Dear Thinker:

Below is a priceless and insightful email from a friend of mine on the housing bubble and collapse.  He and I were discussing the fact that the mainstream media and conventional wisdom blame banks and Wall Street for people buying homes they couldn't afford and taking out second and third mortgages to buy stuff they couldn't afford--as if they were innocent victims and not eager accomplices in a fraudulent system.  My friend majored in journalism in college and understands how journalists "think" and why they never blame the average schmoe.  Enjoy.  

Regards,
Craig Cantoni

I know plenty of regular schmoes who pulled all of the bubble equity out of their homes, bought big SUVs, slacked off at work, took vacations, and then quit paying mortgages they could never afford.  To say the banks "took advantage" of them is absurd.  Let's do the math for the average schmoe.  This is a real life composite example of several people I personally know.

1994: The Schmoe Family pays $100K for a typical 1,600 sf ranch home in Phoenix.  $10K down—borrows the rest.  Makes payments of $800/month for 10 years, which is roughly the same as one would pay to rent the same house.  Builds an additional $20K in equity in the house.  He owes $70 and the bank says it's "worth" $180K by 2004.

2004-2007: Schmoe Family refinances home several times based on a $180K-$300K valuation and takes out approximately $200K in cash.  Spends $20K remodeling the kitchen and bathroom.  Spends the rest on SUV, vacations, slacking off at work (they are self-employed in my industry), hair salons, nail treatments, nanny for the kids, personal trainer, ad infinitum.  Now briefly making new payments of $1,800/month, even though mortgage interest rates are kept artificially low by crooked bankers and the Fed.

2008: Economy tanks, and with it, the income of the Schmoe Family.  Said schmoes (in this order, as you point out) stop making payments, stop taking care of their yard, stop taking care of the house, and actually get both SUVs repossessed.  They are now driving a "Cantoni Special Edition" 20-year old Nissan econobox or similar given to them by one of their parents.  (The Schmoe Family "adults" are in their 40s, by the way.)

2008-2014: Various Schmoe families continue to live in their properties FOR FREE for between one and two-and-a-half years while the banks dither around with foreclosure proceedings.  After all, why would the banks want empty, vandalized homes that will sell for even less?

So to recap--the Schmoe Family has paid the following for housing during the past 20 years:

$10K down payment

$200K in monthly payments for approx. 15-18 years

$0 for approx. 2 years after they stopped making payments.

TOTAL SPENT BY SCHMOE FAMILY: $210K

In return for their $210K, they have received:

$200K in home "equity" returned to them in the form of SUVs, boats, vacations, nanny service, personal training, etc.

Two years of free rent at $1,200/month worth approximately $30K.

TOTAL RECEIVED BY SCHMOE FAMILY: $230K

In other words, the "evil bank" paid them $20K to live in their house for 20 years.  Free rent plus $1K a year for beer money.  Someone explain to me again how these people "got screwed" by the banks?  But they will tell you that they did!

E