Rethinking Debt: Deadbeat Creditors
It’s all in the way you think about it. Debtors or victims? Creditors or usurers?
The ancient dance of debt and credit has changed partners and its moral compass through 4000 years of recorded history. Humanity has had an ambivalent relationship to debt since civilization began. The current battle between borrowers and lenders reveals the age-old struggle shows no sign of abating.
The New York Times published a remarkably biased report entitled, “Debts Rise, and Go Unpaid, as Bust Erodes Home Equity,” on the growing phenomenon of Americans “choosing” to walk away from debts. Far from “all the news that’s fit to print” the yellow journalistic tone of the article makes one wonder whether writer David Streitfeld and the New York Times were fronting for bank lobbyists. Streitfeld writes that defaulting homeowners “prefer” bankruptcy to honoring their contracts.
Of course this reasoning is so logical, as we all know how simple it is to declare bankruptcy. Just become a prisoner for the next 20 years of your consuming life and it’s basically a walk in the park! (Perhaps he was thinking of Central Park at midnight.)
The normally fair-minded Marc Gunther who pens a column on sustainable business followed up the Times article with more borrower bashing in an article entitled simply, “American Deadbeats.” Gunther wrote while he doesn’t mind paying for his sunroom, he doesn’t want to pay for yours too. In his blog, Gunther pontificates on the moral hazards of unemployment and defaulting on debt.
The housing meltdown is, needless to say, still with us today. It’s the single biggest reason why millions of Americans are unemployed, people aren’t spending and the economy remains choppy, at best. It’s also a cause of what, at the risk of sounding like a fuddy-duddy, looks to me like an erosion of moral values, as many thousands of borrowers simply refuse to pay what they owe.
Simply refuse to pay what they owe? Who? Where? What?
Never mind that being unemployed might lead to a tragic inability to pay ones debts, not by choice, but by no choice. Gunther notes the source of the economic crisis is the housing collapse, yet rather than sympathize with those whose incomes have evaporated and find themselves overwhelmed by debt because of it, he judges their state harshly as a willing abandonment of American “moral values.”
Neither of these articles acknowledges the economic suffering going on in Middle America. People are struggling to stay in their homes, struggling to keep the lights on, struggling to find work, struggling to feed their families. They are literally struggling to keep themselves alive and not shoot themselves in the head due to long-term joblessness and continuing threat of homelessness.
How did they miss that? Is the New York Times so cushy a job that the economic despair of the nation can go unnoticed?
Sure let’s make the victims of the housing collapse—the underwater, unemployed, overextended— the source of the problem. Why not, victimize the victim? Isn’t that a brilliant tool of defense used by many abusers? Doesn’t a rapist say of his victim, she wanted it? Essentially that is what these folks are saying. Debtors are walking away from their homes, because they want to go bankrupt? Excuse me, but what ordinary person (not corporation) wants to go bankrupt? I don’t know any.
In the NYT article, Streitfeld portrays borrowers unable to repay debts as “unwilling” to pay. He uses quotes from a Phoenix attorney Christopher A. Combs who teaches classes on foreclosure and claims, “Mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats.”
Firstly, any lender who was reckless enough to issue a loan at 4 times a person’s income was knowingly spinning a roulette wheel. Chances are the “lender” sold the unstable loan to Wall Street underwriters for a fast and fat premium. Wall Street sold it back to mom and pop pension funds for an even fatter premium. No one held the loan for a more than a few weeks. Now who do we feel sorry for?
Secondly, I don’t know too many Mom and Pops with 80k incomes who own yachts, do you? More likely, “mom and pop” took out equity loans to send their kids to college, fix a leaky roof, or pay for their liver transplant.
A little due diligence on Times “expert” Combs, reveals he is part of “CAI,” a group of Arizona bottom-feeder lawyer lobbyists making big bucks from foreclosures. Mr. Combs claims that settling debts for less than the full amount of the loan “rewards immorality.” I guess he would know.
Streitfeld’s second “expert source” is a collection agent who makes his living squeezing pennies out of down and out debtors. A vulture capitalist who pays $500 for $20,000 loans from lenders, any amount Clark Terry extracts from the misery of others is worth his time. Never mind that the borrower and he never willingly entered into a contractual agreement. Parasite Clark somehow feels righteous enough to preach to the fallen. As he pounds the nation’s struggling unemployed and foreclosed with thousands of legal threats and phone calls a day, Clark opines, “Americans seem to believe that anything they can get away with is O.K.” Yes indeed.
Even more peculiar was the fact that two of the three borrowers depicted in the article were not “mom and pops” at all, but savvy real-estate investors who walked away from investment properties. A real-estate agent who defaulted on one of his properties said, “I am not going to be a slave to the bank.”
Perhaps an investor has the choice not to be enslaved to a bank, but ordinary homeowners do not. Anyone who lives in a community where their kids go to school, their friends and family live and where they have put down roots for a life cannot just walk away from an underwater property. First of all, that investment is their home, not a dispensable luxury. Secondly, if they declare bankruptcy or default on their mortgage, who is going to rent to them with trashed credit?
For many “mom and pops” loss of income, a family business and long-term unemployment has become a nightmare of debt enslavement from which there is no escape but bankruptcy or default. You don’t walk away from a home even if its value has decreased if you have no place to go. Bankruptcy limits one’s options for home and job severely – even in post-financial crisis America.
While it would be easier to believe that debtors are “choosing” to walk away from underwater homes, more likely than not, those losing their homes are trapped in a living hell. Foreclosure destroys marriages, families, neighborhoods, communities, careers and lives. It undermines the very foundation our nation is built upon – home ownership and hard work.
While Streitfeld and Gunther call defaulting debtors “deadbeats” and “immoral,” these people are actually our unemployed neighbors and friends who have been caught up in a mortgage securitization Ponzi scheme they could never have foreseen. The sad truth is that many defaulting borrowers have been caught in an ancient struggle for 21st century survival.
Debt slavery has a long history in human civilization dating back four thousand years. Back in the day when one’s collateral was his or her own labor, things went from bad to worse for debtors. Ancient Mesopotamia just south of Hammurabi’s kingdom was the birthplace of the first recorded “Wall Street” and home to a thriving debt slavery industry.
According to Yale’s financial history wizard, William Goetzmann (and contrary to the common belief that only American consumers have gone to borrowing hell), the ancients were living their own credit and debt nightmare.
Time is money and the ancient lenders figured out what modern finance understands all too well—your time and your money equal my profit. Evidence of a complex lending and loan trading industry in the Sumerian city of Ur (circa 1800BC) reveals that the oppressive system of credit and debt that evolved four millenniums ago has remarkable parallels to our modern credit-based economy.
Ancient bankers paid low interest on deposits and charged large interest for credit. Legal interest rates were limited to 20%, but savvy lenders figured out how to circumvent the rules and charged the limit on a monthly basis. (Congress circumvented interest rate limits in 1978. In the U.S., the sky, literally, is the limit on interest.) Lenders borrowed silver mina from the Temple at 20% over five years (3.78% annually) and made short-term loans to ordinary folks not fortunate enough to access Temple funds. (Nowadays big banks borrow from the Fed Discount Window under 1% and lend it to you at 29%.)
Longer-term loans were issued generally over five year periods based on a person’s future production. Debt was commonly sold and borrowers were often obligated to repay someone they never met. (This is 2010 practice as well.) A largely agricultural society, borrowers offered future crops as collateral. Fisherman borrowed against the day’s haul. If crops or fish did not manifest, borrowers pledged their freedom in return for necessary credit. In Ancient Mesopotamia, you could borrow from your neighbor and ultimately be enslaved to your worst enemy.
The ancient system of credit was a matter of survival. The uncertainties of nature could force hard-working people into debt. Floods, droughts, storms, insects, earthquakes and natural disasters could result in a debtor and his or her family becoming slaves of creditors.
The system of debt and credit quickly became a destructive force of oppression in Sumerian society. At one point, more citizens were slaves than were free. Just like the U.S. today, Ancient Sumerian society could not function without the free flow of credit. So the Babylonian King, Rim-Sun had no choice but to cancel all the debts. Creditors were not happy, but debt slaves were freed and the Ancient City of Ur flourished once again.
Debt Slavery in America
It is time to understand that the system of debt and credit in post-subprime mortgage America has become a destructive force of oppression in modern society. Many debtors in today’s economy are victims of the outrageous and callous actions of a few hundred thousand mortgage brokers, lenders, underwriters, securitizers and finance pros. I hate to break it to Mr. Gunther, but we are already paying for the sunrooms of several thousand CDO traders as well as their Porsches, swimming pools and Hampton homes. Yet in a democratic society, this is how it is. We pay for each other’s mistakes. That is why we create laws to prevent them.
Since September 2008, the rules have changed on debt and credit. When the top tier financial institutions (i.e. creditors) reneged on their debts, all bets were off for the rest of America. Many of today’s debtors are former prime borrowers—people who had long-term secure jobs, solid incomes and perfect credit scores. People who were never late paying a bill and would have found it unthinkable to do so now field calls regularly from aggressive collectors—the same creditors that created the credit crisis in the first place. Streitfeld writes:
The amount of bad home equity loan business during the boom is incalculable and in retrospect inexplicable, housing experts say. Most of the debt is still on the books of the lenders, which include Bank of America, Citigroup and JPMorgan Chase.
The irony of this statement is that these are three of the institutions that are directly responsible for the housing collapse and continuing financial chaos. The further irony of this is that these three banks actually receive government support (away from TARP bailouts) to put these debts “off the balance sheet.”
Ever heard of Term Auction Lending Facility or Term Securities Lending Facility? These are official “federal programs” (i.e. legal ways to avoid repaying debt) that allow insolvent or debt ridden banks like B of A, JPM Chase, and Citi to unload bad “assets’ like defaulting mortgage securities in exchange for taxpayer cash.
Yet JPMorgan Chase, B of A, and Citi are three of the nation’s most aggressive foreclosers and debt collectors. Yes it’s true—the same folks who put us in debt are now collecting on our debts.
Creditors have become the modern oppressor – enslaving borrowers in debts they themselves refuse to pay. So the bad investment you made on your home is your problem and the bad investment your creditor made on your home is your problem too.
The difference between leveraged creditors and ordinary debtors is that the government (Federal Reserve, U.S. Treasury and Congress) has their back and not yours. Big creditor banks are legally allowed to dump their debt on taxpayers, but they will pursue folks experiencing economic hardship directly due to their own mismanagement to the “fullest extent of the law.” All this subjective “immorality” proves is that the “law” needs to be changed.
So who is the real deadbeat now? The underwater unemployed borrower swimming upstream to try to salvage his or her home? Or the bank that created the economic collapse and is now able to have you pay all their debts through bailouts, “toxic asset” programs, special privilege, lobbying and distortion of the free market system?
Like King Rim-Sun it might be time to give the debt enslaved some relief and put ordinary citizen toxic debts “off balance sheet” too.
Like the third debtor in the New York Times article remarked, “There is strength in numbers.” Come on America, let’s turn this tanker around.
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Monika Mitchell - Executive Director