back to normalcy." This was followed by Rudy Giuliani urging "Show your confidence," Giuliani said. "Show you're not afraid. Go to restaurants. Go shopping," There was no call to conserve fuel in order to starve the economies of the countries that produced the suicide attackers. There was no recognition that the public image of Americans held by those in other countries could have been any factor in the attack. Or the actions of our government in supporting despotic regimes within those countries. There was no self-reflection whatsoever at a time when that might seem most needed. All we had to do was travel and shop and the terrorists would be defeated.

So nothing substantially changed in the behavior of Americans. It was more inconvenient to travel but just as easy to spend. The housing developments continued to be built at an astounding rate. There were just a few hints in the news of people being behind in their mortgage payments. No one paid much attention to it. But it was clear many people were in over their heads in credit card debt. Students were coming out of college with tens of thousands of dollars of debt in student loans. If they had continued to professional schools, the amounts owed could be over a hundred thousand. And the housing market continued to be hot. The politicians wanted us to spend. The credit companies wanted us to spend. Most Americans were happy to oblige.

Those people who had been in their homes for a while were encouraged to take advantage of the fact that all of the activity in the housing market had driven up the equity in their home and they could borrow on that equity to use the money for anything they wished, and still retain the income tax deduction on the interest on that loan. A great many of them did so, thereby reducing the remaining equity in their homes to near zero. Much of that money was not reinvested in the home, the traditional use for a home equity loan.

So here we are now. Gradually, over the past couple of decades much of the financial regulation introduced after the Great Depression was dismantled. Many more types of organizations were now able to lend us money with much less, or even no, regulation. Everyone was benefiting, or so it seemed. But a lot was happening out of our sight. Large financial organizations were selling our mortgages, chopping them up, repackaging them into things called derivitives, and then reselling them as investments to individuals, school systems, foreign banks and governments, anyone who liked the promises of high returns and quick turn arounds. But many of these mortgages were "non-traditional," that is sub-prime, zero down payment, adjustable rate (ARM), all set to adjust, after some specified period, to a usurious interest rate that the mortgage holder could not possibly manage, something the loan officer clearly knew at the time the loan was offered, especially as they rarely required even proof of employment. The derivitives mixed mortgages of all different "primeness" together, making it very difficult to assess their worth. Unfortunately this did not bother the rating companies. They just gave them all high ratings and the derivitives were snapped up.

What are the consequences of all of this unrestrained "economic activity" over the last decade or so. Well, those ARMs with the time bombs built in started to go off. Some people, whose lives had gone well since they took out their mortgages were able to refinance into 30 year fixed mortgages at the current interest rate. Many were not. They had to figure out how to reorganize their budgets to accommodate this huge new payment that came due monthly. Many, who had not already done so, ran up the debt on the many credit cards from the offers they "took advantage of" to the high limits, irregardless of the usurious interest rates, to pay their bills so that the pay checks could go toward the mortgage payments. This could not continue but no way out materialized. So the foreclosures began, slowly. Then the rate picked up. Since many of these mortgages were on homes in developments, certainly in low income neighborhoods, neighborhoods fell apart. Home values, even for those paying their mortgages plummeted. After all, houses not being maintained deteriorate on their own. Vandals love unoccupied houses. Real estate taxes were not being paid on these houses that had been abandoned so services to the communities were in trouble, unless, of course, the taxes were raised on everyone remaining to take up the slack. And remember those people who were still paying their mortgages but had taken out home equity loans? Well, they now owed more, probably a lot more, than their houses were now worth on the market. Even those people who had not mortgaged their homes to the hilt were in trouble if they wanted to move, for a new job, or any reason at all. The value of their home had dropped precipitously. There were homes for sale all around them, many at real cut-rate prices because the mortgage holder wanted badly to get rid of them. Their prospects were not good.

And the consequences in the financial world. Well, these derivitives were really designed in such a way that their valued could not be assessed. Now, instead of assigning them all excellent ratings, they were all treated as if they were valueless. Many, in fact most, mortgages were being paid but who knew what part of what mortgage was where? Without transparency the derivitives were a just pig in a poke (Lots of those pigs on the loose lately. We really must treat them better!) So those that held these "assets" were in real trouble. In fact, you probably wouldn't believe how far that trouble in the US housing market spread. The mayor of Narvik, Norway, Karen Margrethe Kuvaas, is kept up at night worrying about the US housing market.

"Tiny specks on the map, these Norwegian towns are links in a chain of misery that stretches from insolvent homeowners in California to the state treasury of Maine, and from regional banks in Germany to the mightiest names on Wall Street. Citigroup, among the hardest hit, created the investments bought by the towns through a Norwegian broker."

You can all read the news as well as I can and listen to discussions of the financial crisis on the radio. But the one issue that will cause me to yell at the radio every time is the statement that, "I pay my mortgage. I'm responsible. Why should we help those who made irresponsible decisions?" At that point I turn livid. First, please read again the paragraphs above where I lay out some, only some, of the consequences of this "economic activity" that we called a housing boom. Next, let me ask you about your memories of applying for and obtaining a mortgage. We have been through this now 6 times. Each of those times, while we were both employed and had all of the required information available, it was a very complicated process involving mounds of paperwork. I always felt like there was someone waiting just behind a curtain to drop a black ball to say we were not acceptable, especially for the first couple of mortgage applications where we were moving to a larger house with young children. Then after the date for signing the final papers was set and we arrived at the office for the signing, carrying a check for the down payment and fees that was larger than we had ever conceived of handling before this time, we would be confronted with a large stack of papers, each of which we were to sign and which we would not have been able to really interpret if we had sat there and read them all through from beginning to end! There was always a schedule so no time had been set aside for such an activity anyway. So, trusting in the bank officers to be honest and completely truthful, we signed each piece of paper after being given a one sentence synopsis of its contents and having a our stomachs in a knot.

Now suppose that this is your first mortgage application. You have been house shopping and a real estate agent or a development's salesman has shown you a house you like and assured you that they can get financing for you. You believe in The American Dream and put yourself in their hands, after telling them about your financial situation briefly. They bring you to their favorite financing operation where the agent there quickly assesses what type of mortgage you can be offered and begins the process. The lenders have easy access to your income by simply asking the IRS They didn't want to ask. They might lose their fee if the deal did not go through. And the fees were higher for subprime mortgages than they were for prime mortgages because the interest rates were higher, so many people who were eligible for prime mortgages were shunted to mortgages having the higher interest rates, making default on the mortgage all the more probable. It has been estimated that as much as 65% of the subprime mortgages could have been issued as lower interest rate mortgages. Only the greed of the loan agents for their fees determined the way the loans were written.

Why shouldn't the people who bought these homes want to take part in The American Dream? It has been sold to them at every turn. This is the something for nothing society. Republicans tell us that taxes are bad but we all want the services that government supplies. If there is a pothole on the road we are sure to complain. And with the pressure on state income taxes and local real estate taxes, the states have resorted to running on the backs of their poorest residents by selling them even more heavily on The American Dream by relying on income from state lotteries whose tickets are sold to those who need the dream the most. Let them attack any aid to those who bought houses merely to speculate in the housing market, but not to those who wished to join The Dream.

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Math and Your Life

In the deluge of catalogs in the mail that comes with each Christmas season, I received a catalog today from Signals, the marketing side of National Public Televison. One of the products in this catalog has prompted me to move to the top of my priority list writing an essay about the socially acceptable practice, even among the well educated, to joke about being math averse. This openly voiced opinion, exhibiting no shame, greatly angers me. In fact, I find it to be unpatriotic! The inability of the people of this country to do math, even basic arithmetic, is an enormous drag on the economy and productivity of the country.

Let's look at the variety of t-shirts and sweatshirts offered in this catalog to evaluate the attitudes that are found acceptable to the viewing audience of PBS. There is one shirt that simply states, all in caps, DANGEROUSLY OVEREDUCATED. Others clearly show a preference for those who studied the "Liberal Arts," reading "I am the Grammarian about whom your mother warned you." and "ENGLISH MAJOR, YOU DO THE MATH." Clearly it is desirable to speak English very well, including the use of "big words," as in "I AM DISINCLINED TO ACQUIESCE TO YOUR REQUEST." The products are also aimed directly at teachers, featuring shirts that state: "The dog ate my lesson plan," and "Those who can do. Those who can do more teach."



One of the curious aspects of the appeal to the math averse is that the aversion does not extend to professional disciplines for which an in depth working knowledge of mathematics is a requirement, such as chemistry: "If you're not part of the solution, You're part of the precipitate;" astronomy: "when I was your age, pluto was a planet;" computers: "There are only 10 kinds of people. Those who understand binary and those who don't;" finance: "I 'heart' spreadsheets;" and art: featuring ties with Escher tiling patterns. This even extended to cooking with a pi(e) plate that features an large Greek letter pi in the bottom and the first few dozen digits of the value of pi running around the rim.

But the shirt that really ticked me off was the first one shown near the front of the catalog that stated: "I was promised there would be no math involved." It is not as if this attitude was confined to only the marketing people at PBS. I have even heard a similar attitude spoken on the Nightly New Hour! I cannot understand why this is acceptable, first to believe it as a an "educated" person, but also to express such an attitude expecting it to be understood as common to the educated television audience! The very fact of making the statement shows the speaker to be uneducated!

Why is math aversion such a serious matter? Because our corporations have been telling us that the students graduating from our schools are not prepared to go to work for them, even at lower levels. They must train them themselves. For many years now students attending our colleges have not been choosing to major in the sciences and engineering, in large measure because they have not been prepared to succeed in those professions. It is clear to anyone who has made any retail purchase that it is very unusual to encounter a clerk who can make change. In fast food restaurants workers need not even know the cost of each item; they merely hit the properly labeled key for each item, enter the amount proffered and the correct change is calculated for them. Even so, if the cash register does not return the change automatically, they may have trouble getting it right. These things used to be taught in elementary school. Perhaps if people understood simple mathematics, they would not have blithely accepted credit cards with interest rates of 25 - 36%. They should have known what the implications of those interest rates were. If our education system produced people who understood math, perhaps they would have better understood the mortgage contracts that they signed. Most Americans have no basis for making a risk/benefit analysis, necessary for both the mortgage and the credit card analysis.

During the recent election the news became obsessed with polls, daily polls, aggregated polls, rolling polls, local polls, national polls, etc. However, you could easily see that the reporters and anchors were completely unable to understand and interpret these polls. It appeared that this was also true of one of the candidates campaigns. To understand the polls one must understand statistics and sampling. That is, you must know how the data that goes into the polls was taken and then how to understand what the data means after it has been processed. To do this you need to understand the basics of statistics and a little about statistical error and sampling error. This year, as individual polls fluctuated, the news organizations learned that they could rely upon web site authors like Nate Silver of FiveThirtyEight.com and Mark Blumenthal of Pollster.com to help them understand what the polls meant. These men became fixtures on the news programs and their websites provide valuable information and education to their readers. The math geeks won one.

This country is in dire need of a new generation of technically educated people to reinvigorate our economy. This situation is not helped by having comments laughing about one's inability to do simple mathematics made on the PBS Nightly New Hour! In fact, the only on air personality I have heard dismayed by his loss of some ability of do math quickly is Keith Olberman, who stated that, when he was a full time sportscaster, he used math every day and was capable of making rapid calculations.

Perhaps it is time for a sweatshirt that says "Those who can do. Those who can do more teach math."