The Quaint Mortgage Standards of Bedford Falls

This isn’t Seattle-specific (although I did read it in the Times), but it’s a great column that actually manages to make an insightful contrast between the movie It’s a Wonderful Life and today’s housing bubble / mortgage mess:

Mister PotterNowadays, it’s impossible to watch the 1946 holiday movie “It’s a Wonderful Life” and not feel a twinge of respect for Henry F. Potter, the villainous banker played by Lionel Barrymore. Potter was not above drawing the last drop of blood, but at least borrowers knew whom to hate. And if they were late paying, they knew where to crawl.

That’s not necessarily the case today. Mortgage companies often ship the loans to Wall Street, which repackages them into securities sold around the globe.

So if you’re a borrower in trouble, and your loan is diced up into some mortgage-backed security, you’d be hard-pressed to find a lender’s ear. How’s your Chinese?

Remember the scene where Potter chews out Bailey for giving a mortgage to Ernie the cab driver? He accuses Bailey of lending money to any pal he shoots pool with.

Bailey responds, “I can personally vouch for his character,” but also notes that Potter had the papers documenting Ernie’s salary and life insurance benefits. That established his friend as creditworthy.

In other words, Ernie did not have a “no-doc” loan, a modern invention that doesn’t require borrowers to provide proof of their financials. Because applicants could put any income number they wanted on the forms, these mortgages soon became known as “liar loans.”

…Bedford Falls turns into Pottersville, an evil place full of bad people and good jazz.

Fewer residents owned their home in Pottersville, but that nightmare town had some things over today’s Greenspan City. Pottersville didn’t have block after block of boarded-up houses lost to foreclosure, as is currently seen in many American communities.

Former Fed Chairman Alan Greenspan had cheered on the housing bubble that raised home prices to ridiculous levels. And despite the warnings, he ignored the recklessness and downright cons that would inevitably push mortgage market into crisis.

The weak borrowers who couldn’t get a mortgage from the sourpuss Potter — and probably not Bailey — were better off than the moderns lured by the happy dancing figures. The latter were sucked into paying inflated house prices and fleeced by stiff fees and punishing interest rates. Then they lost their homes.

Which is less attractive, Pottersville or Greenspan City? It’s a real tossup.

Crazy things happen when people buy things that they cannot afford. Go figure.

(Froma Harrop, Seattle Times, 12.19.2007)

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

33 comments:

  1. 1
    deeplennon says:

    first! ;)

    Rate this comment: Thumb up 0

  2. 2
    TJ_98370 says:

    A similar article in the Kitsap Sun today is linked below. These type articles certainly would not have been seen in the MSM a year ago.
    .
    Was Mr. Grinch a Sub-Prime Lender

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  3. 3
    Mike626 says:

    “…Pottersville didn’t have block after block of boarded-up houses lost to foreclosure…”

    Did you take some literary license with this line? If not, I think I see the opportunity for a Flickr Pool…

    Rate this comment: Thumb up 0

  4. 4
    rose-colored-coolaid says:

    Oh no. Sorry all, I appear to have opened a Pandora’s Box of the Slashdot variety.

    Rate this comment: Thumb up 0

  5. 5
    B&W Nikes says:

    Greenspan City only plays elevator music. I’ll take the Pottersville jitterbug everytime.

    Rate this comment: Thumb up 0

  6. 6
    Brian in Seattle says:

    One other line stands out from that movie today. When George Bailey is frantically looking for the lost money in his office and talking to his assistant about how if they don’t find that money, it means bankruptcy and scandal. Contrast that with today when it seems like there’s no social stigma against bankruptcy at all.
    Want to declare bankruptcy? No problem, there’s no stain on your record, we will loan you money right after the court filing closes. And with LLC’s, its no one’s responsiblility.

    Rate this comment: Thumb up 0

  7. 7
    TJ_98370 says:

    When Mortgages Made Sense

    Rate this comment: Thumb up 0

  8. 8

    CHECK IT OUT ON GOOGLE

    Try to find out what the rich are investing in right now.

    The filthy rich are mostly investing in “Martha Stewart” type inside stock trading; like their own companies, that they have inside information about. Ask Bill Gates. The peon rich millionaires invest in more mutual/hedge funds.

    You didn’t hear me say real estate did you.

    But you watch, if there’s a stock collapse, the very rich are the first out of the market and the first back in when it bottoms. Same with real estate, the rich are like us Bubble Brains, waiting for the Bubble to collapse, then buy in.

    Same with “Its a Wonderful Life”, the rich bought at the bottom for bargains.

    Rate this comment: Thumb up 0

  9. 9
    Lake Hills Renter says:

    I prefer the SNL alternate ending where they kick the sh*t out of Potter. ;)

    Rate this comment: Thumb up 0

  10. 10
    Brian says:

    I agree with Brian in Seattle. Bankruptcy doesn’t give people the same black eye it used to. The reason phrases such as “keeping up with the Joneses” were created is because it has become more important to pretend you are financially secure than being financially secure. Of course credit card companies will continue to provide credit to those just walking out of bankruptcy court. Those are the perfect customers. You already know they can’t control their spending and will end up being in hoc to you within 24 hours. Who cares if they never pay their balance? They’ll continue to pay off a $50 purchase for 3 years. Plus, there is now a cushion for credit card companies in that most people have to file for Chapter 13 now, which means they still have to work out a debt repayment schedule. Not too shabby. Wouldn’t you rather get 50 cents on the dollar from someone (in addition to the 250% you’ve already gotten from interest charges) than 0 cents?

    Rate this comment: Thumb up 0

  11. 11
    rose-colored-coolaid says:

    The reason phrases such as “keeping up with the Joneses” were created is because it has become more important to pretend you are financially secure than being financially secure.

    Are you sure? I was certain it came from the movie “Indiana Jones and the Last Crusade”. You know, when Harrison Ford and Sean Connery were looking for the holy grail. The Nazi’s couldn’t find it themselves, so they figured they could get to it through the Joneses. But the Joneses were quick cagey guys, so it wasn’t easy.

    In short, doesn’t “keeping up with the Joneses” mean “agile action taken to maintain parity with an opponent thought superior by most observers?

    Rate this comment: Thumb up 0

  12. 12
    TJ_98370 says:

    .
    With reference to credit card debt, check out the film “Maxed Out”

    Synopsis

    Video

    Rate this comment: Thumb up 0

  13. 13
    Brian says:

    RCC: Sure, why not.

    Rate this comment: Thumb up 0

  14. 14
    MisterBubble says:

    RCC:

    No, sorry. “Keeping up with the Joneses” refers to the next door neighbors of Marion Jones. It is well-known that Ms. Jones is fast, but it is less well-known that her entire family is quite speedy, as well.

    “Keeping upwith the Joneses” == rapid movement intendted to outpace any individual propelled by illegal or illicit performance-enhancing substances.

    And that’s a fact.

    Rate this comment: Thumb up 0

  15. 15
    [troll] says:

    Wth rfrnc t crdt crd dbt, chck t th flm “Mxd t” … r rd “Th Ttl Mny Mkvr” by Dv Rmsy.

    nd n – prcs wn’t fll drmtclly. f y cntn t wt fr th “bst dl”, y wll ) nvr gt n th gm f rl stt, b) chncs r, y wll nd p pyng MR thn f y wr t by rght nw.

    Th wtng gm ds nt py ff. Nthr ds th tmng th mrkt gm. Th frst tctc mks y wnnb, nd cwrd wh s frd f cmmtmnt. Th scnd n gmblr.

    Ys, y cn dsgr wth bth sttmnts.< hrf="#" clss="rplyt" nclck="rplyt('33694','∓#91;trll∓#93;','15'); rtrn fls;">Rply – < hrf="#" clss="qt" nclck="qt('33694','∓#91;trll∓#93;','Wth rfrnc t crdt crd dbt, chck t th flm &ldq;Mxd t&rdq; ... r rd \&qt;Th Ttl Mny Mkvr\&qt; by Dv Rmsy.\r\n\r\nnd n - prcs wn\'t fll drmtclly. f y cntn t wt fr th \&qt;bst dl\&qt;, y wll ) nvr gt n th gm f rl stt, b) chncs r, y wll nd p pyng MR thn f y wr t by rght nw. \r\n\r\nTh wtng gm ds nt py ff. Nthr ds th tmng th mrkt gm. Th frst tctc mks y wnnb, nd cwrd wh s frd f cmmtmnt. Th scnd n gmblr. \r\n\r\nYs, y cn dsgr wth bth sttmnts.','15'); rtrn fls;">Qt

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  16. 16
    [troll] says:

    k – th 64000 dllr qstn – wh s t blm fr th sbprm mrtgg fllt _mr_ (’m nt syng sngly, jst wh d y blm MR):

    1) “wnrs” wh bt ff mr thn thy cn chw
    2) grdy bnkrs

    Jst wnn pll ppl t s th rlty…< hrf="#" clss="rplyt" nclck="rplyt('33695','∓#91;trll∓#93;','16'); rtrn fls;">Rply – < hrf="#" clss="qt" nclck="qt('33695','∓#91;trll∓#93;','k - th 64000 dllr qstn - wh s t blm fr th sbprm mrtgg fllt _mr_ (\'m nt syng sngly, jst wh d y blm MR):\r\n\r\n1) \&qt;wnrs\&qt; wh bt ff mr thn thy cn chw\r\n2) grdy bnkrs\r\n\r\nJst wnn pll ppl t s th rlty...','16'); rtrn fls;">Qt

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  17. 17
    The Tim says:

    Hey that’s a good question. I might steal that one for a sidebar poll. I am going to have to go with “owners,” because the banks wouldn’t have created the dangerous loan products if there wasn’t a good market for them.

    Rate this comment: Thumb up 0

  18. 18
    Buceri says:

    During the 90s a marketing genius told credit cards the they should reduced the required minimum payment to 2% of the balance…….and like they say, the rest is history.

    Rate this comment: Thumb up 0

  19. 19
    NotaBull says:

    “the banks wouldn’t have created the dangerous loan products if there wasn’t a good market for them.”

    And there wouldn’t have been a market for them unless the banks had created the product. Because the bank “won’t give you a loan you can’t afford”, the banks can create a market for anything they want…. Build it and they will come.

    Personally, I think the blame is to be shared by (in no particular order):

    -Banks and Wall Street, for creating stupid products that made them short term profits and bonuses.

    -Brokers for pretending to help borrowers, while at the same time getting them into loans they knew they couldn’t afford and would ultimately need to refinance out of (more commissions!)

    -The fed, for not regulating when the problem was occurring, and waiting until now to even admit there was a bubble and a problem with mortgages

    -Borrowers, for being fools and getting into mortgages they either knew they couldn’t afford, or didn’t bother researching. It’s not much more complicated than baseball, after all.

    -Real estate agents and the NAR for reinforcing this idea that prices can never go down, thereby reducing the risk in the minds of the borrowers.

    Rate this comment: Thumb up 0

  20. 20
    B&W Nikes says:

    As another option beyond buyers and loan originators, I’d add the middlemen who were personally placing risky loans for hyperinflated assets in the hands of purchasers and refinancers knowing that ultimately the long term costs could dispossess people of their equity. Example: the SeattleTimes story on the fleecing of Frances Taylor.

    Rate this comment: Thumb up 0

  21. 21
    Bits of Real Panther says:

    I would add investors to that list, the whole concept of CDOs is a joke. Many many pension fund managers are going to lose their jobs over this and rightfully so

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  22. 22
    NotaBull says:

    Nostra said:

    “And no – prices won’t fall dramatically. If you continue to wait for the “best deal”, you will a) never get in the game of real estate, b) chances are, you will end up paying MORE than if you were to buy right now.

    The waiting game does not pay off. Neither does the timing the market game. The first tactic makes you a wannabe, and a coward who is afraid of commitment. The second one a gambler. ”

    Where *do* you get this stuff from? Waiting to buy a house during a time when all indications by all measures show that prices will CONTINUE to go down is sound financial planning! In addition, I’m making more money from my down payment being in the bank than I would if I invested that in a house right now. PLUS, I can save a ton of money every month by renting.

    I won’t wait for the “best deal” because you never know when that will come. What I will do is wait for all indications to show that prices are near a bottom, or were at the bottom and have started to climb. I’d rather buy into a market that hit bottom and has gone up a bit, than a market that just hit top and is coming down.

    If you don’t understand why that is sound financial planning and insist on reducing this to some kind of chest-beating “you’re a coward!! BUY BUY BUY!” bullchocolate argument, then I feel more pity for you than I already do.

    It’s not gambling, it’s call “investing”. You know, that whole “buy low, sell high” thing. You may have heard of it…

    Rate this comment: Thumb up 0

  23. 23
    [troll] says:

    Ntbll – thnk y mssd my pnt, bt k, rpt yrslf lk prt.< hrf="#" clss="rplyt" nclck="rplyt('33706','∓#91;trll∓#93;','23'); rtrn fls;">Rply – < hrf="#" clss="qt" nclck="qt('33706','∓#91;trll∓#93;','Ntbll - thnk y mssd my pnt, bt k, rpt yrslf lk prt.','23'); rtrn fls;">Qt

    Rate this comment: Thumb up 0

  24. 24
    [troll] says:

    Tm – m t – th wnrs shld knw mth, prsnlly spkng :).

    Bt lt’s nt dscnt th bnkrs thr f th svr cntrbtry nglgnc thy brght bt thr….< hrf="#" clss="rplyt" nclck="rplyt('33707','∓#91;trll∓#93;','24'); rtrn fls;">Rply – < hrf="#" clss="qt" nclck="qt('33707','∓#91;trll∓#93;','Tm - m t - th wnrs shld knw mth, prsnlly spkng :).\r\n\r\nBt lt\'s nt dscnt th bnkrs thr f th svr cntrbtry nglgnc thy brght bt thr....','24'); rtrn fls;">Qt

    Rate this comment: Thumb up 0

  25. 25
    NotaBull says:

    Nostra said

    “Notabull – I think you missed my point, but ok, repeat yourself like a parot.”

    What’s a “parot”? Is it a coward that waits out the market and doesn’t buy immediately? Do I pronounce it like “tarot”, with a soft T at the end?

    Rate this comment: Thumb up 0

  26. 26
    Notorious says:

    MisterBubble,

    Hahahahaha, that’s what i’d call “Keeping up with the Joneses”

    Rate this comment: Thumb up 0

  27. 27
    deeplennon says:

    Notabull to Nostra:

    Where *do* you get this stuff from?

    Sounds like the words of someone who’s been to three too many get rich quick in real estate seminars to me.

    Rate this comment: Thumb up 0

  28. 28
    on topic says:

    I blame the Fed.

    If you believe in homo economicus, that all parties will act in their own self interest, buyers cannot be blamed because they were stupid and seeking profits and lenders could not be blamed because they were making mad cash by selling loans.

    the Fed was theoretically uninterested in the proceedings and should have acted to slow the bubble by changing lending standards or raising interest rates.

    theoretically, you could blame greed, but where would that get you?

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  29. 29
    notabull says:

    “the Fed was theoretically uninterested in the proceedings and should have acted to slow the bubble by changing lending standards or raising interest rates.”

    Simple and good old fashioned *regulation* would have done the trick. Sure, the low interest rates would have boosted prices a bit even with Potter-style underwriting standards, but it would have ended much more quickly than it did.

    Stop the “exotic” mortgages, return to standard DTI ratios, require *some* form of down-payment or insurance to cover the risk of low LTV, and require that borrowers demonstrate their capacity to pay.

    The three C’s of underwriting did not change – they just got ignored:

    Character (Creditworthiness)
    Capacity to Pay
    Collateral

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  30. 30

    I was in a real estate finance class recently where we argued that very question as who was to blame for the subprime crisis. I argued that it was the lenders to blame, it wasn’t simply meeting customers demands, but there was a lot of fraud where loan originators were filling in fraudulent data about the applicant’s incomes, vastly inflating it, and giving 400,000 dollar loans to people simply because they had a pulse.

    Rate this comment: Thumb up 0

  31. 31
    Markor says:

    I won’t wait for the “best deal” because you never know when that will come. What I will do is wait for all indications to show that prices are near a bottom, or were at the bottom and have started to climb.

    Then you are indeed waiting for the best deal, or close to it. The masses will be employing the same tactic, which is why it will take more luck than skill to pan out.

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  32. 32
    what goes up comes down says:

    So don’t try — go out and buy now or you will be priced out forever — Please note the sarcasm :-)

    Rate this comment: Thumb up 0

  33. 33
    Markor says:

    There’s nothing amiss with thinking prices are too high now, and so waiting. But those waiting for a market bottom should not be surprised if prices either don’t fall to that point, or fall past that point. Waiting for a market bottom or top is called market timing; it takes more luck than skill to be successful.

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