Sub-prime mortgages still plague the housing market. Real estate watch-dog Housing Wire, citing statistics compiled by Realty Trak, recently reported that "Lenders filed a record 3.8 million foreclosures in 2010, up 2% from 2009 and an increase of 23% from 2008." But 2011, they said, "could be even worse."
As the government ponders penalties, the banks and lenders continue to seek a scapegoat. In a twist of logic comparable to the man who kills his parents and then pleads for mercy as an orphan, the big banks, whose greed and reckless lending brought us the crash of 2008-2009, are now attempting to wiggle out of responsibility by casting themselves as the victims, not the home buyers who were duped.
On March 3, 2011 the New York Times reported that attorneys for the banks claim that helping homeowners facing default is "like taking money that should be paid to the Treasury and using it for an unappropriated social program." And the Bank of America, the nation's largest mortgage servicer, "is already readying what will be among the industry's main arguments: that it is unfair to reward homeowners who are delinquent or underwater but cannot point to specific errors in their case" These statements echo the rant of financial commentator Rick Santelli who blamed the victims. Back in 2009 on CNBC he charged that bailing out sub-prime mortgage holders was "...promoting bad behavior." He added, "reward those who can carry the water not those who drink the water." Other critics of homebuyers have likened a bailout to raising taxes on the whole population to cover the losses of gamblers in Las Vegas.
Shouldn't home buyers have known, say the accusers, that they couldn't afford a $400,000 home on a family income of $50,000 -- $60,000? Some did know. A predatory bank tried to convince Alex and his wife that they could afford a $330,000 home on their graduate student stipends. They resisted and purchased a starter home for $120,000. But the vast majority of sub-prime buyers were persuaded to make purchases well beyond their means by unscrupulous lenders who would stop at nothing to close a deal. These buyers were putty in the hands of the "tin men" (and women). "Tin men" is a nickname, for fast-talking unethical salesmen known for their skill at selling ice cubes to Eskimos. At one time they confined their activities mostly to selling home items door to door or through seductive cold-call sales pitches, but now they can be found in many industries -- including real estate sales and mortgage lending. The original tin men sold aluminum siding -- thus the moniker -- and they are brilliantly portrayed in the 1987 film Tin Men starring Danny DeVito and Richard Dreyfuss
"Tin men," as we shall soon see, played a major role in the sub-prime mortgage debacle. First, the back story.
I initially met real-life tin men when I worked as an encyclopedia salesman during my college years. Tin men from different industries drifted in and out of the office where I worked. Their pitches and "cons" were hilarious. A number of the classic examples are in the film. Here's a simple one that I love: A salesman is selling aluminum siding to a couple. He surreptitiously drops a ten dollar bill on the floor out of the couple's sight. Then he says, "Excuse me a second," reaches down to the floor, and comes up with the bill. "Oh, this must be yours," he says to the couple, handing it to them. Since they know he could just as well have slipped it into his pocket, the salesman's act of "honesty" inspires the customers' confidence -- a message of trust that gives a big boost to closing the deal
The tin men loved to exchange stories of their stings. Like vaudevillians, they had names for their routines. In "Inside-Outside Man" a salesman shows up for an appointment; he could be selling siding, a raised dormer, or any home product. He arrives at the family's house in a stretch limo. When the husband and wife open the door they look surprised to see the limo. The salesman explains: "The Vice President of the company is in town for a sales conference and wanted to sit in on my presentation. Would you mind?" Of course, they don't mind at all; they're flattered. The "Vice President" emerges from the limo. He is dressed to perfection and casts an imposing presence -- a central casting senior executive. At one point in the "pitch" the salesman shows the family a much more expensive product than they had originally looked at, and says "This is very expensive and the other product is almost as good." The "Vice President" jumps in and says: "Give it to them for the same price." The salesman shoots back, "But we'll lose money on the deal." The Vice President responds, "That's all right. 'Faker' Industries will pay for it as part of our promotion. Give it to them" The salesman looks stunned. Are you surprised that this quickly becomes a done deal?
Frank, the manager of the encyclopedia office, told me the premier tin man story "My People." Frank once worked for a carpet company that advertised "two rooms of carpeting for $79." There was no such product. The "bait and switch men," who got easy entry into homes with the advertised offer, were supposed to switch-sell to higher priced carpeting. But one time, the company got stuck with lots of the ad-priced orders. So they sent in the next tier of tin men -- the "conversion salesmen" -- to convert the $79 contracts to higher ones. The best conversion man in the business was known as "Harry the Snake." He closed a more expensive contract every time. Frank couldn't figure out how he did it. He asked the Snake if he could go out with him on one of his pitches. The Snake agreed. "Meet me on Church Avenue and Ocean Parkway tomorrow morning at 9 AM. Wear overalls and bring some tools and a tape measure. When we get into the home just start measuring the floors. Oh, and by the way, I'm Tony and you're Vito." (The family they were visiting was Italian. On other days they might be Morris and Abe or Juan and Jose.)
Frank and the Snake had no trouble getting into the home in Bensonhurst Brooklyn the next morning. The lady of the house was thrilled that the carpet installers were actually there so soon after the incredible sale. Once inside, "Tony" and "Vito" started measuring. Then at one point "Tony" (Harry the Snake) headed for the door and said, "C'mon, Vito, let's get outta here. I can't do this to a nice Italian family." The puzzled woman asked, "What's the matter?" Tony answered, "When they sold you this carpeting, they showed you the junk; they didn't show you the good stuff." He then pulled out a swatch of carpeting from his pocket. "This is the junk they sold you." He pulled on it and it disintegrated. Then he showed her a swatch of the "good stuff." Again, no surprise that the higher priced deal was soon closed.
Let's fast forward to the sub-prime mortgage orgy. "Harry the Snake" must have felt that he died and woke up in tin man's heaven. Now he's a mortgage broker at a respected bank -- one of the icons of corporate America. And he's the inside man -- suit, tie, and title: VP, Director of Finance.
Let's listen in as the Snake talks to Mr. and Mrs. Jones. The Joneses neighbors, the Smiths, whose income is the same as theirs, about $52,000 a year, just bought a house financed by Harry the Snake's bank. They were surprised; The Joneses didn't think their neighbors could afford a house, but there were the Smiths packing and getting ready to move.
Can Mr. and Mrs. Jones afford to do the same thing? The Snake assures them they can. "Yes, indeed, you can afford to buy this $380, 000 house." (The finance industry's rule of thumb is that the price you can afford is about 2.5-3 times gross income). He tells them that home values will surely keep going up and that the word "down" will soon be gone from our vocabulary. And he assures them that his distinguished bank will put its money where its exuberance is and finance the deal. The Snake shows them that the figures work -- with virtually no down payment and just interest only payments for the first three years: "And in three years when payments on the principle kick in and the adjustable rate mortgage (ARM) will be recalibrated to interest rates at that time [and as much as two percentage points higher for buyers like the Joneses with credit scores below 620], that won't be a problem. The value of the house will rise so much, and probably your income as well, that you will be able to raise money from the increased equity to cover all the costs." How could they resist this opportunity to latch on to the American dream, especially when it is backed by the full faith and credit of one of America's great banks -- and Harry the Snake?
When you are tempted to point the "j'accuse" finger at "irresponsible" sub-prime homebuyers think about all the Joneses across America and how they were shamelessly victimized by the army of Harry the Snakes -- and their banks and lenders who cheered them on.