Today, an organization that I'm somewhat associated with held an event. Many attorneys, from all different practice settings, gathered to eat free salmon and discuss how we move forward from the fallout of the sub-prime lending crisis.

It was a great event; I'm proud to say that, despite my broad exposure to lawyers and the law, I'm impressed more than twice as often as I'm dissappointed. I've been lucky to see the best of my future colleagues, and this event was no exception.

There were two or three continuing themes at the event - I'll talk about one, which I haven't heard covered in the press at all, and one, which is an underlying current to all of the coverage and the reaction to the sub-prime mes, but has only recently been named in so many words.

Sub-Prime Lending, and the Securitization of Debt Drove the Housing Bubble

An attorney who works in legal services in one of the rougher nearby communities brought some remarkable data. I wish I could have stolen his slides - if I could show you his graphs, you'd be knocked over, as I was.

The community he focuses on is historically lower-middle to middle class, socioeconomically. Most residents are African-American. Until around the year 2000, the median housing price in this neighborhood was, more or less, affordable to median-income households in this neighborhood. This pattern is what one would expect to find in a fairly stable neighborhood, somewhat insulated from gentrification, speculation, and development pressures. Unfortunately, this neighborhood's insulation results from racism and poor access to public transportation - but that's not relevant here.

After 2000, housing prices rose dramatically. They tripled, actually, between 2000 and 2006-7.  There was no corresponding rise in income; no discernable  demographic change. No influx of the rich; no mass exodus of the poor. 

During the same time period, sub-prime mortgages rose dramatically. The rise corresponds nearly exactly with the rise in housing prices; it isn't that people were using available credit to buy overpriced houses, but that these loans actually served as a mechanism to free housing prices from housing values. Not only that, but because mortgage brokers, (in the case of refinances) and brokers and agents (in the case of purchases); are compensated according to the value of the transaction, not according to the risk to lender and borrower, these individuals had huge incentives to drive up prices.

Refinancing breeds refinancing; especially with an ARM. Some of these refinances would have fees in the tens, sometimes hundreds of thousands. People may have used their homes as ATMs, but they got mugged on the way in, and on the way out. 

And, of course, as prices go up, people become more desperate for housing. Housing is not like college educations, healthcare, and other middle-class trappings that can simply be put off when prices get high or times get tough. People might hate to tell their children that they can't send them to college, and even bet that they can go without health insurance for a while; but people will do anything to have a roof over their heads. 

Amazing.

I love this attorney. I love him so. In a strictly legal way, of course. He should be on the Daily Show.

"Smug-self-satisfieds" are holding us all back.

Another attorney, very different from the first, but equally impressive, spoke about her practice, assisting homeowners facing foreclosure and going through bankruptcy.

Among other things (and this was actually a pervasive theme of the conference) she spoke about the attitude that people not facing foreclosure have towards people facing it; the general perception that people who are facing foreclosure are somehow entirely and UNIQUELY responsible for it.

 She called it "smug-self-satisfaction." A columnist in the Boston Globe actually diagnosed this attitude a bit ago, and I think it's really a brilliant call. Miss Manners said that this attitude is a manifestation of the "Just World Fallacy." The Just World Fallacy is an explanation of the fundamental attribution error. I'll explain both as quickly and clearly as I can; but a caveat: 

When I was in college, I worked from 5am to 1:30pm, most days that I had class. When I was taking Social Psychology, it was held at 3:30pm, and went until 5:00pm.  It was held immediately after Personality Theory. Some memories are dim. There are some things that I will never understand about Social Psychology because the things that I learned that day in Personality Theory were interesting enough to keep me up through the entire class. The opposite is also true. I will never remember which theorist had the good breast/bad breast theory, but I will always remember the Stanford Prison Experiment. 

 The fundamental attribution error is the tendency that most people have to assign things that happen to other people, and things that other people do, to a characteristic of that person, but to explain their own behavior as a reaction to circumstances. 

 The Just World Fallacy  is the tendency that people have to believe that people get what's coming to them. It's the just world fallacy that makes us suspect, for example, that teenage girls who get pregnant are more promiscuous (rather than more unlucky) than teenage girls who are sexually active but do not conceive. Or that people who get mugged do so because they were in the wrong neighborhood, or not paying attention. Or that people who are unemployed must have something wrong with them. 

It's a comforting fallacy. It helps us function in the world; it is a fundamental part of the bargain that we tend to make with ourselves, about things that are somewhat out of our control. If we believe that bad things that happen to others are mostly their fault, then we also believe that a) we can prevent their happening to us, and b) that we don't deserve the same consequence.

This is the sub-prime lending crisis, big time. There are tons of misconceptions about the loans that occurred, and why they occurred, and who got them, and for what. The general perception is that people facing foreclosure bought the wrong houses, were "greedy,"  when, actually, the gentlemen's research above demonstrates that  it was far more about the climate (at least in the community he studied, and others like it) than the home.

If you bought in a certain neighborhood 2005, you bought sub-prime, and you bought over-value. 

So why do we care? I mean, really- why care? People who are about to become homeless, living in their cars, living out of motel rooms, losing homes that have been in families for thirty or forty years...does it even matter what some jackass watchin CNBC thinks?

It goddamn well does. 

The whole democracy thing. You know.

 Our entire reaction to the crisis; regulatory, statutory, this goddamned AIG business - is all driven by the Just World Fallacy. 

How?

Well, with the money spent on the first and second bailouts, we could have simply paid off all the sub-prime mortgages. The money would have gone straight through the homeowners, to the banks. The banks would be solvent, because the loans would be paid. The investors would be satisfied, because they would have their return. 401ks would end up back at the right value, no harm, no foul, no government paying AIG bonuses.

Banks stabilized, houses saved, communities no longer taking up collections to RAZE ENTIRE NEIGHBORHOODS, it would all be over.

Then we could regulate  - force instututional investors to wean themselves off securitized mortgage debt. We could design a new class of investment vehicle/retirement account, which is not subject to the same "sophisticated investor" exemptions that let town pension funds and towns in sweden invest in these ridiculously high risk mortgage-backed securities. We could offer incentives to strengthen underwriting standards.  We could push for ethical rules requiring attorneys present at real estate closings make an affirmative disclosure to the buyer that they do not represent them.

We could limit w put covenants on the deeds of all the houses receiving individual mortgage bailouts tying the maximum resale value to value in the year 2000, plus inflation adjustments. (Communities have already done this in some areas - it works!)

We could then let state attorneys general, and consumer attorneys, go after the really bad actors. Prosecute everyone who committed fraud; go after everyone under every state's unfair and deceptive practices law.

 And this would be cheaper than the bail out. And quicker.

 Why don't we do it?

 We  JUST. CAN'T. STOMACH. THE. IDEA. Taxpayers do not want to pay anyone else's mortgages. Taxpayers do not want to pick up after someone else's mistakes. No matter how much we want out of the crisis, we cannot give up our anger at people for "getting themselves into it" - because that would mean giving up our pride at staying out of it.

This morning, I might have agreed a bit. It actually makes me a bit horky to help anyone out who had any part, however small, even if inadvertent, in driving up the housing prices that drove me out of my home city and home state. I don't have a mortgage. Why should someone else get theirs paid off?

Why? Because it would help all of us. And blaming the homeowners - gets us all nothing. Maybe self-satisfaction, a sense of security, a shred of control - but tangibly? Absolutely nothing.

So what if any, some, hell, even if ALL were, individually, selfish or misled, biddible or gullible, even dishonest? Can we POSSIBLY hate each other enough that we'd rather plonk billions and billions of dollars into the pocket of AIG, and their goddamned execs?

Well. Actually. I guess we do. 'Cause, we did.