If you’re ever bored and want to have some fun, explain to people over beers how the subprime mortgage industry has been the driving force between the outrageous housing boom and how they’ve been using the fancy process of pushing around paper to make it look like there’s money that’s not there in order to keep the racket going, even though it’s creating a dangerous situation for our economy, as is usually what happens when you’ve got the financial industries making huge profits from smoke, mirrors, and bad credit. (Think 1929.) It’s actually not a complicated process how the banks and the stock market are simultaneously pricing everyone out of the housing market while setting us up for an economic catastrophe. But it’s a lot of steps, and people tend to get glazy-eyed. But it’s important, so I’ll put it in nice, readable bullets.
- First, mortgage lenders, in a bid to get their numbers and commissions up, start shopping out mortgages to customers who can’t quite reasonably afford the houses on their salaries.
- They often convince people to buy into these mortgages by making the payments small—at first. They do this by putting people into variable rate loans that start off at temptingly low rates, and once people sign on the dotted line, the rate jacks up incredibly high.
- Then the mortgage lenders sell the papers on these loans to investment banks, who use them to back up securities.
- Housing prices continue to rise. I’m not sure how much lenders were hoping that the rising housing prices would give them equity for houses they foreclose on, minimizing the loss that’s sure to follow the huge uptick in foreclosures due to these sleazy lending practices, but it’s hard to imagine there wasn’t a little bit of that hoping going on. Considering the “take all your money and put it on Nickel And A Wish in the fourth race” style lending and trading that’s going on, I wouldn’t be surprised.
- Hope that the bottom doesn’t fall out, because you know, there’s no such thing as dramatic crashes after a market’s been artificially inflated.
Still, the overall riskiness of the endeavor is hard to fathom for a lot of people. How could so much of the financial industry be so stupid yet again? There’s some “I got mine” decision-making going on, I think, with people making bad decisions and just hoping that someone else (homeowners, mostly) will take the fall. But surely, people say to me when I explain this to them, someone has to realize how very risky and stupid all this is. Isn’t there something else they’re hoping will save them?
It turns out they were. They want you the taxpayer to bail them out.
Oh, wah. God forbid investment gambling should be a risky endeavor. Sing that sad story to all the people who are being thrown out of their houses, assholes. I agree with Greg: Let them starve.
We’re held hostage by these corporations, who’ve established a huge safety net for themselves while being run mainly by right wing ideologues who preach the values of bootstraps and no fallback position for those of us who see money mainly as a way to eat and pay rent, not as something to keep the yacht maintained. I will say this—it’s not like the banks don’t have that $17.5 billion they make a year in overdraft fees to help cushion the blow.
67 Responses to “Let them eat foreclosures”
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Oh, sure. Privatize the profits, socialize the costs. Meanwhile, so the banks don’t lose money, they’ll raise my taxes to pay for the money the government will use to bail the banks out… while the people who lost thier homes will be given nothing, because giving them money to pay for thier homes would be welfare.
Millionaires get welfare. The rest of us get social darwinism/free market capitalism.
Now would be a good time to start working out how to frame this so the politicians won’t be able to bail out the fraudsters. You can bet the fraudsters pet think tanks are working on how to make the sale for a bailout.
This scares the holy living crap outta me. My folks, my brother, my sister would stand a pretty good chance of losing their homes. I rent, so I expect my rent will skyrocket, and I’ll have to find somewhere cheaper. If it exists.
My grandmother owns her home outright, the lucky gal. Maybe we can all move in with her. I fear I’ll end up sleeping in the pantry.
It will be interesting to see how the foreclosure things go. Banks that are smart only foreclose when they’re in a position to turn the property around and make money off another sale. But since all of these mortgages have been packaged together and sold to a bunch of idiots, that doesn’t really apply.
Another reason for financial-industry types to be so stupid is natural selection. Making a living in the lower echelons of the business requires believing that you’re going to make a profit on this and every other deal, and that greed is good. Question those tenets, and you’re out either voluntarily or otherwise. Comes a downturn, tens of thousands of finance people lose their jobs, so the ones who happen not to get laid off come through with even more of a belief that they’re smarter than everyone else. Repeat for a few cycles, and at the middle and upper echelons you’ll see only the true believers in The System who know how to politick their ways into apparent indispensability. Anyone who doesn’t have the faith will quit, and anyone who isn’t good at the graft that keeps them employed even when things go south will get fired.
Of course, these people are exactly the wrong folks to have at the top of an unstable financial system.
How could so much of the financial industry be so stupid yet again?
Because we bailed them out last time they did this stupid shit with savings and loans, and they assume they’re going to get another handout.
That reminds me, I need to start e-mailing my senators and representatives and tell them to let the bankers hang this time. If they can be this stupid twice, there’s no point in bailing them out.
All it would take to make this the perfect evil plan is if the finance industry could buy a bunch of politicians and get them to pass a law that redefines personal bankruptcy such that you could never actually get out of debt.
Well, that and debtor’s prisons.
The crisis is already hitting Massachusetts. Of course, here in Boston, we have ridiculous housing prices, so that’s gotta add a bit of pressure to things. Here are some numbers from MA:
It’s hitting south Florida too. About once a week, there’s an article in the Sun-Sentinel about how foreclosures or delinquent payments are at an all time high, and the largest single month in ARM resets hasn’t even hit yet–that comes in October. The most recent article I’ve read as about how condo associations are getting in the way of people selling their condos by forcing buyers to put large amounts up front for maintenance fees, since that’s the first thing to go once the mortgages go up.
That said, in about a year, maybe two at the outside, the market may have bottomed enough and the supply high enough that Amy and I can get serious about buying a house, which we never thought we’d be able to do two years ago when we moved here.
Hate to be a wet blanket, Wally, but I wouldn’t be too sanguine about your grandma owning her house.
If too many houses in a given tax base foreclose, property taxes can go up on the remaining homeowners.
Okay, I know practically nothing about real-world business practices (though a rather thorough reading of Marx’s Capital and other Marxist economics texts seems to orient me pretty well for reading up on news stories–and reading between their lines).
But, I was talking to my landlord with whom I have a remarkably good relationship, considering my radical politics and flaky finances–but then again, this is Sonoma County; his politics and worldview are not that far from mine–he and his wife just have more money. Not a lot more–they live on the same property I do, which is why I was able to just casually walk over there. I happen to know, because they have told me, they really want to move up into the Sierra Mountains. So I wondered if they foresaw that move.
“Nope, land prices are just insane everywhere.”
I tried to get a sense of how “insane.” (I have no clue, remember?)
Well, the property they and I (and 2 other households) live was purchased by them (within the larger family) 10 years ago. It cost something like a third of a million dollars.
Now if it were sold, it would probably net $2million.
“Wow,” I said. “What’s stopping you from selling now and moving up to Tahoe?” (I don’t want him to do this, not this year or the next anyway, but they’ve been friends to me and I can hardly gainsay their heartfelt wishes, however much they may screw my interests up).
“It’s the same everywhere. We couldn’t buy in there now.”
A friggin’ factor of 6 in a single decade. Land prices and rents have always been unreasonably high in Sonoma County–but if that kind of “boom” is happening everywhere, it’s clearly not related to mere regional factors. (And otherwise, surely my landlord would see the writing on the wall, know he’d best take advantage of the boom windfall now–if there were less-inflated areas that suited him to buy in to. Therefore I trust that the factor of 6 or so holds all across the nation, more or less.)
A factor of 6 in a decade. 85 percent of current value added out of nowhere. It might make sense if the population had increased by a factor of six, or the general wealth of the community had sextupled.
But how can anyone explain a factor of 6 rise in land values all across the board, during a decade of remarkable stagnation for the real incomes of the vast majority of the populace? Have even the very rich enjoyed anything like that amount of appreciation of their assets? I really think not.
It’s the mother of all bubbles, is what it is. A whole lot of the assessed wealth of the wealthy must indeed be inflated by this very bubble, and the rest of us, if the statistical boundaries rope together propertless peons like myself with more respectable types like my landlord, would also look objectively worse off if none of us had such inflated land values in their portfolios.
That was an interesting conversation.
Via Atrios from long ago, this NYT graphic
http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif
here.
is worth looking at. This bubble has been some few years in the making. Like all good bubbles it is made by extending credit based on seemingly endlessly appreciating assets.
Here’s an interesting article I read yesterday on another factor behind the bubble. Builders got in on the mortgage end of the game, and they were never in it for the long haul, so they went apeshit on writing bad loans that were then securitized and sold off.
Urrgh, pandagon comments seem to be acting up again.
Try this old Atrios post
I got to watch the whole rollercoaster of Japanese real estate prices from the end of the bubble to the end of the slump, 10 years later, by which time land prices had gone down by 40%.
So yup, anyone who tells you that land can’t drop considerably is fooling himself.
The FT has been keeping a leery eye on the whole subprime mortgage problem. Having hedge funds blow up because they over-invested doesn’t bother anyone–that’s what hedge funds are supposed to do. The problem is when you’ve got everything hooked together–then there’s a cascade of failures. Oops.
Someone should have kept the quants out of playing in the mudpile–all the financial engineering producing those CDOs with the rating agencies slapping on gold stars on them. Well, guess what? The Bear Stearns hedge fund was jus’ chock full of those AAA ratings. Doesn’t seem to have helped them that much.
As I keep telling people, quantitative finance only works so well. Gas molecules never panic and stampede into the corner of a box–humans do.
In retrospect, bailing out the savings and loans in the 1980s was a terrible decision. Yes, it propped up the economy for a while, but it made the finance guys think that they have free access to the taxpayer’s pockebook whenever their own bad decisions get them into hot water.
Let ‘em dangle, I say. They’ve got no compunction about doing it to thousands, if not millions, of homeowners. Why should we bail them out when they’ll turn right around and do the same goddamned thing in another 20 years?
Rents can’t go up too high, for the same reason banks can’t sell those foreclosed homes at a profit: no customers, no monthly payments.
My guess is that it’ll be a good time to be a property management company renting out bank-owned houses.
As to the Greenspan housing bubble, it was inevitable once interest rates fell so very low while Greenspan was trying to “surge” the Bush Economy into growth. Lots of people bought homes, many more refinanced and bought consumer goods. Anyone with a downpayment bought - mortgage payments were cheaper than rent.
Of course, now that interest rates are climbing up to more normal rates, the “demand-side” economics of the overinflated housing market is making itself apparent. There’s a large supply of $500,000 houses - but 20 years of shipping jobs overseas means few people can make the mortgage payments at current interest rates. Hence, supply is larger than demand, and prices must fall.
Ugh, okay, I finally registered since I had two comments in a row vanish into the ether. (And by “in a row” I mean “about 1 hour apart.”) Can we please please PLEASE get some kind of notification if our comments go into moderation? Please?
test
Generally, it is all there in black and white - the teaser rate, the bump to expect, balloons, pre-payment penalties etc. Read the manual, eh?
So, now we will have pre-payment penalties reduced or eliminated, per Clinton, which means no teasers (or reduced teasers). Fine with me. But that means the 90% who got the teaser and managed not to lose to foreclosure will have no teaser and will pay a bit more.
It is sad that some homeowners will become renters, but life has risks. Perhaps a better approach would be to phase out the mortgage interest deduction and property tax deduction so it becomes a tax neutral decision whether to rent or own.
For those who will lose homes they “love” (or down payments they would “love” to have back), remind them gently to fall in love with people, not assets or cash.
In the short to mid term, assets or cash are replaceable, though we all end up with zero assets (i.e., you can’t take it with you).
The worst thing I’ve ever had to deal with at a job was when I worked in the Washington Mutual Los Angeles area loan department bankruptcy department. I dealt with title companies to make sure the title on a property was clean and in order.
I get this call one day from this woman who is literally in hysterics–I can barely make out what she’s saying through the tears and wailing. Turns out, her husband thrashed his back at his job, couldn’t work and they were so behind on their mortgage that we were going to foreclose. Bad enough, that situation.
During the night, their neighbor had built a fence right through the middle of their driveway. Why? Because they had found out that the legal description on the deed of trust was wrong (and had been wrong for over 40 years); the lot line was really 3 feet in to their property. So, husband can’t work, in foreclosure, fence in middle of driveway. I kept telling her “It’s going to take a week to get the lot line fixed, I simply can’t do it any quicker”. She puts the husband on the line and I spend the next two hours on a conference call with them explaining the situation. It was awful and these people were screwed.
I transferred out of that department soon after. Even though I was still complicit because I worked at the bank, I simply couldn’t take working in *that* department any longer. Since WAMU is a huge lender in Southern California (mainly through mergers with Great Western and Home Savings, owned by the super-wingnutty Ahmanson family) the WAMU BK department is going to be swamped for the next two years.
Some of these issues related to real estate deserve a little closer attention as there is more nuance here than often is described.
First off, I have read several different proposals and actions taken to provide some form of relief for consumers, lenders and the like, and it’s important to consider the magnitude and likely intent in each case.
For example, in April, Freddie Mac apparently put $20 billion into buying some of the highest-quality (least likely to default) subprime loans, to ease some pain in the lending market. This came after they admitted they were changing their lending practices, tightening requirements for subprime themselves — meaning that they were part of the problem. $20b is small compared to the massive money involved in subprime, but it was an attempt at a face-saving gesture.
Some other actions are out there in individual states, such as moratoria on payments for troubled homeowners. The problem here is that it’s politically very savvy to be helping “the little guy” for 6 or 12 or however many months, but the debt still remains after that time. If a troubled homeowner cannot pay the mortgage they were qualified for beforehand, 6 or 12 months won’t give them a huge raise or source of cash to do so, most likely. But the politicians behind this look good, eh? (And what’s uglier, interest might continue to accrue during such a moratorium, leaving the payer even more screwed a year later.)
(And yes, politicians are going to be doing a lot about this over the rest of the election cycle… look at when all the subprime ARMs reset on chart 42 here: 01/07 through about 12/08… this is definitely going to be an election issue, one way or another. The other charts also show just how huge this mess is, which hopefully precludes any true broad bailout for industry)
Then there are recent attempts to loosen rules on lending, to either raise the conforming loan limit ($417k or so, right now) such that the GSEs (Fannie Mae, Freddie Mac, whose mission is to provide affordable housing for low-/moderate-/middle-income americans) can effectively bail out lenders… Surely to be sold to Joe Q. Public as yet another opportunity to refinance their loans (and keep the prices high, the music going, and so forth.) Does Joe Q. Public win if he gets to chase another adjustable mortgage, punting a few years down the road? Is this really healthy? Will this not just perpetuate the inflation of prices, the fleecing by those who collect fees at every transaction?
There are lots of types of bailout and lots of entities and people who could be the recipients in the end, but it’s not always clear the consequences (cynically intended, unintended) or the costs.
Here’s what I’d worry about at the moment, until I hear details of a sizeable bailout that’s actually going to happen: There are people out there who may lose their homes, who a decade ago could have renegotiated with their lender — a local bank. They could have staved off bankruptcy/repossession/having their home auctioned by agreeing to possibly pay less for their loan, or to some modification of terms — and kept their houses. Nowadays, their loan has been not only sold to some institution somewhere else most likely, but actually carved into multiple pieces and sold to multiple entities. And it turns out there’s nobody to negotiate with — Krugman wrote about this recently.
For what it’s worth, there’s a lot of discussion of these various issues in excruciating detail at Calculated Risk.
And please don’t get me wrong, I figure we’re all screwed by this bubble one way or another, whether directly or indirectly. I’m not cheering for some hard-line “screw the folks who borrowed more than they could afford” or anything like that. I just hope we can come out of this without making things too much worse, and with a minimization of the necessary pain for people. RIP dozens of shady lenders, may you rot for your opportunism and ill-gotten gains.
I keep getting calls from telemarketers working for the company that now holds my fixed-rate, 6%, 20-year mortgage, trying to get me to convert to an ATM. Yeah, right. My mortgage payment checks must have “stupid” in the watermark.
Alternatively, when they send me my monthly statement/bill, they try to get me to take out a “home-equity loan” (or “second mortgage,” where I come from). This includes a line telling me how much my current equity is, which is conservatively about $15,000 above the actual figure.
When exactly did mortgage lenders adopt the morals and business ethics of carny hucksters?
There was an article on MSN a few weeks about about the increase in foreclosures and what it meant to, of all people, animal rescue organizations. Apparently as more and more people realize how truly boned they are, large numbers of them are just picking up and leaving. Some are destroying the houses first, and many are leaving pets behind. There was at least one anecdote of a guy who did both by leaving about half a dozen hogs in the house when he left.
Things are going to get ugly before they get better.
This kind of stuff is happening everywhere. I still have friends and family in the area where I grew up (metro Detroit) and if you want to see a housing market that’s nearly bottomed out, go look there. Of course, the situation in D-town is somewhat different than the housing bubble elsewhere because the local economy has gotten so bad, but as far as I’m concerned, that just makes Detroit the canary in the coal mine.
No one - figuratively speaking, but not by much - is able to sell his or her house in that market except for a massive loss (some houses have been bought for less than you’d pay for a new car, and not even a luxury car). I personally know more than one person who is barely holding on to a house, and at least one of those people will probably lose it.
Meanwhile, here in Seattle, the market’s still overheated. It’s cooled a bit, but it’s still outrageous.
Sheelzebub, where’d that post go? I had a comment that was much better suited to that one than this one.
C’mon, let’s get our class warfare on. Eat the Rich!! Well, steal their fortune and hire their cooks–cannibalism, particularly with the toxins in bourgeois bodies isn’t so appealing.
Are the mortgages held by GNMA? If they’re included in pools of a particular GNMA bond issue, then they are backed by the full faith and credit of the US govt. FNMA and Freddie Mac, no. But if we’re talking about mortgage-backed securities issued by major banks like JPM Chase or REIT holdings then I can’t imagine why the taxpayer should come to the rescue here. This is called “risk”. Welcome to the bond market.
I am REALLY, REALLY hating on these anti-spam numbers. Some of them are so teensy I can’t see them. Is it a 5 or a 6? And I’m wearing my glasses. I’ve had to retype way too many comments now and it’s annoying. Amanda, why did you start down this evil path?
here’s hoping my comment doesn’t disappear entirely (again?)
===
Some of these issues related to real estate deserve a little closer attention as there is more nuance here than often is described.
First off, I have read several different proposals and actions taken to provide some form of relief for consumers, lenders and the like, and it’s important to consider the magnitude and likely intent in each case.
For example, in April, Freddie Mac apparently put $20 billion into buying some of the highest-quality (least likely to default) subprime loans, to ease some pain in the lending market. This came after they admitted they were changing their lending practices, tightening requirements for subprime themselves — meaning that they were part of the problem. $20b is small compared to the massive money involved in subprime, but it was an attempt at a face-saving gesture.
Some other actions are out there in individual states, such as moratoria on payments for troubled homeowners. The problem here is that it’s politically very savvy to be helping “the little guy” for 6 or 12 or however many months, but the debt still remains after that time. If a troubled homeowner cannot pay the mortgage they were qualified for beforehand, 6 or 12 months won’t give them a huge raise or source of cash to do so, most likely. But the politicians behind this look good, eh? (And what’s uglier, interest might continue to accrue during such a moratorium, leaving the payer even more screwed a year later.)
(And yes, politicians are going to be doing a lot about this over the rest of the election cycle… look at when all the subprime ARMs reset on chart 42 here: 01/07 through about 12/08… this is definitely going to be an election issue, one way or another. The other charts also show just how huge this mess is, which hopefully precludes any true broad bailout for industry)
Then there are recent attempts to loosen rules on lending, to either raise the conforming loan limit ($417k or so, right now) such that the GSEs (Fannie Mae, Freddie Mac, whose mission is to provide affordable housing for low-/moderate-/middle-income americans) can effectively bail out lenders… Surely to be sold to Joe Q. Public as yet another opportunity to refinance their loans (and keep the prices high, the music going, and so forth.) Does Joe Q. Public win if he gets to chase another adjustable mortgage, punting a few years down the road? Is this really healthy? Will this not just perpetuate the inflation of prices, the fleecing by those who collect fees at every transaction?
There are lots of types of bailout and lots of entities and people who could be the recipients in the end, but it’s not always clear the consequences (cynically intended, unintended) or the costs.
Here’s what I’d worry about at the moment, until I hear details of a sizeable bailout that’s actually going to happen: There are people out there who may lose their homes, who a decade ago could have renegotiated with their lender — a local bank. They could have staved off bankruptcy/repossession/having their home auctioned by agreeing to possibly pay less for their loan, or to some modification of terms — and kept their houses. Nowadays, their loan has been not only sold to some institution somewhere else most likely, but actually carved into multiple pieces and sold to multiple entities. And it turns out there’s nobody to negotiate with — Krugman wrote about this recently.
For what it’s worth, there’s a lot of discussion of these various issues in excruciating detail at Calculated Risk.
And please don’t get me wrong, I figure we’re all screwed by this bubble one way or another, whether directly or indirectly. I’m not cheering for some hard-line “screw the folks who borrowed more than they could afford” or anything like that. I just hope we can come out of this without making things too much worse, and with a minimization of the necessary pain for people. RIP dozens of shady lenders, may you rot for your opportunism and ill-gotten gains.
Off topic: where did your bios go, Pandagon headmasters/headmistresses? I can’t seem to get hold of Amanda’s so I can find her amazon.com wishlist. I was thinking I could just buy her a ton of shit she wants so that maybe she’ll get rid of the stupid anti-spam thang and make my posts magically appear. Would that tactic work?
Where did my other post go on GNMA? There should be TWO posts by me right here.
Not including this one.
Please don’t make me retype it.
If y’all don’t stop this, I won’t leave you my millions.
One thing no one has mentioned here that is integral to the injustice of this situation is the racial and urban inequities behind subprime lending. Namely, that non-whites, esp. blacks and Hispanics, and urban dwellers are much more likely to be targeted and enjoined by subprime lenders than whites and/or suburban homeowners. A good deal of this has to do with continued barriers to accessing credit in mainstream markets, particularly for low-income individuals, but even middle-class African-Americans have a disproportionate presence among subprime lenders, meaning something deeper and more insidious is going on here.
While the crisis looms so large by now that we are all likely to experience the backlash, this entire fiasco is only going to worsen the credit histories, assets, and opportunities of households unfairly and unnecc. targeted by the subprime lending market and further widen this country’s socio-economic inequity.
As for Wally’s grandmother, I like Jillian, also fear for her financial solvency. Elderly, even those who outright own their homes, are another major subprime target, in loans for “repairs” or renovations that end up costing them their homes. Of course, now I’m getting into predatory lending, which is part of the story, but not the whole story.
One thing no one has mentioned here that is integral to the injustice of this situation is the racial and urban inequities behind subprime lending. Namely, that non-whites, esp. blacks and Hispanics, and urban dwellers are much more likely to be targeted and enjoined by subprime lenders than whites and/or suburban homeowners. A good deal of this has to do with continued barriers to accessing credit in mainstream markets, particularly for low-income individuals, but even middle-class African-Americans have a disproportionate presence among subprime lenders, meaning something deeper and more insidious is going on here.
While the crisis looms so large by now that we are all likely to experience the backlash, this entire fiasco is only going to worsen the credit histories, assets, and opportunities of households unfairly and unnecc. targeted by the subprime lending market and further widen this country’s socio-economic inequity.
As for Wally’s grandmother, I like Jillian, also fear for her financial solvency. Elderly, even those who outright own their homes, are another major subprime target, in loans for “repairs” or renovations that end up costing them their homes. Of course, now I’m getting into predatory lending, which is part of the story, but not the whole story.
Test
One thing no one has mentioned here that is integral to the injustice of this situation is the racial and urban inequities behind subprime lending. Namely, that non-whites, esp. blacks and Hispanics, and urban dwellers are much more likely to be targeted and enjoined by subprime lenders than whites and/or suburban homeowners. A good deal of this has to do with continued barriers to accessing credit in mainstream markets, particularly for low-income individuals, but even middle-class African-Americans have a disproportionate presence among subprime lenders, meaning something deeper and more insidious is going on here.
While the crisis looms so large by now that we are all likely to experience the backlash, this entire fiasco is only going to worsen the credit histories, assets, and opportunities of households unfairly and unnecc. targeted by the subprime lending market and further widen this country’s socio-economic inequity.
As for Wally’s grandmother, I like Jillian, also fear for her financial solvency. Elderly, even those who outright own their homes, are another major subprime target, in loans for “repairs” or renovations that end up costing them their homes. Of course, now I’m getting into predatory lending, which is part of the story, but not the whole story.
We’re still working on blog stuff. Since I’m highly motivated to make things work better anyway, bribes won’t work. But if you’re interested in just random, goal-less bribery, I’m not ashamed of shilling.
Wow, I may have posted a comment 3 times now, and am about to try for a 4th. What is going on??? Trying again:
One thing no one has mentioned here that is integral to the injustice of this situation is the racial and urban inequities behind subprime lending. Namely, that non-whites, esp. blacks and Hispanics, and urban dwellers are much more likely to be targeted and enjoined by subprime lenders than whites and/or suburban homeowners. A good deal of this has to do with continued barriers to accessing credit in mainstream markets, particularly for low-income individuals, but even middle-class African-Americans have a disproportionate presence among subprime lenders, meaning something deeper and more insidious is going on here.
While the crisis looms so large by now that we are all likely to experience the backlash, this entire fiasco is only going to worsen the credit histories, assets, and opportunities of households unfairly and unnecc. targeted by the subprime lending market and further widen this country’s socio-economic inequity.
As for Wally’s grandmother, I like Jillian, also fear for her financial solvency. Elderly, even those who outright own their homes, are another major subprime target, in loans for “repairs” or renovations that end up costing them their homes. Of course, now I’m getting into predatory lending, which is part of the story, but not the whole story.
I give up. Was about racial and urban inequity behind subprime lending. You can read about it at:
http://www.newvisioninstitute.org/foresight/?p=104
Well, since Amanda’s shilling, only 13 months til my “I’m 40, single, and not the least bit bitter” party……registry to come.
(hell, yeah, I’m registering. Just because I’m not getting married doesn’t mean I’m not entitled to my Kitchenaid stand mixer or Le Crueset dutch oven. I need it more than a dual income couple.)
I worked for a bank in consumer lending for years and I learned several things:
-The vast majority of the risky loans aren’t by banks. Most banks are traditional lenders - they expect you to have good credit and an income and other tedious things like that. The risky loans are by brokers. Bankers think brokers are the scum of the earth.
-No one wants to repossess your home. No one makes money on repossessing your home. There will be no winners here.
-Yes, mortgage brokers really are that short sighted and stupid. I read an unofficial study where someone went back and checked tax returns for people who used stated income loans. 90% of them lied about their income. And I’m guessing every single broker knew that at the time.
These people weren’t setting out to be cruel and take homes from little old ladies. They honestly believed they could prop up the boom forever. It’s not that the S&L crisis led them to believe they would be bailed out (believe me, the fines paid by surviving S&Ls were incredibly crippling and punitive) it’s that it honestly never occurred to them that their house of cards could collapse. Deluded? Yes. Malicious? No.
-MaJeff, I have to tell you, making biscuits in the big Kitchenaid stand mixer? Pure pleasure.
Mark Foxwell, in my neighborhood in Chicago, I’d say housing prices have nearly tripled in over 10 years–so I don’t know that a 6x multiplier figures into any but the most irrationally exuberant housing markets.
MAJeff, do register! If you’re not hitting your friends and family up for wedding gifts or baby gifts, they should be delighted to buy you Single-and-40 gifts. No need to buy a fancy outfit (as wedding guests) or add a youngun to the annual birthday gift list. A bargain!
The loan companies are also screwing around with new loans. Locked in the rate? Well, it’s not really locked until the final papers are signed. The banks are now changing their offers on loans in progress.
And the loan industry is possibly going to be subsidized? No. The government should take any money it was considering and BUY the loans from the banks. Then have the tenants/mortgagees pay them back at the same interest rates as government bonds have, so it’s basically an nonprofit endeavor. It would help more people that way, and not reward the bad companies.
what area? my father bought a 3 flat in ravenswood in ‘92 that at this point has roughly quadrupled in price, tho he did get it for a steal so it could be an anomaly.
i think situations like this are the only time i feel gleeful about my poverty, i mean, i have no investments, i own no property, what, like im going to be in super poverty? please, i made $7,000 last year. i guess maybe i could worry about rising food costs, but if it gets too expensive to buy groceries, i imagine ill just become a freegan.
btw, of course Tahoe prices are huge. If someone wants to live in the Sierras , best to look away from the popular resort areas and try someplace like Susanville or possibly Truckee.
Here in Sacramento, our house tripled from the early 1990s and we’ve been supposedly a hot market, so 6x prices doesn’t sound typical at all of most markets.
i imagine ill just become a freegan.
I hope you live in NY or SF or someplace filled with the super-rich, for freeganism only works if your neighbors aren’t as fucked as you are.
Please don’t c/p comments four or five times because they’ve gone into moderation. We’re working on the problem of why it doesn’t give you a “you’re in moderation” message, but I promise that’s what it is. I do try to keep up with the moderation queue, but sometimes I do have to leave the house.
I saw this coming when many of the people I worked with were all suddenly approved for home loans. All of the making the same money I was, I knew they wouldn’t be able to hold the loan for its entirety.
We talked about trying to get a loan, but our bad credit histories and uncertain future decided us against it, for which I am now extremelt grateful(for myself, not those who will be losing homes). The only bright side I can see, is when the industry tries to recover, they will practically be giving homes away, maybe then we will get one.
I’ve been watching this for a while now and I’m seriously worried about the US economy. The subprime issue is gonna cause some serious problems and to make things worse China is currently in a position to pretty much destroy the US dollar if they wanted to (and they’re already flexing that muscle). This is going to be a very very hard time for the US economy (and worse for it’s people).
I have a perhaps uncommon view on how we got here:
We should have let Ling Term Capital Management crash and burn.
LTCM was that hedge fund run by John Merriweather and the guy that won the nobel prize for the model that values option, Myron Sholes. They arbitraged differences in value of similar financial instruments, and among other things, made heavy bets that instruments that had the same fundamentals but different liquidity (because there were more of one trading than the other) would get closer in value instead of farther apart. But they had to borrow and invest massively in these small differences to make significant money.
Many of their investments were complicated derivatives where they had contracts with various counterparties that offset each other, leaving LTCM hedged from movements other than the spread between the two things they were betting on. When the wheels came off (and Roger Lowenstein gives the account I agree with in When Genius Failed) because the value of liquidity spiked the world over during a crisis, the major Wall Street banks stood to lose a ton of money on derivative contracts where the counterparty was LTCM. They had thrown a lot of money into these deals assuming it was low risk because they had a counterparty that was only exposed on the spread — which means they didn’t do their homework or exercise proper skepticism.
The Fed knocked heads together and rescued LTCM — not for itself; as its principals lost most of their money, but for the banks, so LTCM could remain the keystone of the arches of risk it had created.
If the banks that assumed LTCM’s soundness had had to eat the big losses in the 1990s, maybe they would have had a more adult approach to risk over the last seven years. If we’re serious about capitalism, we have to let the smart market participants (not working folks; but the parties most able to calculate risk and reward, like big financial institutions) suck it up when they make a bad decision. Otherwise, we incentivise recklessness.
When big banks ask us to fix their screw-ups, the government should say, “if I just fix it for you, how will you ever learn your lesson?”
Oh, and I am seriously worried now, too. I expect that the combination of housing meltdown and high energy prices will throttle consumer spending and plunge us into a depression beginning in about five years.
Five years? I think we’ll be doing well if we can skate past this beyond Nov. ‘08. The energy prices have semi-stabilized over their massive jump, but goods and services are still adjusting their costs upward in reaction. When will the stop? And how long will energy prices be content to hover in the same neighborhood? The housing & mortgage market is continuing its meandering path downward - but no one is sure where the bottom is nor how long the meandering bit can keep up until it all crumples like an under-serviced bridge. And last of all - most of the mutual funds and retirement plans on Wall St. are still bloated and easy pickings for devaluation if the serious investors decide to take profits now.
I moved my retirement stuff to guaranteed bond 2 weeks ago. I had the same hollow feeling I did before the DotCom bubble burst, only about 4x worse.
Generally, it is all there in black and white - the teaser rate, the bump to expect, balloons, pre-payment penalties etc. Read the manual, eh?
So the stock market meltdown is the fault of consumers who accepted bad loans and not the mortgage brokers who made the bad loans? I guess that means that we just have to hand out even more corporate welfare, because how were all of those poor, innocent mortgage brokers to know that people who couldn’t afford their mortgage would start defaulting?
Won’t someone please think of the mortgage brokers? How on earth are they supposed to pay for their second vacation home if these evil consumers are enticing them into making bad loans to them?
What about offers of assistance? Being the web, I’m sure this place is crawling with computer nerds (including myself).
“plunge us into a depression beginning in about five years.”
Sadly I have to agree … I hate using the word depression but all the indicators seem to be there
I’m just screwed, but I know it.
I was a commercial multifamily mortgage lender for over a decade, so I know the drill.
I got one of the very last “no money” loans–One 80% loan and one 20% loan. ARM with a prepayment.
Absolute evil.
But I’d been responsible and not bought all my previous opportunities b/c they were “overpriced”. Hindsight shows all of those “responsible” choices were wrong.
There still doesn’t make any sense to the Chicago condo market–it ought to be grossly overbuilt, but the prices keep rising. Rents in Chicago are NOT cheaper than mortgage payments, b/c you can’t buy a condo for what you can rent one for.
So we did this really stupid thing and bought a condo with no money and a loan that’s going to kill us in two years.
But we figure if we can’t afford the new payments and have to sell, we might make a profit enough to land somewhere, if the market doesn’t crash for a few years. And if we don’t make any money on the deal, well, we didn’t have anything when we started. No worse than just throwing the rent money away.
As long as the market doesn’t crash, there’s really no foul–we end up with no assets, just like we started, and the bank made money off us.
Now, if it crashes…
God, we’re so screwed.
Here’s my timeline:
ARM readjustments peak in about 18 months.
The first wave of readjusted mortgage payors will keep their heads above water for a while before they default; say the peak is about a year out. That’s 2.5 yrs from now.
The banks forclose, which takes six months most places. We’re at 3 yrs.
The housing markets, which have been struggling to recover from the surplus now, drop significantly more than previously.
With home equity so low, even good borrowers are credit-crunched, and also worried, so they constrict spending. Those with bad credit are in dire straits and cannot spend discretionary income. Consumers as a whole slow down their spending dramatically over the year that follows. We’re four years out.
Over the year that follow, American business has a 1929-style crisis of overproduction: they’ve built infrastructure and products that consumer spending no longer supports. They dump workers and contract capital spending.
And … depression.
What makes that scenario even worse is that a crucial resource - petroleum - that provided the energy required for the recovery last time we had a major depression is now less available and more expensive. Argh.
This couldn’t have happened at a worse time for me; I’m currently preparing to sell my house in order to move overseas and get married to my Scottish sweetheart. I’m really scared I’m not going to be able to sell my house in the timeframe I want to. I’m also afraid that if I do sell, it’s gonna be for a lot less than I was hoping, which would mean a lot less to start a new life with. On the plus side, my home town’s housing market never got too overheated except in the way way expensive housing echelon; additionally, my neighborhood is a very hip, up-and-coming neighborhood, and I’ve noticed that houses are still selling here because the prices aren’t insane. I just need to finish all my cosmetic prettifying projects (painting, etc.) and get it on the market.
Wish me luck, Pandagonians. I might need it.
Socialize the risk, privatize the profit. It’s a great racket if you can get it!
You don’t even have to raise the spectre of 1929 to find an example of this; this is pretty much the residential equivalent of the junk bond boom/bust of the 80’s; that took out the savings and loan industry.
Now I know why I’ve been seeing more of those stupid commercials about how to make money buying and reselling homes! Well, at least that makes some sense.
I’m trying to sell a house right now in a market that never got super out-of-control, but even breaking even on a sale requires that you have 5-10% appreciation because of broker’s fees and various other closing costs. So even though my house is listed at $10,000 more than I owe on it, I’m still going to end up losing several thousand dollars to get rid of it on top of the six months and several thousand dollars I spent fixing it up so that I could sell it at all, much less for more than I owed. And that’s if I can get my asking price, which is looking doubtful.
But I’m lucky. I work at a mortgage company and every day I see stacks of forclosure documents showing people whose houses sold at auction for less than half of what they owed on it, and they still owe the difference (wheather it can be collected or not is another story).
http://articles.moneycentral.msn.com/Investing/Dispatch/070809markets.aspx
Oh SURE. Now look what all of this gab did. You affected the market…
Um, my reason for finally getting a condo in my present location (Oak Park) is that my rent IS higher than my mortgage…even on a 15-year loan. If I had gone for a 20-year loan I would have been paying less than rent, even with taxes and association fees thrown in.
The people next door who are trying to flip their unit at $385K are either a) wildly optimistic, or b) know more about the market than I do…..
First it is housing and subprime mortgages. Next it will be regular ole mortgages. Why? People with good credit and traditional mortgages won’t be able to sell their houses at a gain due to a glut of housing forcing prices down.
So, people who want to sell and move, can’t. People who must sell to move (job related or whatnot) will have to sell at a loss. Driving them deeper into debt.
And the final big bad hit is gonna be Goldman Sachs. When Goldman goes, the economy goes. Derivatives and hedges are gonna break the economy’s back. And I have a feeling that in addition to being a company that makes all its money in derivatives and hedging that there is some massive type fraud going on at Goldman. No insider information here, just a hunch.
I wonder how many first time home owners are able to keep their houses even though under normal circumstances they would never have qualified for a home loan? I hear so much about minority home owners loosing their homes. Any success stories?
After the S&L crises, I have little faith in the government/finance industries ability to control its greed. To bad we can’t use that greed for something good, like giving low income families a chance for home ownership. Think of it as an up to date G.I. bill, where unqualified and underfinanced vetrans got the chance to go to a top ranked university and turned their opportunity into an economic powerhouse.
Just a thought
My sister-in-law just bought the house next door for 199K.
When we first got this house, it went for 77.9K in 1996.
We re-financed twice, once to take off the PMI after I put some money I inherited from Mother Avenger, during which Ilocano Avenger, my noble bride, terrified the mortgage broker who tried to have us re-fi at the same interest rate we paid before.(We did get the lower rate, and he confided to me that IA ‘was very angry with him the last time they talked on the phone’)
The second time, we re-fied based on the increasing propery value, got a 15-year fixed rate, which we’ll probably pay off a lot sooner than the 15 years term.
We could probably refi for and get more money out of the house, but our cars are paid for, we don’t have any humongous bills, etc.
Oh, and the house my sis-in-law bought? It was a foreclosure. Her realtor(get a realtor if you’re buying folks, otherwise you might as well paint a target on your back if you don’t know what you’re doing) told me that it can cost a bank thousands of dollars to do a foreclosure.
“They often convince people to buy into these mortgages by making the payments small—at first. They do this by putting people into variable rate loans that start off at temptingly low rates, and once people sign on the dotted line, the rate jacks up incredibly high. ”
Those with lethal mortgages should look into home equity acceleration to payoff their homes *years* sooner than listed on their amortization schedule:
More and more folks are using a Home Equity Line of Credit (HELOC) or a business-line-of-credit (BLOC) or personal-line-of-credit (PLOC) as an interest cancellation account to accelerate their home equity and payoff their home *years* sooner than listed on their mortgage amortization schedule.
Unfortunately, today’s Real Estate market means that folks can no longer count on appreciation to build home equity. Those who realize that they need to pay down their current mortgage debt are looking for alternate ways to aggressively (yet safely) build equity.
And they’ve discovered a perfect online system to do that; they can focus on their wealth accumulation goals while accelerating their equity simply by using a Home Equity Line of Credit to ‘power’ the Money Merge Account™ financial solutions program.
A typical 30 year loan (of whatever type) can be paid down in 1/3 to 1/2 the time — it’s a great way to save *huge* amounts of income by eliminating a mortgage amortization front-end interest load. (On a million-plus dollar home, I’ve personally seen where the Money Merge Account™ program will save the homeowner $750,000 in interest charges!)
And the best thing – homeowners don’t have to refinance their existing mortgage or, in most cases, make any adjustments to their lifestyle.
It is unfortunate that most of us were never taught to follow three essential principles: (1) Avoid paying interest, whenever possible, (2) Use other people’s money, whenever possible and (3) Find and use a financial system that will guide you, especially if you have the tendency to go off-track. The Money Merge Account™ software and the program’s counselors use these principles to keep each homeowner focused on their wealth accumulation goals.
I’d be happy to provide further details…
“Lee Matthews”, keep your blood-sucking financial scam spam to yourself, asshole…