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Showing posts with label Economics. Show all posts
Showing posts with label Economics. Show all posts

Sunday, March 30, 2008

If You Don't Get It, It Might Be A Joke

by Tanta on 3/30/2008 09:29:00 AM

Taking notice of the endless silliness in the political blogosphere is no part of the mandate of this blog, and we normally try to carry on with our main mission while pretending that we can't hear most of the background noise and cannot feel that terrier gnawing on our ankles. It has never, really, been that we're stupid; it was mostly that we didn't want them to come over here and ruin a perfectly good nerd blog. Political discourse in this country has been so poisoned for so long that we were quite attracted to the possibility of pretending that it wasn't there in case it decided to go away while we weren't looking.

However, I for one did argue, quite early in this mess, that 1) housing policy is political in this country and 2) financial crises are even more so and that therefore 3) whether or not it "should" be that way is immaterial; it is so. The housing bust and the debt bubble pop have been and are going to remain political footballs for the foreseeable future. The least we can do about that is insist that everyone get the elementary concepts right.

Let me therefore do my obligatory least by pointing out that this kind of thing just has to stop:

Apparently, a lot of foreclosed tenants like to trash the house before they leave. I don't get it. It's hardly the bank's fault that you can't make your mortgage payment. I mean, I understand the rage at fate that has pushed you out of your home and left your credit record in shreds--yea, even if you had a hand in that fate yourself. But I don't get pointless destruction.
I can't do anything about anyone who can't quite "get" vandalism, as if it had never existed in the world before middle-class homeowners got in over their heads with mortgage loans. (Really. I was "not getting" the point of cutting off the handset on pay phones and stealing the directory back in the days when we had pay phones and they cost a dime. I was therefore prepared to "not get"--or to "get," as it were--foreclosure "trash-outs," at the point they began to arise (again, in this cycle), since, well, it's a reusable conceptual paradigm thingy.)

But it isn't the not-getting of the "pointless" destruction that makes it less than completely pointless for us to examine this silly little blog post. It's that first sentence with the term "foreclosed tenants" in it.

I "get" vandalism a whole lot more than I "get" a self-described "economics blogger" weilding the English language like that. Which is to say, I suspect I do "get" it. And I don't approve of the latter any more than the former.

There has, for a long time now, been a certain persistent critique of a variety of boom-lending that went something like this: when you take an interest-only no-down-payment loan to buy a house at market price--that is, at anything other than a significant discount to market price--you are in effect, if not in fact, merely "leasing" the house from the bank.

This is a "critique" because, see, "secured lending" only really works when the collateral that secures the loan belongs to the borrower, not the lender. I suppose I could write you a loan that involved my promising to hand over an asset that I already owned to myself--that'll teach me!--in the event that you fail to pay me back as agreed. I'm not sure I could pass a licensing exam with an understanding of the process like that, but you never know.

So the critique came in on the grounds that 1) this is self-defeating for lenders and that 2) it is self-defeating for borrowers. I occasionally run into newbies to the financial world who demand to know why anyone would buy one of these "PO strips" or bonds that do not pay interest. They "get it" once you explain that such bonds are purchased at a "deep discount" to their par or face value. Of course their next question was always why people were using wacky subprime and Alt-A loans to buy houses at "par," and out of the mouths of babes came wisdom.

The point being that "foreclosed tenant" is not simply a curious misunderstanding of law and fact. It is, you know, a way to "get" the "pointless" behavior, if you apply any degree of attention to a contradiction in terms. Possibly some borrowers are coming to the belated recognition that they were, de facto, not much more than tenants who were paying well above "market rent," but the market no longer allows them to "sell" the "lease" to the next sucker, and the law does not allow them to simply forfeit the security deposit and move away. To be a "foreclosed tenant" is to live in the worst of both worlds.

It is possible, you know, that about-to-be-former homeowners understand these things better than self-anointed "economic thinkers" do. They begin to grasp that they had only ever been given a short-term lease on the "American Dream," not a piece of the "ownership society" pie. More than a few of them are very, very, crabby. This, I can "get."

What I also "get" is that here you have a classic example of where the rush to start making a list of people you don't have any "sympathy" for gets you: nowhere, fast. It always disappoints me whenever a thread on one of our foreclosure or predatory lending posts immediately degenerates into a lot of people writing the same comment repeatedly: "I have no sympathy for these people."

It has, actually, been hard for me to "get" why some people think that the first question to be established in any discussion of the real world is whether their own personal sympathies are engaged or not. You'd think I'd be more familiar with the profoundly self-involved than I apparently am, coming out of the banking industry, but there you are. Some entertainment can be wrested out of the situation by responding that I don't have any sympathy for people who don't have any sympathy for other people, but it's limited entertainment because we are often dealing with heads over which such a response tends to fly at a fairly high altitude.

The trouble is I do "get" it. I get why some people need to turn it all into a matter of which contestant is more conventionally attractive, sympathies-wise. The original point of the "joke" about borrowers with these dumb loans just "renting" from the bank was about puncturing the claims of a certain class of economists, who seemed ready to believe that a finance-based "ponzi" economy could go on forever, and that it ought to. If you require to have the joke "foreclosed" in order to defend against its implications for the kool-aid you've been drinking for years about the larger economy, not just real estate, then you might want to willfully misunderstand the point of making jokes. Namely, to see it as making fun of "contemptible" people rather than unmasking the contradictions in economic silliness.

Joking around actually has a long and storied history in the old, old project of arriving at conceptual clarity about important problems, you know. Jokes are not merely "transgressive" of a kind of stuffy demeanor of academics and legislators and courts of law and so on, although they do have an invaluable function in ratcheting down the pompousness to tolerable levels. Jokes are, in fact, often funny because they fail to "resolve" or paper over real contradictions and conflicts: the joke drags it out into the light of day, and leaves it to squirm while we all laugh. We are all subprime now. Is a joke. With, as they say, more than a bit of "truth" in it.

It is of course not always easy to distinguish between a joke and a bog-standard stupidity. We touched on that the other day with the Zippy Tricks. Sometimes the joke actually arises when we find the naive or uninformed or logic-impaired coming up with an inspired phrase like "foreclosed tenants."

Sometimes people feel like they're being "laughed at." That, say, the joke's on them. It has been known for them to get very, very angry. Enough, say, to knock holes in the drywall and rip out the plumbing before following one's belongings to the curb.

Those whose only understanding of humor is to ridicule the victim--not to deflate the hot air filling the designers of this doomed system--will never quite "get" why the butts of the joke become so "pointlessly" destructive. Those humorless souls who do not see an appropriate role for humor in intellectual critique--who really just have to say that this is too serious for such lightmindedness, tut tut--will fail to grasp the overall dynamics of the situation from the other end of it. Between those who have no sympathy for others and those who have only sympathy--syrupy, patronizing, Sunday School-tract simple-minded sympathy--it's a wonder you can get a good joke going some days. Not that I've ever quit trying.

It is within the realm of possibility that some folks engaging in "trash-out refinances" are, well, making the point that the joke's on you, Mr. Bank. You might consider it a kind of performance art of the gallows-humor subgenre. I do think it's a usual expectation that people who write for outfits with the pretensions of The Atlantic are, frequently, expected to try to "get" that. We call these attempts to try to "get" such things intellectual effort. Expenditure of this kind of effort is way harder than, well, just asking yourself if you feel sorry for someone today. Or yukking it up at someone else's "expense."

Saturday, March 15, 2008

The Economics of Trust

by Tanta on 3/15/2008 09:30:00 AM

Yves at naked capitalism has a great post up this morning on Character and Capitalism. I strongly recommend Yves' post and the Steve Waldman post as well.

Two anecdotes to add to the mix: back in the 90s I found myself at some manager compliance training session at my stuffy regional midwestern bank. The compliance officer was talking about the corporate policy of running credit reports on job applicants. The rationale was that, well, you don't hire people to handle other people's money all day if you have reason to believe they are personally desperate for money.

The human resources manager was there, and at that point she let out a loud uncontrollable guffaw. Challenged, she responded that yes, the HR department does order the credit reports as policy requires. They put them in the file, as policy requires, and get on with hiring people anyway. "Are you aware," she asked the compliance officer, "what we pay tellers and accounting clerks? If we didn't hire people who really needed the money, we wouldn't have anyone to hire."

A few years later I was in some meeting of the CRA Committee (Community Reinvestment Act), wherein we were examining the proposed guidelines for a low-income lending initiative. There was some resistance to the loan program based on the fact that borrowers with incomes as low as 50% of the area median could qualify. Grumbling about having to make loans to "poor people" ensued. My boss pointed out that over half the rank and file in his department who would be actually handling these loans--reviewing the loan files, preparing them for the servicing system, delivering them to custodians and investors--were paid 50% of the area median or less. Henry Ford might have figured out many decades ago that you need to pay your workers enough that they can buy your product, but that lesson was lost on the banks.

Friday, November 23, 2007

We're All Subprime Now

by Tanta on 11/23/2007 09:20:00 AM

A little cognitive dissonance with your coffee from The Arizona Republic, via our friends at Housing Doom:

The Valley's growing foreclosure problem is hitting the upper and middle class the hardest.

Metro Phoenix homes in neighborhoods where prices range from $400,000 to $450,000 now have the highest foreclosure rate. . . .

All segments of the Valley's housing market have been hurt by falling home prices and rising interest rates and payments on adjustable-rate and subprime mortgages. But the problems are worse for homes in the $400,000-to-$450,000 range because many speculators bought in those neighborhoods, some families moved up beyond their means, and the recent credit crunch has made getting mortgages for more than $400,000 tougher. . . .

"The two groups of homeowners hit the hardest now are investors and those who overextended themselves," said Jay Butler, director of realty studies at Arizona State University's Morrison School. "That's why more people in higher-end neighborhoods are struggling now."

Also, there are more loan programs to help lower-income homeowners, while fewer lenders are eager to make loans above $417,000. Mortgage giants Fannie Mae and Freddie Mac are restricted to mainly [sic] investing in loans below $417,000.

"Often, people with lower incomes are better prepared to survive tough times and look for help," Butler said.

"People with higher incomes and bigger homes have a harder time telling neighbors and co-workers they can't afford their mortgage anymore."
Let's skip over the part about how those poor folk with no pride are "better prepared" than their wealthier brethren who face the horror of admitting to their equally overextended peers that they're in the same boat as the working poor but like to pretend otherwise. We have to skip over that part because it's still a holiday weekend and I don't need to get that cranky today.

Let us, instead, ask ourselves what constitutes the "upper and middle classes." If they "moved up beyond their means," then . . . their means are what, exactly? If 100% or near 100% financing is required to keep these neighborhoods stable (loans over $400,000 for houses in the $400,000-$450,000 price range), then in what sense are they neighborhoods of the "upper and middle classes"? Does our current definition of "middle class" (not to mention "upper class") include having insufficient cash assets to make even a token down payment on a home? Things seem to have changed since I did Econ 101.

What is the utility of this kind of thinking?

Homeowner's Insurance: Risk Shifting

by Tanta on 11/23/2007 08:32:00 AM

From the New York Times:

“It was a kind of avuncular, sleepy line of business,” said William R. Berkley, the chief executive of W. R. Berkley, a commercial insurer in Greenwich, Conn. “Then losses started to outstrip even what investment income might have been able to make up.”
Yeah, yeah, that's what we used to say about the mortgage business.

Now what would really be cool is if all those people who took over risks from their insurers also had ARMs . . . wait . . .

Tuesday, September 25, 2007

A Clockwork Mortgage

by Tanta on 9/25/2007 10:51:00 AM

I made an idle threat a while ago to write something about the negative convexity of mortgages--and options theory generally--but I haven't gotten around to punishing you all like that. I looks like I should. Exhibit ZZ in my never-ending war on "economist-underwritten loans" showed up this morning, courtesy of our WaitingInOC, and it's a doozy: "Surprise: Toxic Mortgages Are the Best."

This is a summary of an academic paper by professors Tomasz Piskorski and Alexei Tchistyi, the full text of which I don't have. If any of you do and feel the need to forward it on to me, why, go ahead. It has to be more fun than a sharp stick in the eye. What I can glean from the Reuters paraphrase suggests that it's about a massive campaign of borrower re-education designed to convince you that giving up your option to prepay and your fixed rate protection in exchange for a couple of nickels of interest is in your best interest, since investors who suddenly experience positive convexity with MBS--it's like perpetual Christmas morning--will give up all the resulting price gains in rate concessions to you, and interest rate cycles will be repealed. Or something. Remember that I am working with a summary here.

Right now is not the moment for the major UberNerd treatise on convexity, so suffice it to say that the main issue is the imbedded options in mortgage loans. In options theory terms, a mortgage gives the borrower a put (the right to default or "send jingle mail") and call (the right to prepay the mortgage with proceeds of a refinance or any other funds). Although both options have costs--especially if you have a prepayment penalty on your loan--those costs can end up being much lower than the cost of keeping your current mortgage. Because the "strike price" of these options is so heavily dependent on local and national economic conditions, interest rate levels, and home price changes, it is notoriously difficult to predict for any given borrower over any given stated loan maturity.

The lender, on the other hand, is "long a bond, short an option." Mortgages cannot be called or accelerated by the lender, except in case of default. No lender can make you refinance (although loan terms can certainly be created that will make you see that as your best option). If you are given a 30-year fixed rate, the lender must allow you to keep that rate for 30 years, even if it subsequently becomes uneconomic for the lender, as market rates rise and new investments would return more. On the other hand, if market rates drop, you may exercise your right to prepay, which means that the lender loses your old higher-rate mortgage and must reinvest its funds at new, lower market rates.

All this produces some difficulty in valuation of mortgage securities, since mortgages have a tendency to prepay at the worst time for the investor and to extend durations--stay on the books--when prepayments would be best for the investor. The mortgage origination industry--as distinct, here, from the investment community--has a lot at stake in making refinances fast, cheap, and easy, as each new loan is a new fee opportunity. But the lower the option cost of the borrower's "call," the less valuable the loan is to the investor (and servicer). Prepayment penalties have become, basically, an attempt to put the genie back into the bottle.

We think of the ARM mania so much in terms of payment "affordability" that we forget why lenders like them: the idea of an ARM is that, subject to some lags due to adjustment frequency, caps, index volatility, and so on, the ARM is designed to keep "repricing" itself to current market rates. Theoretically--and we are definitely in the realm of theory here--ARMs obviate the borrower's refinance option because a refinance would offer no better rate, as long as the ARM is "at market" at any point in its life and the refi rate is "at market." In the real world, of course, we've created enough "inefficiency" here with teasers, discounts, "lagging" indices, long adjustment intervals, and cap structures to make sure there's still--or there was until recently--plenty of incentive for borrowers with an ARM to refinance. Not coincidentally, we have used the best technology we can buy to make refis fast and cheap in terms of transaction costs, which we're perfectly happy to finance if even low upfront costs bother you.

"Until recently" is a way to speak volumes about the flaw in this plan: the refinance option depends as much on the value of the collateral as on the availability of cheap, easily-obtained mortgage money, and we have a little bit of a problem right now with that. As the LTV rises on a loan, that other option, the borrower's "put," gets a whole lot cheaper for the borrower and more expensive for the lender. Theoretically, the "perfect" loan, for the investor, would be one with no or minimal options for the borrower to call or put, and with a rate adjustment mechanism with very short reset invervals, large caps, and a highly sensitive (not "lagging") index. This ideal loan would prohibit prepayment or make it terribly expensive, and also allow the payment to fluctuate such that borrowers in a bit of an income or expense jam are less tempted to put the thing back in periods of home price declines.

Well then why, you ask, have we not invented this perfect loan? Apparently we're nearly there:

If you had to name the most toxic, dangerous, foolhardy kind of mortgage loan that exists, you'd very likely pick a pay-option ARM, which lets borrowers get deeper into debt by paying less than the minimum interest they owe each month and adding the unpaid interest to the loan principal. Worse yet, you might say, would be a pay-option ARM with a very high penalty for prepayment so borrowers can't get out of it easily once they're in it. There's a move afoot to ban these worst-of-the-worst loans.

Guess what? The worst is actually the best.
It's the best, not the perfect, because even though we've managed to stick the most onerous prepayment penalties on these loans that the law allows, we have yet to find a legal way to extend them to the life of the loan at a high enough penalty rate to make Option ARMs permanent loans. If we did that, you see, these things would be a fabulous deal; we would need only to "educate" borrowers about how giving up options is handsomely repaid in lower interest rates forever, and we're nearly there.
If the optimal loan really is better for homeowners who behave rationally, maybe it makes sense to get people to behave rationally through extensive, even expensive, consumer education. In an interview, Piskorski told me that by his rough calculation, the benefits of the optimal mortgage vs. a conventional mortgage amount to a least half a percentage point of interest -- namely, $50 billion or more a year for the U.S. as a whole. In other words, you could devote many billions of dollars a year to consumer education about these misused-but-potentially-valuable loans and still come out ahead.
Anyone who can determine who "you" is in that last sentence wins a free subscription to Calculated Risk. When dollars are being proposed to be spent, it is always wise to ask whose those dollars are.

And why are Option ARMs, in a perfect world, "optimal" for borrowers?
-- The option to pay less than the minimum monthly interest owed on the loan is valuable for people with good self-control whose income fluctuates a lot. They can pay just a little in lean months and catch up in fat months. It's good for lenders, too, because they don't have to foreclose on people who fall behind, which is an expensive process. People with steady incomes don't need this feature, but having it doesn't hurt them.
We must, of course, leave aside "good self-control," because that will undoubtedly be covered in "our" training program. We will have to content ourselves with asking how, in a perfect world, incomes "fluctuate." In some tight band around a mean to which they revert? In that case, why would you not qualify the borrower at an interest only payment at the "bottom" of the band, allowing for sporadic principal payments when times are "fat," but preventing negative amortization? Perhaps we are really talking about incomes that never quite "fluctuate" up to where they need to in order to retire the debt? And how does this option not hurt people who don't need it, when it comes at the cost of losing the right to prepay and the inflation-protection of a fixed rate?
-- The fact that the loan is an ARM -- namely, its rate fluctuates with market interest rates -- is especially valuable to lenders. This is a subtler notion, but the idea is that if there are going to be a certain number of defaults in a pool of mortgages because of random bits of bad luck like a job loss or a divorce, the lender would prefer that they be concentrated during periods of high interest rates. Why? Because when market interest rates are high, the lender that forecloses and gets back (most of) its money can redeploy the cash in high-yielding alternatives. The lender would prefer not to foreclose and get its money back when rates are low and other options are unattractive. An ARM loan achieves what the lender wants. Borrowers, meanwhile, are neutral about whether they default in periods of high or low market interest rates.
So "lenders" don't want to foreclose because it's expensive, except for the fact that apparently investors would like to see foreclosures happen when rates are high. Whether the additional cost of foreclosure in a high-rate environment doesn't offset reinvestment gains is a good question. All that high past-due interest has to be recouped out of the liquidation of the REO, and there is a theory about connections among RE values, marketing time, and high interest rates, you know.

Similarly I'd like to know why borrowers are "neutral" about default in various rate scenarios. But I am most interested in the idea that lenders wouldn't want to foreclose on an ARM when rates are low. It's, um, an ARM. Why would the rate on a new loan be lower than the rate on an existing ARM, in our perfect frictionless world? If there is in fact some friction here--the ARM rate is still higher than market in this falling rate environment--then where is this "discount" that these consumers got in exchange for giving up the refi option?
-- Finally, the economists say the optimal loan contract would outright ban getting a new loan from a different lender. There are no such bans. But they say that the prepayment penalties that are common in subprime loans are a good second best. How could that be? Because lenders will offer more favorable terms if they know that they'll be able to hang onto the loan long enough for it to be profitable. If they fear that the borrower will refinance at the drop of a hat, they'll give less favorable terms.
OK, guys. What are "more favorable terms" on an ARM? I mean, you do not have to have the cynical response that lenders who know you can never get out of the contract will be motivated to extract as much out of you as possible short of forcing you into foreclosure to wonder where the deal comes in without the offer of a fixed rate.

The problem with those subprime ARMs, of course, is that while the borrowers did get a "discount" on the initial rate in exchange for that prepayment penalty, it is not at all clear to informed observers that it was much of a discount: you have to rule out the possibility of predatory lending, and assume perfect pricing of credit risk, in order to say that no borrower got a "discounted" subprime ARM that involved a higher rate than that borrower would have paid on an undiscounted FHA fixed rate. You also have pretend we haven't been having a major affordability problem with home prices in order to understand rate discounts as something other than "qualification" games, or simply a matter of rate concessions the lender makes solely because the alternative is no loan at all if you have to qualify at a "market" interest rate. A "teaser" is not a simple discount in exchange for a prepayment penalty; it's a means of getting you into a loan you cannot afford, because lenders who do not own the loan forever just want to make lots of loans.

You can, of course, assume anything you want in a "perfect world," but I notice these helpful economists are not proposing a massive educational campaign designed to teach lenders and servicers and investors not to be greedy, sociopathic cretins. We are proposing that "we" spend "our" money to teach "you" to understand that what is in our best interest--all the options on our side, none on yours, except your "option" to get deeper in debt each month--is really in your best interest.
Says Piskorski: "Obviously people are to some extent irrational. But if you want to ban this type of contract, you should really weigh the benefits and the costs. How much could you educate people? Make people understand them. Provide them with software. Make a federal law that requires the lender to reveal what this contract is about."
In other words, we need to keep our toxic products but fire these irrational borrowers, replacing them with some trainees who can be brought to have more rational points of view. I suggest issuing this software with applications for Social Security Numbers; as soon as you begin to work for money, you should begin the process of understanding how to become contributing members of the "free market" by handing over your "pricing power" and behaving the way the rentier class wants you to.

I am not, of course, suggesting that there's no room for improvement in borrower education. I certainly don't think your "refi options" are always more about saving your money than about handing over fees to an industry that loves to "help you out." Nor do I claim that these academics are mere useful tools of the mortgage industry. However, I am reaffirming an old conviction of mine: there is no fruitcake like academic fruitcake.

Saturday, September 08, 2007

Reich on Moral Hazard

by Tanta on 9/08/2007 04:18:00 PM

From Robert Reich's blog (Hat tip, Yves):

One day while sitting on a beach last summer I overheard a father tussle with his young son about whether the child was old enough to take out a small sailboat. The father finally relented. "Go ahead, but I’m not gonna save you," he said, picking up his newspaper. A while later, the sailboat tipped over and the child began yelling for help, but father didn’t budge. When the kid sounded desperate I put down my book, walked over to the man, and delicately told him his son was in trouble. "That’s okay," he said. "That boy’s gonna learn a lesson he’ll never forget." I walked down the beach to notify a lifeguard, who promptly went into action.
Reich has some interesting comments on our rather different treatment of risk-taking by corporations and risk-taking by individuals. The whole thing is worth reading.

I am increasingly troubled by a take on the "moral hazard" problem that sounds to me, ultimately, like a kind of moral extortion. This is the old argument (it has been used before now against any "safety net" provision) that nothing will stop people who are not "needy" from finding a loophole through which to exploit the safety net, and therefore it will have unintended negative consequences. So we should not offer it at all, because while the needy will be helped, the unneedy will also be helped, and this, the argument goes, is an unacceptable outcome.

What this is, of course, is a threat, not a prediction: a way of threatening to make us end up with a politically unpopular "free rider" program by promising to free ride on it before it gets started. It seems quite clear to me that the argument really isn't about "moral hazard," since in order for it to be about preventing hazards there has to be, as Reich notes, a much clearer ability for people to assess certain risks. In other words, the more sophisticated, informed, and powerful the risk-taker, the larger the moral hazard, because that risk-taker can both see the risk and see the potential bailout, which may not be all that obvious to the less well-informed. (Just ask your average homeowner if he or she sees FOMC minutes as a potential backstop against the risk of taking out a home equity loan. You might have to explain what FOMC is first.)

Would I call the lifeguard if I saw a parent apparently willing to let a child drown in order to "teach that kid a lesson"? Yes, and then I might call the police next. It seems to me that there is a certain hazard to that kind of morality.

Is it a useful analogy for the mortgage mess? Well, insofar as lenders should be expected to know more than borrowers do, and thus exercise some reasonable restraint in making loans, then, yes. On the other hand, infantilizing other adults is rarely helpful, in my view. The parent-child analogy gets you bogged down in worries over "paternalism" or "nanny state regulations" that, I think, have more emotional than rational content.

Even worse, though, this analogy calls to mind the infuriating comment Angelo Mozilo--the Tanster himself--made a while back about high-risk lending:
"First-time home buyers were begging us to make them loans because they thought home values were going up significantly, and so they put a lot of pressure on us to make them loans," he said.
Yes, we lenders are just long-suffering parents who finally succumbed to those wheedling, whining children who pestered us until we gave in. Now, the children should blame themselves for their predicament. Sure.

Strangely enough, Countrywide has not yet erased from the web this 2003 presentation, by one Angelo Mozilo, on Countrywide's "mission" to provide "outreach" to first-time homebuyers, with low-downpayment mortgages and flexible underwriting guidelines. I don't know about you all, but I've always thought "missionaries" were the sort who brought their gospel to the heathens, not the ones who were forced to re-write their gospels in the face of intense heathen-lobbying. The very concept of "outreach" implies that they are inhibited from coming to you, so you must go to them. It works well in drug-abuse interventions. It appears to have a possible problem when you apply it to mortgage lending.

Letting "them" founder, in my view, is not "tough love." It's self-serving rhetoric designed to retrospectively shift the real "risky behavior" onto those of whom advantage has been taken, so that they become the ones who need to be "punished" to remove the "moral hazard." I think it's a rhetorical trick that we could usefully resist.