One of the most common criticisms I've read of efforts to provide some assistance to struggling homeowners is that most people simply don't deserve the help. After all, they read the paperwork before they signed the loans, so surely they knew what they were getting into, right? And if they didn't read the paperwork? Well, that's obviously even worse!
As you read those sorts of arguments, it wouldn't hurt to keep stories like this in mind:
An internal memo, explaining how to beat the Mortgage Loan Computer System (Zippy) at JPM Chase was leaked to the Portland Oregonian.
The memo gives advice for fooling the system to get otherwise unqualified borrowers approved for mortgages:3 "handy steps" for getting a questionable loan approved by JPM Chase's automatic system:
1. Lump all of an applicant's compensation as the applicant's base income, rather than breaking out commissions, bonuses and tips.
2. Do not disclose use of gifts for down payments.
3. If all else fails, simply inflate the applicant's income. "Inch it up $500 to see if you can get the findings you want. Do the same for assets.
If the potential homeowners should have known better, what can we say about the mortgage brokers working at JPM Chase? And if the brokers at Chase were gaming their own system to get approval for people who would have otherwise been denied, how can we blame this all on the homeowner?
More generally, if this doesn't make the case that tighter regulation of our banking industry is necessary, I don't know what does. JPM Chase had the most to lose here, so market theory would suggest that this sort of thing simply should not have occurred. And yet, it did. Why? Because the interests of the individuals working within Chase are not the same thing as the interests of Chase itself.
If you are an individual working on commission, it makes sense to game the system, particularly because the risk represented by any one individual improper loan is almost non-existent. But if enough different people think and act this way, over time the risk will build to unacceptable limits. At no point, however, will anyone be in any position to stop things. Each individual loan, no matter how many have come before or will come after, still represents an almost insignificant increase in risk for Chase. Until the moment the entire thing collapses, it is perfectly rational for everyone to think, "oh well, what's one more insignificantly tiny bit of risk?" It's the Tragedy of the Commons writ large.
Even Milton Friedman understood that government action is necessary when faced with this sort of problem. In fact, for Friedman this was precisely the sort of problem that made life without government unthinkable. No matter what some of his ill informed followers might now try to claim, even he recognized that there are some problems that free markets cannot solve.
No doubt there are plenty of homeowners who deserve to feel the full impact of the mistakes that they made. No doubt there are plenty of businesses, too. But assigning blame is not nearly as simple as many people like to claim. Individually everyone could have been acting rationally, while collectively everyone was going insane. Keep that in mind...
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