Tuesday, May 19, 2009

Into thin air

On May 14, The New York Times printed Edmund Andrews’ article about embracing massive debt. I have six thoughts on this.

First, I don’t see how anyone can claim this is a story about predatory lending. To me, predatory lending assumes a certain lack of sophistication, intelligence, and/or education on the part of the borrower and a certain amount of misleading on the part of the lender. Andrews is an economics reporter for The New York Times and as Conor Clarke points out certainly seemed to understand the costs of borrowing more money than you can afford in order to buy a home. As for the lender (Bob), he didn’t mislead Andrews in any way. Although Andrews skims over the process, it seems clear to me he wound up talking to Bob because Andrews and his real estate agent both knew he’d never qualify for a “normal” mortgage. Once contacted, Bob made it clear that obtaining a mortgage would require withholding pertinent information (emphasis mine):

But given my actual income after alimony and child support, I couldn’t possibly have qualified for a standard mortgage. Bob’s plan was to write a “stated-income loan,” or “liar’s loan”,” so that I wouldn’t have to give the game away by producing paychecks or tax returns.

When Bob’s first attempt at this type of loan failed, Bob explained exactly why this had happened: the underwriters determined Andrews was carrying too much debt. Instead Bob got him a loan which allowed him to withhold even more pertinent information. There was a higher interest rate but Bob reassured him that his home’s value would go up and he could refinance.

Bob was right. After a year and a half the house had gone up enough in value to allow Andrews to take out a home equity loan which Bob told him up front would be “really ugly”. Why did Andrews need this home equity loan? Because he’d buried himself in credit card debt. So instead of thanking the mortgage gods that he could buy the house at all, cutting expenses to the bone, preserving his good credit score, and being able to refinance the house at a good rate when its value went up, Andrews spent money like it was water and relied on the increased value of his house to cover his credit cards.

There is no doubt this was stupid on Andrews’ part but he knew and understood exactly what he was doing. No one can believably claim otherwise. As for Bob, he did not mislead Andrews at any point. Do I think Andrews should have been able to get the loans he did? No. I believe the law should require that buyers put 20% down on a mortgage and that the monthly payments on their mortgage should not exceed more than 25% of their income. Home equity loans shouldn’t change those figures. So it should be illegal for Andrews to borrow and Bob to lend the way they did. But it’s not. It is in fact perfectly legal and everyone went into this situation with their eyes wide open.

Second, the article reminds me very much of Jon Krakauer’s Into Thin Air, a book about a lot of people who should have known better trying to climb Mount Everest under the auspices of a lot of guides who should have know better. The book is a horrifying tale of people endangering themselves and others to feed their greed. The climbers’ greed was for glory, for bragging rights, for achieving something they had not earned. How different is that from Andrews’ greed for a nice home, a beach house, dinners out? Not very. And Bob the mortgage guy is not so different from the Everest guides who did nothing illegal and were totally upfront about the fact that there was risk involved but must have known they were putting their clients in a terribly dangerous position.

Similarly, I found Into Thin Air un-put-downable but I hold the author in contempt as a human being. Although not as strong - Andrews’ little adventure didn’t actually kill people - my reaction to his story and him are the same. As Althouse put it:

It was a readable article. I'll give him that. But I wanted to smack him.

Third, I won’t buy the book Andrews has written, for which his NYT article is just a teaser. I’ll read the book, just as I read and reread Into Thin Air but I won’t contribute to bailing Andrews out of debt by paying for it. Althouse says she “felt aggressively hostile to giving Andrews any attention.” I feel aggressively hostile to giving him any money.

Fourth, I’d like to know how Andrews is doing in five years. I’m assuming he’s counting on the book to get his head above financial water. It will be interesting to see if it does so or if he continues to see every hope of increased income as a reason to run up still more debt.

Fifth, when people make the argument that getting married, staying married, and having kids in a stable marriage is the best way to avoid poverty, I tend to think they’re talking about the poor, uneducated, and disadvantaged finding it easier to escape poverty by following this advice. Based on Megan McArdle’s thoughts after reading Andrews’ book, though, it’s pretty clear Andrews’ slide into financial hell began when he divorced his wife; his inamorata, Patty, divorced her husband; Andrews and Patty got married; and “Andrews took on the obligation to support two adult women and, by [McArdle’s] count, six children.“ Clearly a messy personal life is not just a recipe for staying poor; it’s also a good way to get poor.

Sixth, I’d really like to hear some other versions of this story. Andrews’ first wife and Patty’s former husband would provide an interesting look at what their financial lives looked like prior to breaking up and reforming the families.

As for Patty, she comes off pretty badly in the article. I’d love to hear her view of what was going on as they spent more and more and had less and less. Maybe if Andrews’ book isn’t enough to get them out of debt, Patty can give it a try.

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