Economic Breakdown: Result of Moral Breakdown?
In May 2006, at the height of the housing market frenzy, Karen bought an apartment in California for $500,000. Today she will be lucky if it sells for $300,000. And the interest rate on her loan is about to increase.
As a successful professional, Karen says she can easily handle the higher mortgage payments. But instead, she has decided to do something different—and what she is doing not only has banks across America worried, but has grave implications for the economy.
Karen’s actions typify a new mentality that has emerged in America. It goes something like this: Why should I continue to make payments on my 30-year fixed-rate mortgage on a house I bought two years ago that won’t sell for half as much today? If I let the bank have it, my credit will be trashed, but in five years I will be able to borrow again. And the same house will probably still be half the price. Let the bank take the loss.
The reasoning continues: Since lenders are swamped with foreclosures, I might even be able to live in my home—rent free—for a year or so before the bank gets around to dealing with me. Remember that California guy back during the ’90s bust who lived in his house rent free for seven years as the banks tried to figure out who actually owned the mortgage?
Karen sums up this cynical line of reasoning best when she says, “I think people are taking a more cold-hearted look at it. Is the bank going to pay for my retirement because I was a good girl and paid my mortgage …?”
Good girl? Let’s not forget that Karen happily signed the agreement with the bank saying that she would do her best to pay back the $500,000 the bank lent her. In fact, Karen was the one who asked for the loan in the first place. She is the one who took and spent half a million dollars. Yet because of current bankruptcy law, Karen can get away with abandoning her devalued home even though she can afford the payments, and the bank can’t do much of anything about it.
Karen is not alone. In the city of Stockton, California, 60 percent of delinquent borrowers do not even bother to contact their banks to attempt renegotiating their loan. “They stop paying and they stop talking,” says Kevin Morgan, an estate agent who sells repossessed houses for banks. “They just plain walk away.”
Prof. Nouriel Roubini of New York University says it “is becoming a tsunami of voluntary defaults,” and if trends continue, the financial losses could be more than a trillion, wiping out “most of the U.S. banking system” (emphasis mine throughout).
In past real-estate busts, homeowners did everything they could to make good on their word and their mortgages.
But during the housing boom, for many people, homes transformed from family nests to speculative investments—the bigger and more leveraged, the better. While peer pressure at that time fed the get-rich-quick housing greed fest, it now works in the opposite direction as people try to salvage their finances. “First you are a fool not to get in (the housing market), and then you are a fool not to get out,” says Larry Calbers, director of the Center for Accounting Ethics at Loyola Marymount University.
Today, people don’t seem to care so much about things like their reputation, honesty and character. The pursuit of money reigns supreme.
The next big thing homeowners who can still afford their payments do is tell their banks that they want to purchase a new home and rent out their current one—which is leaking value like a shack in a storm. Since they have good credit, the bank gives them another loan to buy a new house. Once the transaction is complete and legal, the double homeowner all of a sudden conveniently “finds out” that he has lost his renter. Since the old home is probably only worth half or two thirds of what was owed on the mortgage, he is only too happy to stop making his mortgage payments and let the bank take the loss on his first house. Scammed bankers call it “buy and bail.”
This buy-and-bail mentality just adds another “element of fraud to a market that is already out of control,” says Inland economist John Husing.
Michael Pfeifer, a mortgage fraud lawyer, says it has become one big “game.” “Lying is the reason we have the economic crisis to begin with. People thought it must be okay because they could get away with it.”
Don’t get me wrong, there is plenty of greed and wrongdoing to go around, and not just on the part of homeowners trying to ditch their underwater mortgages. Queue the thousands of buyers lying on their mortgage applications; appraisers inflating valuations; lenders knowingly overlooking suspect documentation because they were just going to sell the mortgage to someone else anyway; credit-ratings agencies providing triple-A ratings to risky subprime mortgages even though they knew many were up to 10 times riskier than similarly rated investments; and the National Association of Realtors telling people it is always a good time to buy and vigorously denying the existence of a housing bubble—even as the bubble was clearly popping.
Fannie Mae and Freddie Mac, the two giant mortgage lenders, are another clear case of simultaneous moral breakdown and fraud. Over the weekend, the federal government announced that it was nationalizing the two companies after it determined the lenders had drastically overstated (lied about) their reserves. According to the International Herald Tribune, regulators also exposed blatant manipulation of recent losses: “For years, both companies have effectively recognized losses whenever payments on a loan were 90 days past due. But, in recent months, the companies said they would wait until payments were two years late.”
Can you imagine that? Losses are not losses until the borrower hasn’t paid his mortgage for two years! If Fannie and Freddie are doing it, you can almost guarantee the accounting methods that other lenders are using are equally as creative. No wonder America is facing such a mortgage crisis.
But the truly sad thing is that this whole mess at Fannie and Freddie could have been avoided. The two companies have been wracked by accounting scandals for years. Many people saw it coming, but nobody wanted to confront and reap the painful consequences that would have resulted from rectifying the mess.
And now Americans will all pay the price, meaning that U.S. taxpayers are now on the hook for trillions of dollars’ worth of fraud-ridden “liars” (no documentation loans) and “ninja” (no income, no job or assets) loans. And you can bank on the fact that as other lenders’ profits get crushed, they will do whatever it takes to try and stay solvent. That means more fees, less taxes paid, more layoffs, reduced services, and higher lending costs for the rest of us.
Harvard Business School (hbs) provides another example of how widespread the moral breakdown in America has become.
hbs is one of the most influential educators in global industry. One fifth of the ceos in Fortune 500 companies have been groomed and shaped by this revered institution. The biggest banking conglomerates and oldest families routinely send their best and brightest young up-and-comers to hbs to learn to manipulate the reins of power.
But consider the following event that took place at the 100-year-old hbs, and ask yourself: Can any society that values money and power over honesty and morals continue to prosper?
In 2005, over 100 applicants were caught hacking into a website that stored Harvard’s admissions information. When the breach was revealed, the school administration retracted acceptance offers made to students involved in what Harvard labeled a “serious breach of trust.”
Seems like a reasonable and just course of action.
Not according to at least one significant chunk of Harvard’s student body.
An astounding 75 percent of Harvard’s “corporate accountability” class sided with the hackers. These are students in a class on corporate ethics! Most of the students didn’t see anything wrong with breaking into the school’s website, says Harvard graduate and former Daily Telegraph Paris bureau chief Philip Broughton.
In his recently released book Ahead of the Curve—Two Years at Harvard Business School, Broughton describes hbs as basically an institution that transforms students into individuals capable of running businesses but fails them in almost every other way. According to BusinessWeek, Broughton describes a group of amoral strivers who are willing “to sacrifice family and friends for the success they felt they so richly deserved.” In his stinging account, Broughton says that as a result, hbs has turned into a “factory for unhappy people.”
hbs has also churned out some of America’s most reviled corporate felons.
Legions of lawyers and armies of analysts are crunching numbers and trying to answer this question: Can the economy survive the looming financial collapse?
But the real question is this: Can the economy survive the widespread moral collapse?
God’s laws apply to every aspect of life—not the least of which is finance. Think what America’s economy would transform into if Americans followed those laws and never stole and never lied. Think of the cost savings that would result from obedience to just those two of the Ten Commandments. Think of how much money would be saved if businesses were never robbed, websites were never hacked, billion-dollar lawsuits were extinct, police did not have to track down criminals, and courts and prisons did not have to process convicts. Even adding 5 percent to the purchase price of your bicycle for a lock would be obsolete. Then expand that out to the national scale.
As Bruce Walker, writing for the American Thinker,said, “The cool, practical, financial argument against sin is so overwhelming, the number crunching of any serious cost-benefit analysis of the trillions lost through our acceptance of sin is so convincing, that hopeful people can dream that a wise leader will champion the fight against sin as the clearest way to make us wealthier and happier people.”
Again, can the economy survive the moral collapse? The answer is no. America’s economy will not survive—because morals have not survived.
But, good times will eventually emerge after the coming financial days of reckoning. You can read about this time and how it will come about in the booklet The Wonderful World Tomorrow—What It Will Be Like. Once all the fraud and deceit is removed, a healthy, solid, prosperous economywill be established and will spread across the globe. Financial markets will thrive, businesses will succeed, families will enjoy wealth and fairness. Why? Because a world economy based on law and honesty—God’s principles for prosperity—cannot fail to succeed!