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Thursday, August 23, 2007

Lucky Sub-prime Meltdowns

Life is full of bumps and bruises. You can work real hard and nothing will happen. Or you can not work at all, be born with incredibly great looks -- and still, nothing will happen. And then there are those few, chosen people who haven't looks or talent, but succeed beyond anyone's wildest expectations. Those are the folks that have the one thing for which none of us are ever prepared:

Luck.

Everyone associates luck with success. I view it from a somewhat different perspective: Luck is just the flip side of the Randomness Coin. On one side, you have fame and fortune. On the other, you have meteorites plummeting from the sky, instantaneously immolating buses filled with school children who happened to be in the wrong place at the wrong time.

It's the same randomness. One is good, the other is evil.

When it comes to luck, I suppose I've had my share. But truth be told, I've never had the really great, change-your-life kind of luck. I've never won the lottery or been discovered on YouTube. Or been rescued by a government program the way politicians are now talking about with regard to the sub-prime loan meltdowns.

In case you haven't taken a good, hard look at the sub-prime meltdown situation, it goes something like this: The media's version tells you that lots of hardworking people were duped into home loans that went bad on them. The loans went bad because they either were "interest only" (which means you don't really buy the house at all, you just pay interest on it) or negative amortization loans (which means every time you pay the "low monthly payment" you actually increase the amount you owe on the house) or something just as bad. The media likes to portray these homeowners as innocent victims.

But they're not. They're suckers. Lucky suckers. Here's why:

If you've ever purchased a home, you know that everything having to do with anything even remotely connected to the purchase is put in writing, shoved in front of you to read and sign. Every regulatory, government and industry agency makes sure of that. And while the fonts are small enough to require reading glasses, every term and condition is outlined for the average eighth-grade-reading-level American to peruse and digest.

You and I both know that even though they can read and understand all those terms and conditions, the fact is that few of those lucky sucker ever actually read and and understand all those terms and conditions. They usually rely on the agent to scratch an "X" next to the places requiring initials and signatures. The papers get signed and the next sounds you hear are the jinglings of the front door keys.

What everyone explained to these homeowners, what every loan agreement disclaimed to them, was the less-than-traditional situation in which these people were signing on the dotted line. What buyers were told, but often chose not to hear, was that "interest only" loans and "negative amortization" loans were founded on the precarious hope of their property's value appreciating by at least 25%, as it may have in previous years. That's when the greed factor kicked in, with hundreds of thousands of paycheck-to-paycheck citizens decided to spin the wheel for the big money, betting on red that the real estate market would keep on rising. The plan was to ride the inflation, then refinance the current loan with a more traditional 30 year fixed -- and maybe even take out some cash.

At last, the Little Guy could rip the system the way he'd always heard the big boys do it.

Of course, that didn't happen. The property values didn't rise. They sank, and along with them went the hopes and greedy dreams of the homeowners. Many of them lost their homes and their jobs. Once again, the lottery didn't turn up their numbers. They were, to be totally honest, victims of their own foolishness. And yet, they remain lucky, as politicians begin clamoring for rescue programs to aid the "victims" of the sub-prime meltdown. Yes, your tax dollars could soon be at work bailing out the media victims of their own poor judgement, in much the same way that the Federal government bailed out Chrysler some years back.

See, that's what I mean. I never get that kind of luck. We recently lost a fair amount of money in a real estate deal. Turns out the general contractor was a felon, and a good one. Lots of people lost lots of money. We went into the deal with our eyes as wide open as they possibly could be. When we heard the contractor was in jail, we knew we'd lost it all. But not one politician came forward with a "rescue plan" for us. No tax dollars going to work for me. I don't have that kind of luck.

Of course, what we lost amounted to something in the thousands. Others lost hundreds of thousands and even millions. Now that I think about it, maybe there's some luck in that, eh?

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