Edmund Andrews has a new book Busted: Life Inside the Great Mortgage Meltdown that details his personal credit crisis. Andrews, a New York Times journalist with a 120K/year salary, lost his home to foreclosure. His story is an open and heart-felt personal account of how he was swept up in the housing boom and got burned. To my way of thinking, I find his story rather incredible. Although it now seems rather common.
Here is an excerpt from the book published in the New York Times magazine last Sunday. A series of quotes below should give you the basic idea:
If there was anybody who should have avoided the mortgage catastrophe, it was I. As an economics reporter for The New York Times, I have been the paper’s chief eyes and ears on the Federal Reserve for the past six years. I watched Alan Greenspan and his successor, Ben S. Bernanke, at close range. I wrote several early-warning articles in 2004 about the spike in go-go mortgages....Now Mr. Andrews has a tantalizing story and sweet book deal about his ordeal that I imagine could make him a cool million. Not bad for a guy who got busted.
But in 2004, I joined millions of otherwise-sane Americans in what we now know was a catastrophic binge on overpriced real estate and reckless mortgages. Nobody duped or hypnotized me....
As for me, I had two utterly compelling reasons for taking the plunge: the money was there, and I was in love. It was August 2004, just as the mortgage party was getting really good....
Patty [Andrews' new wife] discovered a small but stately brick home in a leafy, kid-filled neighborhood in Silver Spring, Md. We sent in an offer of $460,000... The only problem was money. Having separated from my wife of 21 years, who had physical custody of our sons, I was handing over $4,000 a month in alimony and child-support payments. That left me with take-home pay of $2,777...
..Bob [the mortgage broker] called back the next morning. “Your credit scores are almost perfect,” he said happily. “Based on your income, you can qualify for a mortgage of about $500,000.”
...Patty and I were now unwittingly tapping into our credit line at a terrifying pace: $5 overdrawn because of school supplies for Patty’s daughter Emily — $100 from the MasterCard. Fifteen bucks over because of gasoline? Another $100 from the MasterCard. Groceries for $305? No problem! Uncle MasterCard would front us $400... We were approaching $50,000 in credit-card debt alone...
[Bob the mortgage broker] had come up with a scheme that was either wickedly smart or proof that the big-money people had gone mad..“What we’re going to do is a two-step plan,”...“Now, because this mortgage is really ugly, your monthly payments will jump to about $3,700. But don’t worry about it, because you’re only going to stay in it for about three months. Once we pay off your credit cards, your credit scores will go up and we can get you a cheaper loan.”
....Our brief interlude of optimism and peace ended on Oct. 10, 2006, when Patty lost her job....
...I took a certain pride that I outlasted two of my three mortgage lenders.... ...When I first called Chase in October, a representative named Sarah said I didn’t qualify for a loan modification because I wasn’t yet 90 days past due... I called Chase back in January, when I was 90 days past due. Another representative told me that I would automatically be evaluated for a loan modification.... Another two months passed without anyone calling, so I tried again in late March... ...
I was actually beginning to feel sorry for Chase. It seemed to be so flooded with defaulting borrowers that it didn’t have time to foreclose on my house. Eight months after my last payment to the bank, I am still waiting for the ax to fall.
And so the economist in me, who always thinks in the back of his mind about incentives, wonders if there is a possibility the well-educated writer and New York Times journalist Mr. Andrews may have considered up front, in 2004 when he first bought his house with Patty, what might have happened in the event he could not make his payments. Maybe, just maybe, he thought that if the housing market crashed or if he couldn't otherwise make ends meet that many others would be in the same situation he would be in. So, in this worst case scenario, he might have thought he could write a dramatic story about how he lost his home. And since so many others were surely taking out positions as highly-extended as his, the book would resonate with a broad audience. Andrews, after all, was in a position to what kind of story sells, and surely in a position to tell the story well, and line up a good publisher.
If Andrews thought about this worst case scenario a little bit, I imagine it would have made him a little less fearful of this worst case scenario. Maybe these thoughts and considerations affected his decision to take out that first mortgage. Or to extend himself further with credit card debt and refinancing.
This is what economists call moral hazard. It is a general phenomenon that applies to journalists as much as it does to bankers, or anyone else. The idea is that when outcomes are uncertain and thereby depend on luck and one's actions, it can be difficult to separate hazards resulting from bad luck from those resulting from bad actions. If the individual choosing the action is protected from the most adverse consequences--if his/her liability is in some way limited--the individual will have an incentive to take on greater risk. Heads he wins, tails someone else loses. And so riskier actions are undertaken and hazards occur more often.
I emphasize that this is merely an illustration of the concept of moral hazard. I have no evidence to suggest that Mr. Andrews deliberately over-leveraged himself for the sake of the story and book deal. All I'm saying is that his incentives were plausibly such that, if Mr. Andrews were rational in the economic sense, his book-writing opportunities plausibly made it more likely that he would engage in riskier borrowing.
Oh, and the New York Times Magazine article is a great read and highly recommended. I kind of imagine the book is good too.
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