‘After Prolonging The Boom’ Loans ‘Worsen The Bust’
Business Week looks at exotic loans. “For cash-strapped homeowners, it was a pitch they couldn’t refuse: Refinance your mortgage at a bargain rate and cut your payments in half. New home buyers, stretching to afford something in a super-heated market, didn’t even need to produce documentation, much less a downpayment. Those who took the bait are in for a nasty surprise.”
“Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules, often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can’t count on rising equity to bail them out.”
“What’s more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.”
“There was plenty more going on behind the scenes they didn’t know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan’s interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they’ll soon be confronted with the choice of coughing up higher payments or coughing up their home.”
“The option ARM is ‘like the neutron bomb,’ says George McCarthy, a housing economist at New York’s Ford Foundation. ‘It’s going to kill all the people but leave the houses standing.’”
“Gordon Burger is among the first wave of option ARM casualties. The police officer from a suburb of Sacramento, Calif., is stuck in a new mortgage that’s making him poorer by the month. Burger, a solid earner with clean credit, has bought and sold several houses in the past. In February he got a flyer from a broker advertising an interest rate of 2.2%. If he refinanced the mortgage on his $500,000 home into an option ARM, he could save $14,000 in interest payments over three years.”
“Burger quickly pulled the trigger, switching out of his 5.1% fixed-rate loan. ‘The payment schedule looked like what we talked about, so I just started signing away,’ says Burger. He didn’t read the fine print.”
“After two months Burger noticed that the minimum payment of $1,697 was actually adding $1,000 to his balance every month. ‘I’m not making any ground on this house; it’s a loss every month,’ he says. He says he was told by his lender that he’d have to pay more than $10,000 in prepayment penalties to refinance out of the loan. If he’s unhappy, he should take it up with his broker, the bank said.”
“‘They know they’re selling crap, and they’re doing it in a way that’s very deceiving,’ he says. ‘Unfortunately, I got sucked into it.’ Among Burger’s alternatives were one for $2,524, about what a standard fixed-rate mortgage would be on the new amount, and the $1,697 he pays. Why would his bank make the minimum so low? Thanks to a perfectly legal accounting practice, no matter how little Burger pays each month, the bank gets to record the full amount.”
“Most of the pain will be born by ordinary people. And it’s already happening. More than a fifth of option ARM loans in 2004 and 2005 are upside down, meaning borrowers’ homes are worth less than their debt. If home prices fall 10%, that number would double. ‘The number of houses for sale is tripling in some markets, so people are not going to get out of their debt,’ says the Ford Foundation’s McCarthy. ‘A lot are going to walk.’”
“After prolonging the boom, these exotic mortgages could worsen the bust. They also betray such a lack of due diligence on the part of lenders and borrowers that it raises questions of what other problems may be lurking.”
I encourage everyone to read this article in full. Last year one writer called what was going on with this housing boom, ‘winking at each others’ scam.’ Now it seems all involved are looking around with disbelief at what they have done.
I agree - this is an eye-opening, must-read article. I like the ending….
“In an April letter to regulators, Cindy Manzettie, chief credit officer for Fifth Third Bank in Cincinnati, said it’s not the “lender’s responsibility to help the consumer determine the appropriate payment option each month…. Paternalistic regulations that underestimate the intelligence of the American public do not work.”
In other words, “Hey, we’re preying on the poor, desperate and ignorate here. Stay out of our way!”
“it’s not the lender’s responsibility to help the consumer determine the appropriate payment option each month…. Paternalistic regulations that underestimate the intelligence of the American public do not work.”
Comments like this make me think of It’s a Wonderful Life and Bailey Building and Loan, and how loans used to be about building communities. Now it is all about points, fees, etc. No one gives a damn about effect on communities. Very sad to see what a nightmare “the American dream” has become.
In the real world, Potter wins.
And we all know how “Potterville” turned out.
Cindy’s attitude perfectly illustrates the fact that the deregulation juggernaut has run off the tracks. The ironic consequence will likley be a taxpayer funded bailout of the lenders who enjoyed sky-high profits in this predatory-lending frenzy.
IMHO Cindy is correct:
“it’s not the lender’s responsibility to help the consumer determine the appropriate payment option each month…. Paternalistic regulations that underestimate the intelligence of the American public do not work.”
1) Fifth Third Bank does not offer the Option Arm.
(Fifth Third Banks wholesale rate sheets for Sept 1, 2006)
http://tinyurl.com/gbgtj
2) In the securities industry, there was always a BS financial disclosure to provide evidence that you were qualified to make such an investment. “To make this investment you are providing evidence that you are worth over $100,000 in liquid assets.” or some such blather. When I was asked about it in the 1970’s, I always told friends and family to ignore. The reason is that there is no such thing as a perfectly safe investment. Plenty of widows and orphans were wiped out with the “safest investment” General Public Utilities (they owned Three Mile Island, a minor mishap).
I do not want a well meaning but incompetent government telling me what I can afford or what loan I must get.
I agree. Individuals must take full responsibility for their affairs. Government meddling and intervention makes things worse. It is highly likely that bad mortgages would not be approved with GSE’s like Fannie Mae. Clearly, an implied government backing certainly affects the lenders/investors decision making. In this case it has created serious problems.
There is evidence that there was not even the most basic disclosure here, so the customer had no clue. Requiring some significant level of real disclosure is hardly onerous regulation. The loan documents already state the total amount to be paid, for example.
The reality is that we the taxpayers will be bailing these people out AGAIN, so we might at least potential want to think about begining to consider in some circumstances requiring the market to operate in such a way that these crashes do not happen. Making people responsible for their own affairs sounds cute, but we know from repeated application that it does not work. It is in the public interest to control explosions of debt. Pretending to be tough on individual borrowers is just a recipe for more of same.
Exactly, Mole Man.
It’s wrong for people on this blog — who likely have higher IQs, better education and resources — to assume everybody else would be able to understand these loan terms. Loan docs are created in such a wasy as to overwhelm most people (how many duplicates of assinine, redundant fine print does one need?). When we did a refi on our old house, the notary was trying to rush me throught the paperwork, sighing and saying, “it’s just standard paperwork, nothing you need to worry about.” I kid you not. She thought I should trust her verbal description of what was on the paperwork, and not read it myself. Also said I could look at it after we had signed, as I would get a copy.
No, we need some kind of regulation here. At least we need loan docs to be simple, easy to understand, and much more concise!!! They need to spell out, on the first page and in big letters, what the worst-case scenario looks like. Also should disclose on that same page(s) how the lenders/brokers are compensated.
Over my dead body.
The banking regulators should be also on the side of another group that can be hurt by the bank’s lending practices, the depositors. I don’t want my savings at risk because the bank was reckless with lending it out. The regulators should be more concerned for the depositors than for the borrowers. Otherwise the depositors have little or no influence in how their money is used.
If the regulations seem paaternalistic, perhaps it’s because the financial industry as whole seems to have the restraint and self-discipline of a three-year-old child.
Moopheus . Boy do I agree with what you said . How dare the lenders put the depositors at risk .
Of course, these days very few banks actually lend against depositor savings. That is so yesterday. Now it’s all about packaging loans into MBS and selling them to investors (GSE’s?). This is actually the main part of the problem. If a bank can simply sell off the loans and get them off the books, what is the incentive to conservatively underwrite?
There is a heck of a lot of risk here that is not being properly priced because nobody really knows who is holding the bag. I think Buffett’s statement about derivatives being weapons of mass destruction applies.
Yes Darth, what you say is true, but if the bank fails, the bank fails and your deposits are at the mercy of the FDIC to recover. And deposits are loaned out of course (they don’t just sit in the vault), but thanks to the mechanism you describe, they can be loaned out many times more than before.
Precisely. Nothing pisses me off more than some bureaucrat in a $1,000 suit saying, “well, we’re not in the business of fixing people’s mistakes, we just have to let the free market take care of this.” HEY ASSHOLE: you didn’t spend LESS of my tax dollars, you’re just giving me less service, specifically more lawlessness. You wanna be a big Adam Smith guy? Go around and peel off all those FDIC stickers all over the windows at the banks. Then we’ll see how much they’ll pay me for a CD.
Any meaningful reform has to proceed from the premise that 99.44% of the American public are sheep and need to be treated accordingly.
“The shepherd drives the wolf from the sheep’s throat, for which the sheep thanks the shepherd as his liberator, while the wolf denounces him for the same act as the destroyer of liberty.”
– Abraham Lincoln
It just shows you how most people are incompetent when it comes to finances. Sure the lenders are in fault for pushing loans but people should do their homework and know what their getting into. I know the industry has it’s faults but the consumers should sharpen their skills and understand what they are signing. Ignorance is simply no excuse.
I 100% agree with you. Unfortunately, people have no restraint when it comes to what seems to be free money. Case in point - one of my best friends is in debt far beyond her eyeballs. Just took out a home equity loan to help with it - but will still have a huge chunk. She blames, get this, the credit card companies for her plight because they keep giving her credit cards. I said, “Uh, did you ever think about just shredding those offers rather than accepting them?…” Rhetorical question, obviously, as she has some ridiculous number of cards.
Ecoast;…Maybe I can top that one….
My nephew blames modern day marketing on TV as the cause for him to buy to much stuff….Its the retailer’s fault….
scdave-Marketing is seductive and I am emminently seducable.
It’s called instant gratification.
And I bet you a million dollars that Miss Cindy would be the first to sue if she was ever taken advantage of. Imagine the audacity of a borrower expecting truth in lending and disclosure- not just having papers shoved in front of them and being asked to sign them because it is required or SOP.
Sorry Cindy, but you DO have an obligation to make certain that the borrower fully understands what he is signing, that all options are disclosed to him, that all of the information provided by the borrower is factual, and that you act in an ethical, moral,and professional manner.
Your sole defense is, “Yeah we know we screwed them, but they are adults and if they let us screw them, so be it.” That does not fly in a court of law.
And McDonald’s should explain all the risks of eating a Big Mac. A loan salesman should explain all risks and make sure the borrower understands. Of course, this may be impossible if the borrower just doesn’t want to hear it. And not all mortgage brokers do. This is why a loan agreement or note is provided. Any individual can hire a fee-only financial planner or attorney to review documents and give them their opinion. Of course, most people do not take full responsibility for their affairs and will blame someone else when things go wrong.
I’m being pedantic here, but taking out a home equity loan doesn’t ‘help’ with debt - it’s just moving debt from one creditor to another. The principal hasn’t changed one cent.
Totally agree. Her thinking was easier to consolidate and a lower rate. Note that she still has 4 credit cards that she’ll be paying on after this consolidation and she didn’t pay off any school loans with the equity loan. Cannot imagine my finances being that screwy.
“She blames, get this, the credit card companies for her plight because they keep giving her credit cards. ”
Funny. Reminds me of a humorous statement made in the movie “as good as it gets.”
A receptionist asks the author ( Jack Nicholson), “tell me how you write about women so well?”
(Nicholson) answers…”well, first, I think of a man, then I take away reason and accountability.”
DOC
Well, unless you are very savvy (and I would put maybe 10% of the population in that boat), at some point you are going to have to rely on somebody’s trustworthy advice. Who, exactly, could have been relied upon in 2005? Even Greenspan was recommending that people refinance into an ARM.
Maybe the real lesson is that you shouldn’t take advice from someone who is financially interested in your decision.
I don’t think you need to be that savvy. Everyone was saying, “These are the lowest rates have been in modern history, in many, many decades.” Now, given that, where will rates go in the future? Up, sideways, or down? Well, down is pretty much out of the question, so why not lock in the interest rate now? I don’t think it takes much knowledge or savviness beyond a typical second grade education to grasp this.
An analogy - a store has a sale and says, “You can pay the sale price in full now, or pay me half now, and then half of whatever the price is two months from now.” Well, cripes, if it’s a sale NOW, you know it’s going to cost more LATER!
Actually what you are stating, even if they are very good examples, could be beyond the basic understanding of many…
It reminds me of the people who argue it’s “smart” to have a mortgage because of the “tax writeoff.” Erm, you’re paying the bank $X to save sending Uncle Sam $X * 0.33333 dollars.
It would be like me saying, “I know you owe Bob $100, but Bob and I have come to an agreement - if you pay me $100, Bob will forgive $33 of what you owe him.”
Now who would take that deal? Who would rather pay $166 versus $100? But that’s what many “financially savvy” people do (and tell others to do).
Um, it is “smart”. You borrow the money at 6% from the bank. The government pays 2% (mortgage deduction). You turn around and put it into assets that yield 6%. You get a 2% profit. In reality, you can get more than 6% yield, so you’re even better off.
As opposed to putting the original principal in a savings account at 5% interest??? It’s not smarter.
And I remember looking into the details of a ARM mortgage and thinking this was just a really big credit card - no thanks. I also remember watching housing prices go up in Sacramento and thinking how out of whack it was getting. I don’t have a degree in business, finance or econ and I could see the writing on the wall. Not sure why no one else could.
Snake Charmer you’re right, caution should be used when the other party has a financial interest in your decision.
The problem is that for some reason many people actually TRUST brokers and realtors both and so they completely let down their “sleaze detectors” when dealing with them.
Or, when their sleaze detector sends an alert, they discount it. They have too much “respect” for the “profession”. To the point that they literally can’t distinguish between a good and bad realtor/broker or even when they can tell, they won’t act on it, don’t trust their own intuition.
Even people who are smart enough to work the numbers before they begin looking for a house will be swayed by a broker or realtor or both to invest/ borrow more than they’d planned. Or not read the paperwork /ask the right questions.
I’ve had friends, who seemed generally well-informed, recommend realtors/brokers to me as “A great realtor/broker”. Within minutes of meeting with them they’ve already betrayed themselves as complete sleazeballs and I’m out of there and continuing the search for an honest person who will listen and has MY interests at heart.
A lot of brokers/realtors are nothing but snake oil salesmen but they still hold the esteem of the general public who believe they have their best interests at heart.
This belief will be sorely tested in the aftermath of this bubble.
There have always been skeezy brokers/realtors around, but they’ve wreaked so much havoc this time that I think they may have blown their cover for good.
They’ll be generally thought of as out and out crooks who exist only to take advantage of the consumer.
Remember the Tru-coat scene in the movie Fargo? I predict some theater like that in the coming years with brokers and realtors playing the bad guy.
Also don’t miss checking out the “related items” links to the right of the Jaguar add. Some real gems in there.
From the “Worst Practices” link in the article:
“Consider Greg, a single father earning about $45,000 a year as a baker in San Diego who asked BusinessWeek not to use his last name. A decade ago a bank might have given him a mortgage for about $100,000, or 2.5 times his income, the rule of thumb. Yet he’s on the hook for about $940,000, or nearly 21 times his pay, with two loans on two houses from Countrywide and Accredited Home Services. (Neither would comment on an individual case.) Says his bankruptcy attorney, Ray Schimmel: “He got those loans in about a year. How crazy is that?”"
Pretty F%#$$^% crazy!
I wonder what he put down for income on his stated loan application?
How do you spell F-R-A-U-D…… and I am sure his BK lawyer knows that those loans will not be discharged if he LIED on the applications. Sucks to be him.
Jesus! I just dumped a cup of coke on the keyboard! 940K????
He makes a lot of dough.
*chuckle*
$940 k? Ok, let me breathe, $940k?!? I make… a lot more than this baker… and I wouldn’t borrow $940k.
Man… he is rolling in the dough.
2007 is going to be “interesting times” to paraphrase the ancient Chinese curse.
Neil
a recently married couple i know bought 2 houes in 2004, ,1st house ~$350K, 2nd house about $450K for rental.. Both of them are waitstaffs at the restaurant, with combined income no more than 100K
how they both qualifed for 0 down, IO loan on both houses i have no idea..
At what point in time did 300k, 400k and 940k become *not* a hell of a lot of money?
21 times annual income, good lord!
I remember being a little nervous buying my house at 2.5 times annual income.
At what point in time did 300k, 400k and 940k become *not* a hell of a lot of money?
21 times annual income, good lord!
I remember being a little nervous buying my house at 2.5 times annual income.
I think that if you’re not a little worried about taking out a mortgage that’s more than your annual income, then there’s something wrong.
I fully agree, this is one of those articles that need to be read in full, it is too good to miss.
I think this feels like it is the kind of article I’ve been waiting for since the summer of 2004.
Me too. I’m one of those who believe that toxic mortgage lending is the biggest single factor in the housing bubble’s bloated size and galling strength (in the Bay Area, such lending is virus-prevalent). This excellent article really feels to me like a watershed moment in this whole mess…
I am split on whether I believe the government should have stepped in to regulate this mess. One the one hand, had the government stepped and regulated these moronic ARMS, the housing boom would slowed immensely, thus possibly avoiding the catastrophe that lay ahead. Let’s face it, the primary instrument that allowed RE to spring out of control was exotic mortgages, without them, it would have been impossible for the average Joe to afford such ridiculous prices. However, the primary reason for the housing boom was speculation by an uneducated, greedy populous who is a product of Pax Americana and has not experienced the hardship or tragedy of past generations. Believing that housing equity gains of 100% in two years was perfectly justified because they are such shrewd investors for buying a house.
On the other hand, I would like to believe the free markets would dictate whether exotic loans were a viable consumer product. I would like to believe that the companies making these loans had undertaken a through risk analysis to ensure they were lending money that a relatively good chance of being repaid, but that obviously has not been the case.
After months of lurking here, reading perhaps a hundred posts each day, there is one piece of this puzzle I have been unable to decipher: WHAT WERE THE MORTGAGE COMPAINES LOGIC in making these exotic loans? It does not take a whole lot of research to uncover the fact that many homeowners would default on these loans, so how did the mortgage companies become so complacent with such a large sum of money? My understanding at this point is that the trillion or so dollars fueling this fiasco has no face, it is money derived from massive hedge funds, which was poorly managed. Perhaps they were counting on a bailout, which was smart because we all know they are going to receive one. Heck, event the FB were not that dumb because they knew that they could walk away from their overpriced homes, what was their real risk—a lowered FICO score?
The logic of the mortgage companies was: WE are not HOLDING the paper…we are selling the paper, so we are getting paid after the loan funds.
At one lender that I was at, when we got a ’special’ file, we would take the file to the investors to see if one of them would buy it…if they would, we would approve and move forward with the loan. The lender would NOT make the loan and hold it in portfolio if there was not a buyer on the secondary market.
As far as this whole article goes, I have been saying these things for years and on my blog for the past year. Anytime I said ‘what happens in the future…’ I was met with either stupid stares, or some great ‘data/logic’ that they can just sell and cash out when the time comes, or refi. “you can’t lose on real estate!”
As for the guy who left a 5.1% 30-year fixed for an option arm with a fat pre-pay penalty (which most have…the broker (usually) gets a 1% commission on each year of the pre-pay they can sell. Maybe you shouldn’t rush in and make a 5 minute decision that has at least 2-3 years up to 30 years of consequences.
I know it happened a lot…but most people are lazy and don’t do their own research. Government should not provide a ’solution’ to protect people that don’t/won’t do their due diligence.
SoCalMtgGuy
socalmtgguy@gmail.com
I am in agreement with you but how do we avoid something like this in the future. We are in a real, and I mean REAL mess right now. There is a possibility that many even on this board could lose employment over this. I’m not in favor of government regulation but I also am not in favor of banks sending the economy into a tail spin. What’s the solution?
Let those in the path of the storm be financially destroyed. Knowledge is gained from failures, not from bailouts.
absolutely concur…… no other message gets thru. ‘long as they do it on their own dollar, i’m happy….
Its time the middle of this country sent the right and left fringe to the back rows because its hurting this country.
1 - The government requiring a lender to fully disclose ALL of the terms of a loan and get some minimimal verification that the person sitting in front of you reasonably qualifies for this loan is NOT unreasonable regulation by an incompetent government, it is reasonable regulation by a competent government. These laws don’t stem from thin air, there was a time when there was no lending regulation on speculative assets and it got out of control and then economic disaster resulted, it was only at this point that the so called incompetent government was forced to come in and had to try to clean up the mess before the country fell into oblivion.
When this unregulated garbage gets so bad that it causes a crash you better believe the sheeple will bring in the gubment for another new deal that’ll make FDR look like Dubya.
There was a time when at least one of the political parties was in periodic contact with the center of this country to realize this.
Nail, meet hammer. Well said.
Ditto that. Very well said.
Thanks SoCalMtgGuy that clears up the issue a bit, but the one thing that’s still has me confused is the timing of all these factors. It is conceivable that the banks have always possessed the power to cause a housing bubble. All that needs to be done is simply loosen the lending standards and introduce exotic mortgages to the John Q public. There is always someone willing to accept money regardless of the risk; however, the banks never did this in the past (at least not on this scale) because it was obvious that it would not be in their best interest due to a higher default rates etc. So why did the banks change their thinking on this issues. I find it hard to believe that executives making these decisions could be blinded by the housing boom and believe they were making sound financial decisions by lending $650,000 to a worker who only grossed $50,000 /year.
SoCal, good see that you’re still active in the RE Bubble. When do you think you’ll have a new post up at your site?
The redeeming value of idiots is that they usually aren’t around for very long.
SoCalMtgGuy,
Investors usually write in a clause that forces the lender to buy back some of the loans if too many of them are going bad.
According to what you say, the lenders didn’t understand this and are going to be on the hook down the line. This is pretty surprising.
Well uhh, that’s exactly what happened with H&R block recently and they had to increase their bad debt provision to deal with the forced buybacks.
The sellers of these mortgages are complete sleazeballs. I’ve lost count of the deceptive mailings I’ve received, many of which are designed to look like they include a check, are from my existing mortgage holder, or are from the government, trying to persuade me to refinance into an interest-only or negative amortization loan. Until I put my home phone on the national Do Not Call list, the number one source of illegal pre-recorded telemarketing calls to my home was from sleazy mortgage brokers. Fortunately, because they were breaking the law, I was able to sue most of them and get some nice judgments for their telemarketing violations.
Outstanding work, sir!
Capitalism at its finest!
Ben, it gets worse. Quotes from the annual report of Washington Mutual below. It appears that 75% of the Option Arms funded by WaMu, totaling about $30 billion dollars, may not have qualified if the market interest rate was used (the loans were underwritten assuming a pre-2004 interest rate when the market rate was, in fact, quite a bit higher). So on top of these loans probably flunking the stress test (when interest rates/payments adjust), these borrowers have to deal with the fact that they may not have qualified for the loan in the first place.
http://sec.gov/Archives/edgar/data/933136/000110465906053228/a06-17516_110ka.htm
From page 56:
Underwriting and Risk Mitigation
The Company actively manages the credit risk inherent in its Option ARM portfolio primarily by ensuring compliance with its underwriting standards, monitoring loan performance and conducting risk modeling procedures. Risk attributes and compensating factors, which may include an applicant’s credit score, the loan-to-value ratio, loan size and debt-to-income ratio, are taken into consideration as part of the underwriting process. The Company’s practices of not offering Option ARM loans through its specialty mortgage finance lending program and of selectively selling Option ARM loans to secondary market participants have further limited the potential for credit risk in its Option ARM portfolio.
In the underwriting of loans, one of many factors the Company considers when deciding whether to approve or decline a loan is the applicant’s debt-to-income ratio. The Company’s underwriting process for Option ARM loans has historically involved calculating an applicant’s debt-to-income ratio using an administratively set interest rate. Prior to 2004, the administratively set rate approximated the then-prevailing fully-indexed rate. However, as short-term interest rates (and hence the fully-indexed rate) increased in 2004 and 2005, the Company’s administratively set qualifying rate was not adjusted upward, which resulted in loans being made to borrowers who were qualified based on debt-to-income ratios calculated using an interest rate below the fully-indexed rate. The administratively set rate was adjusted upward in October 2005, and beginning in mid-December 2005, it was replaced with a fully-indexed rate that adjusts monthly for changes in the index rate.
The Company’s experience shows that debt-to-income ratios are less predictive of loan performance than credit scores and loan-to-value ratios, which the Company believes are the two key determinants in forecasting future loan performance. Therefore, having considered the credit scores and loan-to-value ratios of the Option ARM loans made to borrowers who were qualified based on debt-to-income ratios calculated using an interest rate below the fully-indexed rate, the Company expects that the credit performance of these loans will not differ materially from the expected performance of Option ARM loans qualified using the fully-indexed rate.
Option ARM loans originated in 2004 and 2005 and held in portfolio at December 31, 2005 had an unpaid principal balance of $42.87 billion, a weighted average FICO score of 681 and a weighted average loan-to-value ratio at origination of 72 percent. Of such loans, the unpaid principal balance for borrowers who were qualified at below the fully-indexed rate totaled $29.97 billion, with a weighted average FICO score of 685 and a weighted average loan-to-value ratio at origination of 72 percent.
Well, it is a good thing that tighter lending standards are on the way…
The headlines will say one thing, the fine print something else, the loopholes will be huge. Result: Bizz as usual.
I’m afraid you’re right. Only when these mortgages become unprofitable to the secondary market will this stuff ever dry up.
“The option ARM is ‘like the neutron bomb,’ says George McCarthy, a housing economist at New York’s Ford Foundation. ‘It’s going to kill all the people but leave the houses standing.’”
Great analogy…….
Outstanding! Well said.
-But others, caught up in real estate mania, ignored or failed to appreciate the risk.
- “Most of the pain will be born by ordinary people. And it’s already happening. More than a fifth of option ARM loans in 2004 and 2005 are upside down
Next up in the pain-bearing lineup: Federal taxpayers…
Why should it be any different this time?
GetStucco, please don’t say that!!!! Why would the government ask us to bail them out? FB’s are not important well-moneyed lobbyists, They are not even a large percentage of the voting population, the banks are not suffering so why would the government even consider bailing ordinary people out? In fact, isn’t that why they changed the bankruptcy laws recently? So they could still make their tax money?
I think we should discuss what we, on this blog, are going to do about it if anyone in Government even whispers the word “Bail-out”.
We need a plan of action.
But the banks will be hurting. Their stock prices will be hurting, when the billions of dollars they’ve “claimed” on these option ARMs has to be taken off the books because these FBs have handed the banks the keys.
My only hope is that there will be enough finger pointing among the lenders, appraisers, brokers, and realtors that nothing will get done.
Regardless of how this unfolds, I do not believe the banks stock will be hurting. For an excellent example of how well the Plunge Protection Team does their job these days, I suggest taking a quick look at GM’s stock price (Google: GM and PPT). Now here is a company in dire straights, teetering on bankruptcy and their stock actually surged 40% in Q1 2006, look at any chart to see the obvious. I hate to sound like I am suggesting a conspiracy, but the evidence is overwhelming in my opinion.
I have no idea about whether the PPT is supporting GM’s stock price.
However, I do recall that sometime earlier this year and likely in Q1 (or close enough to it timewise to get investors excited), that GM’s BoD and senior management finally decided to do something about restructuring the company.
Something called “layoffs” and/or “job cuts.”
Those things usually thrill investors.
[On the morning of September 12, 2001, *I*, as in *me*, could have told GM the world had changed and they had better think about changing some of the way they do their business... but it took them only about five more years to figure it out.]
I agreed we need to start a plan of action. I refused to have to pay more taxes for their greed. I got out of high school in the late 70’s at the beginning of the recession. I raised my children on my own, went back to school and now thanks to the crooks at Sallie Mae will forever be paying off students loans, but it was a chance I took to have a less physical job in good old Appalachian America. I watched people in my neck of the woods that would buy, buy, buy so they had everything there hearts or their kiddies ego desired. Or my favorite, go ask mom and dad to open their wallets again. It amazed me for years how could these people afford everything. Eight year olds with cell phones! Fancy cars and homes in Appalachian the norm! A few months ago I found Ben’s blog. Amen! I felt for the longest time something had to give, homes that were at the average $400-1 million, huh? When my husband and I started to buy a home 5 years ago we looked all over the area and I refused to buy a match box home for $120,000. I drew up the blue prints (basic CAD 101). My husband, a construction worker took six months off and built the house. We couldn’t finish it completely but that was okay. I would rather live with a small mortgage payment and finish a little at a time I‘ve worked hard all my life to manage my own money and responsibilities. When friends would buy households full of new furniture, gadgets (a TV and DVD for every room) and then go bankrupt, not once but several times and get by with it. Who did they think was actually paying in the end for all their toys, me! When the new bankruptcy laws come into play I thought finally they won’t get off that easy anymore. Wrong! Then to see consumer spending going up with all the high gas and fuel prices I felt so stupid. I thought I really can’t budget like I thought I could. I had no idea people were that dumb to think there is no catch to all the mortgages games and that’s were the lifestyle was coming from. While I have conserved and lived in my means all my life and they spent beyond their means let them learn a valuable lesson. This website has been a godsend. It is a true common sense education for someone that doesn’t work in the finance world to understand the depth of what has went on and how bad it will get.
The only thing I need know is an acronym list for all the jargon. Most of it I can figure out but there are a few I have trouble with. (what oh what does FB stand for `~~~~ Buyer ???).
The government is not going to bail out the FB’s but the government will bail out the banks if trouble develops.
Ordinary people who get exactly what they asked for. The majority of the blame has to be on the borrowers, not the lenders.
Agreed. Next time, maybe they’ll remember a couple of pointers: 1) when you’re signing papers dealing with hundreds of thousands of dollars, you might want to read what you’re signing, and if you don’t understand it, have someone other than an interested part explain it to you; 2) if it sounds too good to be true (”$500,000 mortgage for only $1000/mo”) it probably is.
Yup…..No free lunch still applies….
Plenty of blame to go around. The banks after all made assertations about Loan to Value and debt to income ratios when they were selling these loans to investors that they should have known were probably fraudulent. The Banks are deeper pockets than appraisers so I’m betting that honest appraisers who can show that they lost business because they couldn’t “hit the numbers” will be called to the stand to testify in class action suits aginst banks.
Finally. The MSM finally are prepared to cut loose and fire salvos at this thing, to alert the public of the fire after it has been raginf for quite a while. The cover, with the serpent crushing the house, should get a little attention in the newsstands.
Once the elections are over, it’s ALL over. “Seatbelts!”
Frankly, this article is astonishing. It was just a few months ago that Business Week published a blurb about this blog that belittled it as ’schadenfreude’, using a quote from Mr D, of all people, for that charge. Now they stand indignant at the fraud that will cause serious financial pain for millions of Americans. Too little too late, Businessweek.
Ben, Could you post a link to that article?
It wasn’t an article, it was just a paragraph in the print edition.
It was the blog of the week section.
This will hit the newstands this week and I hope the non=financial media picks up on it, however, agree it is too little too late. But just in time for the 2007 congressional hearings!
“Too little too late, Businessweek.”
Yes - as I said above - I’ve been waiting for an article like this since 2004. Essentially, since the Fed began raising rates I had thought that somebody would start poking around and figuring out where the “holes” were in the housing charade. It was certainly obvious what was going on in San Francisco back then, if anyone was paying attention (what? Are there no mainstream reporters in the SF Bay Area?).
What did happen to critical thinking in the US media?
“… Business Week published a blurb about this blog that belittled it as ’schadenfreude’, using a quote from Mr D, of all people, for that charge.”
And where is “mr. d”?
Wasn’t he the one proclaiming every day how he was going to sell his home next spring?
No, I think that Mr. D was one of the angry hyper-inflationists.
If I remember correctly, we had a few “discussions”.
The one I remember is the one dwr remembers.
In late ‘05 he kept saying he would sell in the DC/NoVa area in the spring on a “bounce” in the housing market.
At the time, it was apparent (to many here, the blog, anyway), that a torrent of inventory was in the offing and it would be a “Silent Spring” (my apologies to Rachel Carson).
I wanted him to “do well” and hoped he would sell sooner rather than later.
“Too little too late”
I completely agree with you Ben. This “plague” should have been identified at least three years ago by main stream media. Alerts should have been being published in every business or finance periodical across America. But we all know some other interest was being served here. If these toxic loans were exposed to the masses for what they are/were, then this bubble couldn’t have kept it’s legs and would have collapsed at least a couple of years ago. No, they had to keep the psuedo economy rolling along as long as they could. Now that it’s apparent this bubble can hold no more air, the finger pointing begins. Pretty friggin’ lame!
Those who did predict this fallout were qualified as “HENNIE PENNIES” who have told the same story for the years of RE inflation. When in reality they were the ones who “SAW THE FOREST NOT THE TREES”.
BusinessWeek 1982 Death of Equities
What the hell is a cop doing living in a $500k house?
What a moron, he didn’t know how good he had it. He just bought too much house in the first place.
The entry level homes in sac are a joke. Affordable housing for the working class is hard to find up there.They are often forced to into houses they can’t afford.
“forced” into houses, kicking and screaming.
Forced by market forces, in a sense.
Oh yeah, I forgot, renting is outlawed in Sacramento.
Yep, people need housing, they don’t have to purchase it.
It’s obvious stupid and greedy of buyers played a huge role in creating this mess. But as the Businessweek article makes plain, predatory lenders who lack any sense of business ethics deserve jail time or worse.
Feelings of getting “left behind”, “locked out of the market forever” and giving up on the American dream of home ownership where exploited shamelessly by realtors and their accomplices. Such arguments have a strong emotional pull that’s difficult to ignore. I rent, but over the last few years I’ve heard the same things from well meaning relatives and friends. They were repeating conventional wisdom which for decades (prior to this unprecedented bubble) has been true — that owning a home is a good way to build equity toward retirement. I imagine a portion of today’s FBs jumped in with such an attitude, not to get rich quick. And I believe those people deserves a little sympathy.
Sorry, that’s why I moved out of state 12 years ago. I wanted a house, but I didn’t want to be living in fear that job loss would equal home loss. Today, I’m putting 15% into my 401(k) AND making my fixed-rate house payment AND paying $400 a month extra to turn my 30-year note into a 17-year one. The weather is nice in the Bay Area, true… but I have no “right” to live there. It’s a choice.
I guess you didn’t read what I wrote. Who said anything about “rights”?
True enough. Maybe he was supplementing his income with
some ‘Referal’ payments from the local drug dealers.
A couple of years ago, I saw a police car, from a large city here, parked in the driveway of a house well outside of the city — the signs were that this officer lived in the house. (In this area it is common practice for LE officers to take their cars home at night — itself a subject for an entirely OT debate — so I’ll leave that part alone.) At first, I was a bit unhappy for the taxpayers of the city, that the department would allow the car to be taken so far away (wear & tear, etc) each working day. Then I realized that this cop would not be able to have a decent home on his/her salary if they had to live withing the city limits. That tempered my view a lot.
He was doing the same thing his neighbors were doing, buying houses they could not afford which were pumped as “affordability loans” by the REIC. A cop up the street from me fell prey to the same trap; since buying his $500K+ house, he has divorced and is now trying to sell into a very soft market.
“afford using loans…”
In the area I live , the running joke is that the cops , teachers (many of whom top well over 100k ) are the only ones that CAN afford to buy houses.
I’d love to know where teachers are paid over $100k.
If you are going to troll at least make the figures reasonable.
Uncle Git , I’m not sure where you live , but if you don’t know anything about other areas , maybe you should ask instead of making accusations:
“16% of NY Teachers currently retire from school districts paying salaries exceeding $100,000.”
“Next year’s raises are on top of an East Islip payroll that already totals $28.1 million, and includes more than 100 teachers - out of about 400 - making more than $100,000 apiece annually.”
“One such teacher is Adrienne Spivak, a 34-year classroom veteran with a master’s degree and 75 additional college credits who teaches kindergarten at Sachem’s Nokomis Elementary School.Her current salary is $106,369.50 and she’s sure she earns it. ” ( a kindergarten teacher , regardless of education should not be paid this much , sorry)
http://www.myshortpencil.com/schooltalk/cgi-bin/show.cgi?tpc=2&post=14475#POST14475
Do a google search for hundreds of other substantiations , I don’t have to , I live in the area and read the papers. In Rockland County NY there are many teachers making over 100k a year. Many administrators in the region making 125 and over. Many Police officers making over 100 with overtime and none of them pay into the HC costs. Clarkstown Police are arguably the highest paid in the country.
San Francisco, a city of 740,000 people, had in 2005 more than 3,000 city employees making more than $100K per year.
That’s one city employee making more than $100K per year for every 250 citizens.
The place is not run nearly well enough to justify that.
Though I do recognize the city government can be paralyzed by ridiculous politics, it does appear nearly completely dysfunctional much of the time.
*Average* pay for teachers in Boston is 70,000/year (with starting pay at 40,000/year), so 100,000 isn’t an unreasonable assertion in many places.
I know elementary school teachers nearing $100K in the SF Bay Area.
And let’s not forget - they get summers off! Prorate that for a full year salary.
I’d love to know where teachers are paid over $100k.
Centennial School District - Warminster, PA
Council Rock School District - Bucks Co., PA
Those are two I know of in my area (Philly `burbs) FOR CERTAIN off the top of my head.
Teachers aren’t paid that much in Missouri, I promise you that! When mom started teaching elementary school the same year I was in college and working for a summer as an intern for a computer consulting firm. My summer salary, prorated for the year, was several thousand dollars than hers (and I was only paid the equivalent of like $30,000).
I don’t even know if they have a teacher’s union where she works, which would explain the salary disparities between there and California.
( a kindergarten teacher , regardless of education should not be paid this much , sorry)
No? And who “should”? Lawyers? Mortgage brokers? Realtors? Damn that tiny percentage of highly-educated elementary school teachers bringing their expertise and knowledge to educate young minds…and actually getting paid something decent.
I would add that there are certainly a lot of New York Yankees who should not be paid what they make.
“No? And who “should”? Lawyers? Mortgage brokers? Realtors?”
I’m sorry , lala , I see your point but it’s just my opinion. None of those groups you mentioned get salaries from the taxpayers. Nor do they get health care paid out of the tax base. Nor do the work 6 1/2 hour days for the most part , not do they have tenure guaranteeing their employment (short of anything except a felony), nor do the get the equivalent of 3 months paid vacation. Nor pensions for life in most cases. Obviouly jmo.
Friendly discourse, no worries. I just wonder if you care so much about paying other tax-funded employees a good salary/benefits — fire-fighters, city council-members, law enforcement, or what have you. Discounting public school teachers as somehow inferior to these groups smacks of a worrying kind of short-sightedness to me.
And 6 1/2 hour days? That’s pretty funny. No offense, but have you ever met a teacher? Much of their work is 1) preparing lesson plans and 2) grading homework. (Imagine the middle school math teacher’s day — six periods, six sets of homework every night). All of which happens outside of school hours. And then there are the administrative duties.
Yes , I have a problem with the police and others as well , as I mentioned. Just my worldview. It actually extends beyond government/civil service. I just have problems with non-performance based remuneration in general. But I didn’t mean to open up a political can of worms on this forum lol.
My wife is a schoolteacher (now on sabbatical to be a mom while ours are small).
The teacher in question is a kindergarten teacher so I doubt there is much in the way of homework etc , and actually here in my district , they don’t even start full day K until early Oct , so the first month is actually 3 1/2 hours.But I do sympathize to some degree , my wife was often up late with lessons , and many times had to pay for her own supplies etc.
Oh , I should mention that the wife was a teacher in a private school , and made far less .. so maybe that’s part of my pissy-ness
“I just have problems with non-performance based remuneration in general.”
Not to beat our totally OT discussion into the ground, but I agree with you here. Tenure is just a bad idea all around (except for those who have it, of course).
Hey, this discussion about “non-performance remuneration” reminds me that I was on a flight in mid-August and the guy in front of me was reading the WSJ.
On one of the pages was an article/editorial with a title and a table that talked about how the average Federal employee’s salary grew faster than any other major sector over the last five years.
Granted, they probably start at a lower base than most others, but they do get some great benefits and retire on a pension that pays what? Anecdotally, I’ve heard 75% or 80% of the average of the last three years salary? And it takes a real screw up to even come close to being fired?
I meant to find that article, but never did.
Know a cop who recently bought a house for $650K. So I looked up the property sales history, and learned that the previous owner paid $360K in 2003.
Haven’t told the cop yet, and probably never will.
this enrages me to no end. why the hell wasn’t this kind of reporting done 2 or 3 years ago, hell even 1 year ago, to prevent the financial cataclysm that’s going to effect so many people. but then, look at all the advertising dollars being made, esp by network/cable industry, from the financial services people to refinance today!
hell even 1 year ago
___________________________
I am sure you know - BUT WE WERE RIGHT HERE TALKING ABOUT IT! Hopefully all of us warned enough people.
Most of us tried, but very few listened.
It is simple.
Anyone who would have spoke out against this would have been labeled as anti-”American Dream”, anti-minority, or anti-homeownership. The first thing that pops up when regulation of these loans is discussed is that they are affordability products that allow those who could not otherwise afford homes purchase them. They let people live the American Dream. If you want to see these loans eliminated, it’s because you are anti-American and you don’t want to see others finally reach their dream.
The politics behind these loans is disgusting.
grim
Don’t forget “bitter, jealous renters.”
- why the hell wasn’t this kind of reporting done 2 or 3 years ago
Well, it is called ‘News Speak’. Folks are dependent on the media for their guidance. If the news media reports that ‘Now is the Time to Buy’ … they buy. If they say that Hybrid cars are ‘In’ … they buy, etc, etc.
It used to really bother me when foreigners called Americans stupid, but after our track record over the last 8 or so years, I can’t say they’re wrong.
As nhz would point out, plenty of foreign housing markets are just as bad as the U.S. market.
I was referring to a stock market mania immediately followed by a housing bubble, but I’d love to see an example of a foreign market where the median price is 10x income, as it is in all of california.
Human stupidity is not an exclusive trait of “Americans.”
Stupidity, is stupidity.
I never said it was, but it’s hard to argue that we don’t have a disproportionate amount of it.
America is an egalitarian society, which discourages morons from considering the possibility that they’re morons. That would imply others are smarter than they are, which implies that they’re better, which is un-egalitarian and therefore un-American.
That was my exact reaction to this.
“but then, look at all the advertising dollars being made, esp by network/cable industry, from the financial services people to refinance today! ”
Bingo.
Now that there’s probably much less advertising $$$ flowing from RE related entities to the MSM, we’ll see more and more articles like this–however late, unfortunately. Sadly, the MSM is married to $$$, not objective news reporting. We can thank our lucky stars for blogs like this to search/analyze facts and diverse opinions.
DOC
There was a great article in Barrons, “The Debt Bomb” by Jonathan R. Laing, published in January of 2003. It was one of the very few contrarian articles I could find at the time. It’s more about the debt bubble, but the subtitle is “Only housing is keeping the fuse on America’s borrowing habit from burning down.”
here’s a link:
http://www.freerepublic.com/focus/news/825013/posts
i bought this issue of Fortune in October 2002. it was very good, dealt with prices being totally out of sync with rents. this link only shows the magazine date 10/29/2002, cover story ‘Is real estate next?” i’m too lazy to find the whole article:
http://www.timeinc.net/fortune/information/magarchive#2002
The neutronic “Option ARM” was the favorite instrument of flippers who expected to carry the loan for only a few months and then perform their “flip trick”. One can easily see how these loans were actually “right” for infestors….unless they became stuck.
Unfortunately the infestors forced “regular home buyers” into these suicide loans as there was no other way to purchase overpriced properties and RE agents were constantly playing the fear card; “buy now or be priced out forever, don’t worry prices only go up, not making any more land, etc.”
And now we find out that banks and brokers were actually encouraging the use of these toxic loans. You mean RE agents and the financial industry are actually sharks?
what a shock…
When I was applying for a mortgage, I was VERY insistent on a 30-year, fixed rate loan. Even so, the loan officer tried to talk me into an ARM, saying that it would lower my monthly payment. I refused to take his bait. I’ve never regretted that decision.
As I’ve found out recently on this blog, loan officers make more of a commission on the ARMs. What kind of person trys to put their client in financial jeapordy, with repercussions which could severely damage their life for years to come, simply to make a few thousand bucks? That’s not much different than someone robbing a convenience store and shooting the clerk.
“The payment schedule looked like what we talked about, so I just started signing away,” says Burger. He didn’t read the fine print.
You don’t need to read the fine print, he knew he was getting an adjustable rate mortgage. That oughta tell you right there. Even so, this is how poor math skills and the new math and all that in the US leads people to not be able to figure out what it all means. Quite amazing someone can’t figure out that 2.2% means you’ll be paying 2.2% of the balance in any given year. Simply calculate 2.2% of the principal and see what the interest part of the loan is, if it’s exactly the same as the payment quoted, well, you oughta know that something ain’t right. Maybe scratch head and say, “Duh, how’s the principal going to get paid back?” Even so, for the math retarded there’s plentyof calculators online they could have figured out what the deal was. But then again, that’s why they didn’t want you using calculators to do math in school, the concept was to be able to figure it out on your own and really know what’s going on.
Poor math skills I will give you. You do know that new math was a brief period in the 60s, right? It’s gone — gone for a long time — and if the people that sat through it have not recovered by now, that’s not the fault of the education system.
The problem with math education today is that (1) students are too dependent on calculators/tech and (2) proofs have been removed from the curriculum because you cannot standardize test them. But that is a rant for another blog.
Actually, they’e doing some funky math in school these days too. My nephew was doing division and had some whacky-asses grid all draw up just to figure out the solution. It had more rules to follow but worked faster, but you couldn’t really tell what was going on mathwise. Basically just a calculator on paper.
I’ve heard about that too. Had a friend who showed her son how to do division the way she did in school and the teacher told her not to do that. I think they called it number strings
If you do that with the numbers quoted, 1697 a month is a touch over 20K a year, whereas 2.2% of 500K is only 11K.
So why isn’t the loan balance decreasing by 750 a month (=9K a year)?
Methinks the headline 2.2% was the minimum payment rather than the interest rate. Either that or the teaser rate didn’t last more than a few months.
Even so, there should be some obvious discrepancies.
Indeed.
That is how these loans ARE misleadingly marketed. The question is, how stupid do people have to be to even THINK that somebody is giving out loans at 2.2% interest. I mean COME ON. That should set off the “Okay, what’s the scam here?” alarm in your head, just like the “YOU’VE ALREADY WON one of THESE VALUABLE PRIZES!” comeon does.
“the loan’s interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they’ll soon be confronted with the choice of coughing up higher payments or coughing up their home.”
Hedge funds setting interest rates. Long Term Capital Management was a hedge fund that nearly brought down the world’s economic system, but was instead bailed out. Hedge funds are nasty business and should be illegal, period. Hedge funds are nothing more than financial Mafiosi.
What is it hedge funds do really? From the word hedge I can imagine that they’re trying to make money from everything by “hedging” their bets.
That’s sort of it in a nutshell. According to an article I read in Vanity Fair Magazine (which was bubble related, having to do with the huge “palaces” built by hedge fund managers in Greenwich, Connecticut, which has been taken over by obscene amounts of new money), hedge funds were conceived in 1949 by Alfred Winslow Jones, an editor at Fortune Magazine. A hedge fund “hedges” its bets against market volatility by taking both long positions on undervalued stocks, hoping they will go up and short positions on overvalued stocks, hoping they will go down. Hedge funds are pretty much unregulated, so they can do whatever they want without government intervention, because their clients, who usually must invest $1 million or more, are thought to be richer and more sophisticated.
No friggin way are Hedge funds operators as intelligent as “financial Mafiosi”. You are giving them too much credit and that is why the ETF’s of hedge funds may be the best short on the street.
If interested in L.T.C.M a book titled “When Genius Failed” by Roger Lowenstein tells the story of hedge funds, their financial endevors and finally the unpercendented failure of world markets.
the problem is not the hedge funds. it’s the lenders that lend to them. excessive leverage was the death knell for ltcm.
Exactly - the name of ‘hedge’ is becoming an oxymoron, nowerdays, hedge funds are the most audacious risk-takers, not the ‘reducing’ as the name implies.
‘The gov bailed out LTCM’ - not quite as it sounded. LTCM can fail flatout - if it is only by itself. Actually the gov bailed out the lenders by infusing capital into LTCM. Still it’s a bad precedent.
What I don’t quite get is the MBS buyers these days - they think they are insulated - the broker need to buy back bad loans. What if the broker blows out? What if the bad loans turn out to make 30 or 50% of the package? The short rate is already decent, why they still wanna take the unnecessary risks?
“Why are hedge funds willing to buy risky loans directly? Because they can demand terms that help insulate them from losses. And banks, knowing what the hedge funds want in advance, simply take it out of the hides of borrowers, many of whom qualify for lower rates based on their credit histories. “Even if the loan goes bad, [the hedge funds are] still making money hand over fist,” says Engel.
Eventually, some of it will go sour. But the Wall Street pros who buy option ARMs are in the business of managing risk, and no one expects widespread losses. They’ve taken on billons in iffy option ARMs, but the loans are no shakier than the billions in emerging market debt or derivatives they buy and sell all the time. Blowups are factored into the investing decision”
option arms and derivatives, sounds risky but i’m not a Wall Street “Pro”
(The entry level homes in sac are a joke. Affordable housing for the working class is hard to find up there.They are often forced to into houses they can’t afford.)
Exactly. May the flippers and those who imagined themselves Rockefellers who required a McMansion get what they deserve. And the housing ATM based me-me-me boom is a national shame.
But what has also happened is that ordinary upper middle class, middle class, and even working class homes have been bid up to the stratospehere by lax lending standards, excess liquidity, and an upside panic as ordinary people desperately tried to secure a home for their families before they lost the “American Dream” of living in the communities where they grew up. These people weren’t greedily hoping to “never work again” or to buy more house than their parents could afford.
These unsophisticated people were robbed. Was it easier to rob them because they were ignorant or (worse) trusting? Yes. But they were robbed nonetheless.
The winners? The selling generation, who also got the pensions and social security we will never see while running up the national debt. The flippers who knew enough to get out early. And the real estate brokerage, mortgage banking, appraising, and securitization industries that deserse their share of the blame but will probably get all of it.
Who is the “selling generation”? If this is an unsubtle reference to boomers I disagree. Many boomers have NO pension, only savings, house, whatever they made on their own. Anyone who works/ed in hi tech is pretty much in the same boat. It’s the previous generation (the “Greatest Generation”) that got the pensions.
That’s right. A lot of people are confused about which generation is which. I’m a 52-year-old boomer who’s been making those FICA payments since 1972. I wonder whether I’ll see a dime.
the selling generation is the parents of boomers.
Larry, I wish more people could understand what you have just said. There has been a MASSIVE wealth redistribution, not from the poor to the rich (that’s been going on since the beginning of time) but from the younger generations to the older.
My parents (60’s-70’s) have had (for the most part) a booming economy, low income taxes and massive government entitlements that will never be seen again. This has been done at the expense of subsequent generations (me included).
Even more personal to many of us in California is Prop 13…anyone that has owned a house more than a few years not only got in at a low price, but has bascially locked in their property taxes at the price they bought it at (with very, VERY modest increases). A new resident in a boom area like the Bay Area will often pay 10 times the prop tax as a new (younger) neighbor.
And don’t get me started on the frickin’ prescription drug bill signed a couple years ago. Think of the diffence in the cost of health care for Gen X vs. Baby-boomers!
It will only get worse my friend!
CPA - You’ve got it nailed. I love hearing the younger generations finally talking about rising up against the boomers (I’m a boomer) and older. I really hope the next big revolution in this country will be against the intergenerational wealth transfer - all of what is going on is legislative - old people aren’t owed a dime of your money for their so-called entitlements, and that includes social security and their #@#*& drugs and anything else. Rise up and demand your rights! If nothing else, just always vote for the youngest candidates - it’s a start.
“…just always vote for the youngest candidates.”
Please tell me that you are just kidding. Otherwise, you are up for ‘Stupidest post of the day award.’
Paul in Jax, I’m sorry. Previous post was mean. Everyone is entitled to a goofy statement sometimes.
A great book on this subject is “the coming generational storm”. Co-authored by Scott Burns a financial columnist for the Dallas Morning News
http://www.powells.com/review/2004_06_13.html
“old people aren’t owed a dime of your money for their so-called entitlements, and that includes social security and their #@#*& drugs and anything else”
Those old people include your parents, dude? Let’s not forget that lots of “old people” have paid into the SS system their entire lives. The fact that it’s been mismanaged to whatever degree isn’t your fault, but it certainly isn’t theirs either.
Talon - They haven’t paid into anything, dude. Social security is not an insurance plan, it’s a tax. You have no claim to any money you put in. Benefits are decided by Congress and can be raised, lowered, or withdrawn by Congress.
The average percentage paid by someone who retired 10 years ago is around 2%, and they didn’t pay any other social welfare fees either. What the average 80-year-old paid, plus interest, relative to what she’s takes in can effectively be rounded off to zero, but that’s not even the point.
The point is these things can be changed legislatively, and it’s time people wake up to the possibility.
And who’s talking about fault? This has nothing to do with fault. It has to do with people taking control of their lives by trying to get some political power so that they aren’t fleeced by people who are literally stealing money from them. And it’s also not about mismanagment in the sense I think you mean. SS is actually better-managed than many government programs. The point is it’s a ponzi scheme in which the old are taking advantage of the young. Why should I mince words? BTW, my mother knows exactly how I feel about it and we are quite close.
So you’re off base and I tag you out.
“fleeced by people who are literally stealing money from them.”
So, all of those retirees who depend on SS payments so they won’t have to camp out under a freeway overpass are stealing? To say SS is a “tax” vs. something that is paid into is a distinction without a difference to the people who have been paying it all of their lives. You obviously don’t care whether or not you receive SS payments—fine, neither do I, as I’m just assuming they won’t be there, or will be so reduced as to be all but useless. But I would never support denying them to people who may need them. As for just “voting for the youngest candidate,” I don’t think that would bring about sweeping social change of the kind you’re envisioning. The political climate is the political climate, and politicians, young or old, will out of necessity pander to it. Young people may indeed change that climate, but then eventually they grow old, and, well, there you are…
I agree with you about everything but Proposition 13. This helps all generations not get kicked out of their houses once they buy them. You will also benefit by this when you buy a house. I didn’t buy until 1991 (I am at the tail end of the baby boomer generation and believe me, it has not been easy to be last in that line) and am benefitting (sp?)now by prop 13 because my taxes did not go up because people like the ones in the article above brought the price of my house up to crazy levels.
Your parents are not boomers. Boomers are no more likely to receive Medicaire than you.
Yes the entitlements are being kept in place just long enough to screw future generations after the boomers.
Thought I read yesterday that 50% of US gov’t payouts are for Social Security and Medicare. Wonder who benefits from that?
My 70-something Dad (1 year of college) flew for United Airlines in the “good old days” (cushy union gig) for 40 years and got a big fat pension. He makes more in retirement than many plastic surgeons! He also gets SS and Mom gets to take advantage of the gov’t medical bennies. Talk about a generation with a horseshoe up their @$$….
I agree with you. My only hope is inheritance. Seriously.
Maybe the Northwest doesn’t have a wall around it that we hoped for. Wife spoke with one of our favorite title officer reps who stopped by the office yesterday lamenting that business fell off like a rock recently.
Most all the families who have kids starting school next week that have purchased or sold, are through. This Fall may be time our markets catch up with the problems in So Cal. & elsewhere? Hope not, but we’ll see.
I meant that most people with kids who start school next week HAVE already purchased or sold, so those with the means to buy and sold prpobably did so this summer. Leads me to believe that we may see a more sustained drop off in sales and increases in inventory.
I feel for all the independant escrow firms in tough markets. It’s got to really suck. Not looking forward to drop off in work in our area, but sense it coming sooner or later.
It would be interesting to ask a sampling of the people who are getting burned by these suicide loans whether they participated in and got burned by the tech/internet stock bubble. Are any of these idiots being burned a second time?
If so, I’d like to introduce them to some “work at home” business opportunities.
What do you reckon the odds are on any mortgage broker sweet-talking Mr Burger out of a ticket any time soon?
LOL. Wouldn’t want to be driving a black Hummer or a black Bentley in Burger’s jurisdiction.
I am a firm believer in personal responsibility, so the reality is that if folks are too stupid to realize that if a deal sounds too good to be true it probably is stands. That said, what are banks doing lending $500K to regular working folks? There was a case of a ship yard worker in the UK a few years back who had a visa card for which over the years the bank had increased the credit limit to 40K in Pounds so adjusted for inflation and dollar exchange over 100K in US dollars. One day he decided to go shopping and of course had no money to pay the bill. When the bank took him to court, the judge threw out the case, stating the bank knew what he did for a living and had no business lending him so much money. It will be interesting here to see how many of these loans end up in bitter court battles.
If these loans end up in bitter court battles, then of course the lawyers will be lining up for their slice of the pie. Ugh! This housing bubble gets more unattractive by the minute.
All of a sudden, the players are realizing that there will be bagholders and are engaging in efforts to make sure that they don’t end up being “IT”
From the right column article on p. C1 of today’s WSJ:
Housing Chill Begins to Pinch Nation’s Banks
————————————————
Slower Demand for New Loans May Hit String of Strong Profits;
Few Default Concerns — So Far
These stories of folks using option ARMS/ARMS saying that they did not know what they were getting into and/or they were deceived are total lies. People knew what they were getting into (I do agree that brokers did market them aggressively) and they all had plans to sell and make hefty profit before the ARMs reset. It was a gamble which will ruin many people. Others should not feel sorry for them and there should not be a bilout. Are the folks who made money going to return it?
Yes, this was a huge gamble by many and there were winners and losers. Just like any good Ponzi scheme, those who got in too late are left out in the cold. Those who participated drove prices so high that now no one can afford a house in many areas.
And like most good Ponzi schemes, losers will outnumber winners.
People who can’t read English (about 40% of SoCal) might have a legitimate complaint, but aside from them, caveat emptor.
“These stories of folks using option ARMS/ARMS saying that they did not know what they were getting into and/or they were deceived are total lies.”
It’s probably true that most of them knew what they are getting into but some of them probably just took their mortgage broker’s advice which is completely dumb. But that is not very unsual when you trust people. I was victimized by a company who was selling real estate back in the ’90s. The salesperson was very nice, charming and he seems like he had integrity and concience. How could he con a couple with a newborn baby? But I was totally wrong. I should have known but WAS stupid. Even with my college degree did not help. What I signed was the opposite of what is in the fine print. Luckily, I contacted the media and made a full story about it. More people came forward. I was very fortunate that I lost very little money. But it was a great experience. Never trust anyone else about money again. Get advice but trust yourself.
“Comptroller of the Currency John C. Dugan, the banking industry’s main regulator, wants banks to clean up their act. ”
Ho Hum.
When someone robs a bank, the regulators (cops) chase him to the ends of the earth. When banks begin to rob customers, it’s only wink, wink wink, shrug.
“Those who took the bait are in for a nasty surprise.”
So are those who, gave the bait. When they don’t get paid back!
(Larry, I wish more people could understand what you have just said. There has been a MASSIVE wealth redistribution, not from the poor to the rich (that’s been going on since the beginning of time) but from the younger generations to the older.)
Worse here in NY State than elsewhere, yet everyone complains when their kids move away. They should have had dumber kids! NYC is an inherently good place to be young, and this offsets state policy for the moment. Not so upstate.
I was upset enough about this (and other things) to run as a minor party protest candidate for NY state assembly two years ago, before existing the private sector. You can read about it here http://www.ipny.org/littlefield/civicunion2020.html.
Not much impact, but at least I said my piece. And 20 years from now I can tell my kids “daddy did all he could.”
If you run again I’ll move to New York just to vote for you!
(If you run again I’ll move to New York just to vote for you!)
Hey, I’ve done my civic duty. How about reading all the stuff I wrote, plagerizing it, and running yourself? I didn’t want to grow up to be a politician, but it finally dawned on me that since no normal people run there is no one to vote for and nothing changes, at least not for the better.
The housing crash, however, will get a reaction if it is a bad as people here predict. Maybe a counter-productive reaction. Maybe an over-reaction. But something will happen.
I suspect in a few years we will see two years of tax returns, forget it if you are self employed and squeeky clean credit needed to get a loan of any kind. That will have a huge impact on house prices alone.
Fascinating story, Larry. Thanks for sharing it. I often wonder who the people are behind the screen names.
In the spring of 2005, we were trying to buy a home in Anatolia, a new home community in Rancho Cordova, near Sacramento. At the time, I had about $400,000 in cash, but could barely get the agents to speak to me. I was scrambling, getting pre-approvals like crazy (even if I wanted to pay cash, had to get pre-approval from builder’s “preferred” lender”) and getting on waiting lists. The waiting lists gave a lucky person the chance to purchase one of the lots/homes at a pre-arranged time. If you couldn’t make the release date/time for whatever reason, you were screwed. House went to next person on list. Total mania atmosphere outside the Pre-fab offices were the lot releases/purchases went down.
Seems like an eternity ago! But only a little over a year!
By the way, that was the last straw for me, and I moved my family out of CA shortly thereafter. I go back every month or so for work, and have seen many homes for sale for a year or more.
Bviewer;…Where did you move too ??
Rio Rancho, New Mexico. I’m not sure if it’s where I want to stay long-term, but overall I like it a lot. We actually bought a house here a year ago but sold it a few weeks ago and are renting now (4-bedroom, 2-bath on one acre on Albuquerque-Rio Rancho border for $995 a month). Very nice community, pretty good weather (except for duststorms) and affordable housing. I sold the house because I have a sneaking suspicion that because of climate change and oil depletion, we are going to have to change many aspects of our lifestyles in the not-to-distant future and will be downsizing and downscaling and living more locally, whether we want to or not.
I think buying a house requires a lot of confidence in the future and how the economy will be in the future. Myself, and many others, I think, are looking around at everything, peak oil, global warming, unending Iraq war, outsourcing, lying thieves in govt., and get rather pessimistic about the future. Or to put it another way, why buy a house with a hefty mortgage on the eve (or early stages) of World War III, the battle for the planet’s dwindling hydrocarbon resources?
Continued debate on how to account for neg am loans. Increasing bad debt expense is too easy. Ok so the bank accrues the neg am portion to loans receivable not interest receivable. These neg ams can be more than one year so that means we got long term debt/loans receivable here not interest receivable. So I think the neg am portion needs to be amortized over the life of the loan and expense associated with that loan is effectively spread over the life of the loan using the interest method. Plus the bank should have to put a nice disclosure in the back of the statements describing their neg am loans, by way of a nice schedule showing what I just described. I think just saying oh we have negative am loans now lets increase bad expense goes against FAS 5. If they have a history of neg am loans going bad then they need to be lumped into the pile of other loans and bad debt expense increased accordingly. However, specific identification of loans losses needs to adhere to the following criteria.
It is probable that the loan is impaired (that is, that the loan payments or other assets to be received in settlement of the loan are less than its recorded investment) and the loss can be reasonably estimated.
Ok anyways please comment about my approach and I think a consensus should be reached and then FASB should get a draft.
David, you are one boring guy! I love it.
What about just recording the negative Am part as deferred revenue and then recognizing it as the cash is received?
That suggest some type of payment schedule. Aren’t neg am payments just added to the new monthly payment, which is over the life of the loan anyways.
lack of due diligence on the part of lenders and borrowers
Well, I have to disagree with that. The banks certainly did their own due diligence. They know these are risky loans, but they also know that they can “book” a lot of revenue from them, and they also assumed they would have a house to secure the debt. Whether that house is worth enough next year, that’s a different matter. But anyway, evil and conniving does not necessarily mean lack of due diligence!
Where the due diligence is really missing is on the part of ignorant buyers, or maybe just those too lazy to read the mortgage documents.
“Burger quickly pulled the trigger, switching out of his 5.1% fixed-rate loan. ‘The payment schedule looked like what we talked about, so I just started signing away,’ says Burger. He didn’t read the fine print.”
Whiners! Ignoring the stupidity of switching out of a 5.1% fixed-rate loan, didn’t this guy read his loan documents?!? And I can’t speak for every mortgage around, but on three recent ones that I have seen, THERE WAS NO FINE PRINT! The terms and conditions are spelled right out, generally in Times New Roman 10 font.
This is just a case of greed by the lender, and greed (and haste) by the borrower who can’t do math and/or won’t read.
“And once balances grow to a certain amount, the loans automatically reset at far higher payments.”
Oh, NOW I get it.
Sorry if this observation was already posted. Those who thought they had 5 years of lower payments are getting screwed ’cause they made minimum payments, triggering an unknown clause in the loan note documents that accelerates the reset.
What this means, of course, is that whatever the “official” number is regarding total dollar amount of resets coming in 2007, the actual number is undoubtably much higher.
I didn’t catch that either, that’s really predatory. I’m guessing that part was buried deep in a pile of stinking legalease and probably never discussed. Talk about a time bomb!
“They accounted for as little as 0.5% of all mortgages written in 2003, but that shot up to at least 12.3% through the first five months of this year, according to FirstAmerican LoanPerformance, an industry tracker. And while they made up at least 40% of mortgages in Salinas, Calif., and 26% in Naples, Fla., they’re not just found in overheated coastal markets: Through Mar. 31 of this year, at least 51% of mortgages in West Virginia and 26% in Wyoming were option ARMs.”
I love it. Can’t wait to send it to a RE agent here in Salinas. BTW, local radio guru on his radio show out of SC yesterday said he was making 15 day refi loans for people about to go into foreclosure. Hit’um one more time before they go under on the next reset on the new loan.
From the article:
“Not that all option ARM holders go in blindly. While the loans are marketed aggressively, plenty of holders know exactly what they’re getting into. Jon and Meghan Bachman of Portland, Ore., consider them wealth-building tools. “We want to own a bunch of houses,” says Meghan. “We’re hoping for early retirement.”
So far they have stayed out of the fire. The couple, who are in their 30s, bought their first home, a 100-year-old farm house in Portland, Ore., in October, 2005, with a no-money-down loan for $200,000 from GreenPoint Mortgage, a unit of NorthFork Bancorporation Inc. By May, the value of the house had soared to $275,000. Rather than sit tight as their grandparents might have, the Bachmans, with an annual household income of $70,000, took out a home equity loan to put a $30,000 downpayment on an investment property in an up-and-coming neighborhood nearby. They pay a minimum of just $825 on their new $191,000 mortgage, and rent the house out for $100 more than that. Sooner or later, the payment will rise. Then they’ll have to raise the rent to stay in the black. If the still-strong Portland housing market tanks, they could find themselves in deep trouble. It’s a risk they say they’re willing to take.”
Anyone else feel like pimp slapping these people? 6 more months and these people will be featured in an article crying about how they were “duped” and were told that the real estate market will NEVER go down..
30K downpayment + 191K mortgage brings $925/mo. rent (in summer). Now there’s a clever investment.
Still strong Portland market? Inventory in Jan. (realtor.com) was 2800. Inventory mid-July 4428. Inventory Tues. 5200. Inventory today 5300. Or look at housingtracker. Can’t think of a good BTO pun though. We’re signing a longer term lease today : )
(Oh, NOW I get it. Those who thought they had 5 years of lower payments are getting screwed ’cause they made minimum payments, triggering an unknown clause in the loan note documents that accelerates the reset. What this means, of course, is that whatever the “official” number is regarding total dollar amount of resets coming in 2007, the actual number is undoubtably much higher.)
Holy smokes!
“There was plenty more going on behind the scenes they didn’t know about, either: that their broker was paid more to sell option ARMs than other mortgages;”
It’s true, I’m afraid. Not only that, but many of these OpARM’s came without prepayment penalties, but if a prepayment rider was added to the note, the broker makes up to 3 points in lender YSP (rebate). So the LO presents the program as if the only option is to have a prepayment penalty attached and the borrower never knows that it was optional. LO makes 3 points on the back, charges 2 points up front, and laughs all the way to the bank. Now you know why I’ve become sickened by this biz. It truly is disgusting what’s been happening “behind the curtain”.
I have seen brokers push the margin to 3.625%, making an extra couple of points, plus adding the PPP and getting another point, plus charging an upfront fee. The people get a “1%” rate that lasts one month, and then the rate goes to full index plus margin (high 7% range.) Their payment stays low, for a time, with big Negative amortization. That this happens to people that can barely qualify for the minimum (below interest-only) payment is a problem for them personally and a huge risk that can gravely hurt the housing markets.
In some offices in So Calif, a large bank has had over 80% of their loan productin in Option ARMs. In an article in the WSJ Wednesday, it was reported that this bank, in its annual filing to the SEC, disclosed that it improperly underwrote/qualified borrowers at below-market rates in 2004-2005. This “mistake” was on $30 billion of the total $43 billion in loans they origniated.
This is a large lender, but just one of many originating this type of loan. Add to this, the two other big changes in loan underwriting/origination in the last few years: the expansion of Stated-Income loans and 100% financing, and you have the basis for this housing bubble.
It is amazing to me that this all of this is just now becomming known. If anyone had asked me and other old timers in the business (29 years for me) I would have told them of my concerns several years ago. (I and the bank where I am employed have never originated Option ARMs.)
Is the secondary market stupid ? Incentives were offered to crooked loan officers to give people the worst loans ,combined with stated income loans.The lenders think they are going to get in on the real estate boom this way with higher profits ?
Again I say ,lenders were betting real estate would go up and they would gouge people loan wise and get a piece of the action and take advantage of the frenzy .Further they expected built in business every 3 to 5 years when people wanted to get out of the original bad loans ,(along with a windfall of pre-payment penalties from FB’s and Flippers ).
I think the secondary market looks at this as much more profitable and safer than buying fixed rate mortgages. With an option ARM, you have an adjustable rate over the life of the loan. In theory, you will always be keeping up with inflation. You can’t say that with a fixed mortgage. Take 2003 for instance when 30 year rates where in the low 5’s and 15 year rates in the mid 4’s, if those borrowers kept their loans, the interest is equal if not less than what it costs a bank to attract deposits. Then what if you need to sell the bond to get some cash? A 5.00% yield would get you 85-90 cents on the dollar. An option ARM, on paper, is paying the investor 7.50-8.50% and maybe more if you count the interest on the negative amortization. They must consider the risk worth it for the money they are taking in.
subsonic …I don’t question the logic of lenders wanting to go on adjustables to protect the yield long term . What I question is the logic of putting people on loans they can’t afford and accepting low down loans thereby creating so many defaults and risk that it eats up any profits and than some . Loaning to unqualified buyers only works when real estate is going up 20% a year . I don’t believe any lender should make a loan on the premise that appreciation will erase the risk on unqualified borrowers .Lenders should know that real estate prices can turn. The truely qualified buyer can weather real estate cycles ,but the ones relying on appreciation ,job raises and equity loans can’t . I object to the easy underwriting and the no down loans . My God ,lenders found out many moons ago that a buyer without any skin in the game will walk verses someone with a down payment in the game not to mention it protect against downturns .
I agree totally about lenders loaning 100% LTV on stated income programs are taking a huge risk regardless of the rate they are receiving. If something doesn’t have the means to pay you, it doesn’t matter if the rate is 5%, 10%, 20%, the lender will lose money. For example, I found a home currently in Clearwater, FL up for sale by IndyMac that was an obvious first payment default. The borrower bought the home with 100% financing (80/20). The home sold for about $530k. The loan is now sitting on IndyMac’s books until they can unload the property. Obviously, whatever rate the borrower was supposed to pay means nothing now and they will take a loss on this property and I’m sure there are many more like it down the road. There will be quite a few lenders who go down because of desperation lending and an abdication of lending standards.
My point was about your lead question, is the secondary market stupid? Greedy, yes, but stupid, generally no. I think the investors have made a calculated risk that despite the losses they could take will be more than offset by the interest they will ultimately receive. You could also argue it is an inflation hedge. In the end, an investor is only concerned about beating inflation. Paper where the rate changes every month will insure that. There is risk for the investors in safer “A” paper Fannie Mae type of mortgages. For example, “A” paper loans don’t have PPP’s, so if rates go down the lender will be receiving a lower rate of return. With a product like the option ARM, the investor has protection, pay them early and the investor is compensated. My point is that A paper has it’s risks too even though the borrowers are of better quality and the loans carry much less risk. It isn’t a risk I would want to place billions on.
I think the option ARM is a terrible product for most borrowers. I abhor how this product has been marketed. This is not a product for Joe SixPack. It is only for the very wealthy in boom times only and I think the real estate boom times are on hiatus for the next 5 years or so. I personally spoke to a borrower that got one of these loans who had no idea how they worked. This borrower got an option ARM on a property he had just bought for a 20% downpayment. I think it is unconscionable that the LO recommended this program. The borrower was a senior on a fixed income. The borrower also had a 3 year PPP. I told the borrower to at least make the IO payment if he could. Based on where rates are, most people will max out their principal ceilings within 5 years. This borrower will see his payment double within 3 years if he just pays the minimum. I’ve would never place a potential client in one of these products. I have strongly discouraged potential borrowers from option ARM’s. Unfortunately, too many other LO’s are only concerned more about their commission checks than the welfare of their borrowers. If there is karma, these LO’s got these loans themselves. Eventually, you do have to pay back the money.
That’s my beef ,putting people on loans they don’t belong on. I’m a ex loan officer/underwriter from years ago so I know what the deal is . I know the secondary market doesnt like the fixed notes ,but come on putting a retired fixed income guy on a IO loan .
I think the margins and point are to greedy on the new adjustables also . Lets get back to reasonable adjustables and put people on fixed notes that belong on them . More important ,don’t put people on loans they can’t afford and set them up for a big fall if real estate doesn’t appreciate .
That would be Washington Mutual. Here’s a blurb from the WSJ:
“In the filing, WaMu confessed it had bungled the underwriting for option ARMs, improperly measuring some of its customer’s debt-to-income ratios for 2004 and most of 2005. As short-term interest rates rose in those years, the company disclosed, the interest rate at which lenders qualified for loans “was not adjusted upward, which resulted in loans being made to borrowers who were qualified based on debt-to-income ratios calculated using an interest rate below” the prevailing interest rate…
Of $43 billion of such loans, WaMu discloses, the unpaid balance for borrowers who were qualified at below the market rates totaled $30 billion. ”
WHAT?!?!? WaMu’s lending controls are SO screwed up that it allowed 75% of it’s Option ARM loans to be underpriced?!?!? That’s unbelievable, but there it is. Really, really, REALLY disconcerting news. Sounds to me like something much bigger is being swept under the rug.
Did’nt WAMU offer to buy and assume the housing market related debt of another big West coast bank? Is’nt this the same WAMU that’s been complaining about FNM’s unfair advantage b/c it wants to buy and hold more housing market related debt.
“Gordon Burger is among the first wave of option ARM casualties. The police officer from a suburb of Sacramento, Calif.,
“Burger quickly pulled the trigger, switching out of his 5.1% fixed-rate loan. ‘
“After two months Burger noticed that the minimum payment of $1,697
“‘They know they’re selling crap, and they’re doing it in a way that’s very deceiving,’ he says. ‘Unfortunately, I got sucked into it.’
What would have been perfect is if he said: “I feel like I’m in jail.”
I say just walk and yeah your credit will be screwed, but stick it to the banks or anyone who bought “your” crap. Don’t get mad, get even. Afgter you declare BK, there will be a bunch of new creditors dying to give you loans etc because they know you just can’t walk away. Also expect to pay high interest payments. Meanwhile, I will buy your house for pennies on the dollar after the bank goes bankrupt.
I think there will be a lot of walking away. Maybe banks will get what they deserve in the end.
Better check the new BK laws. Have to have a very low income to file discharge. Most people will have to do a reorg, which means any shortfall in recourse loans will have to be eventually repaid. This menas garnished wages, less money left over for disposal income type goods, etc.
You need to understand your state. In CA purchase-money loans are without recourse, but the HELOC’s, refi’s, etc are with recourse. So just because you walk away and file BK does not mean that deficiency judgement (difference between what you owed and what the home eventually sells for in auction) still is owed. Further, if the lender does forgive the debt, you will get a hefty tax liability per the 1099-C that will be issued (in order for the lender to claim the loss).
Some acquaintances in Las Vegas have already given back two homes recently. In states like Nevada (not very Liberal and not very consumer-focused), all loans are with recourse. In this case, maybe this couple loses $200K each on two homes (very realistic for the POS KB homes they had). Now they will owe $400K which wont be erased with BK, since they make too much to qualify, thus they have to do reorg BK. They will basically never be able to pay that money back. And if the lenders somehow forgive the debt, they will owe approximately $113,268 in tax on that “income”.
The worst part of this situation wont be the FB’s losing their homes and the decline in R.E. values. This always happens (although this may be the worst in U.S. history), but others will always be there (the bottom-feeders) to arbitrage the situation and profit. But in this case, the scary part is what happens when all of these FB’s dont have any disposable income left to buy much of anything (as in the case I just mentioned above). Then what happens to our economy? Can you say “recession”?
Well, you’ve just laid out the bear case on the US economy.
I gotta say that I blame the lenders for making loans to people that they should of known would have problems with the increases .You just don’t make loans based on the concept of real estate will always go up and cover the risk .
I believe that many of the people that went on these loans will claim ,(after the fact ),that they didn’t know what they were doing. I believe FB’s were taking the same kind of risk the lender was and were betting that real estate would go up and cover their increases ,so they wouldn’t be priced out forever ,and they wanted to get rich to .
Remember there was a big real estate rah rah campaign going on for the last 3 or so years convincing people that we were running out of land ,real estate always goes up , get in now or you will be priced out forever,etc. IMHO the 5 year real estate campaign had false talking points to induce panic buying ,urgency ,and the industry convinced people real estate was the road to riches .
The media only published the up side of the story, making people feel they were fools if they didn’t get in . I remember there was one big media group that would publish the “under valued ” real estate areas in America and sure enough the flippers would swarm to the area and the builders would start over building .
And the change in the tax laws that allowed up to 500K exclusion of real estate capital gains every two years no doubt influenced the real estate activity,along with lower interest rates and easy underwriting .
So you had alot of factors that inflated prices beyond any reasonable persons expectations . Why didn’t anybody stop the frenzy ? To many people owned real estate and they were paying big bucks in advertising to keep the party going .
I have to agree. The idea that J6Pack is really capable of understanding these complex loans and time value of money concepts is nieve at best.
One thought that came to mind when I read the BW article was that the banking industry has figured out a great way to separate Joe Sixpack from his money. They are competing just as aggressively to sell Joe their product (money) as Wal Mart, Target, and other retailers compete to sell Joe goods. The banking industry in an era of mass liquidity is competing with real industry to get Joe Sixpack’s hard earned cash. It is much more efficient and profitable for the banking industry to sell Joe their money in large transactions (houses) than small transactions (purchasing groceries with a credit card). Basically they found the perfect distribution mechanism (houses) for their product (money) which enables them to cut out numerous middlemen (retail industry). This must be one of the efficiency gains that B.B. was referring to recently.
The “Iron Triangle” of Housing/Auto, Banking/Finance, and Media. Separate yourself as much as possible from these.
Did you ever stop to think that maybe that Joe Six-Pack guy is yourself?
Maybe, but this one J6pack that didn’t fall for the hype…and my give name is…Joseph.
An acquaintance of mine owns a mortage brokerage and 2 yrs ago hired 22 laid off stock salesmen. He told me they could sell ice to Eskimos and each were clearing 2k- 2.5k/ mo. it seemed like one boiler room to another. And now the pot runith over.
What gets me is the two people in this article who had amazingly low fixed rate 30 yr loans. 5% is an amazing deal! What was wrong with these guys that they gave that up for an ARM. It wasn’t like they were trying to get a house and were afraid they would never get in and couldn’t afford it any other way, they already HAD a house and a great low interest loan and they just got greedy.
No sympathy here.
Not just greedy. Stupid and greedy.
“Thanks to a perfectly legal accounting practice, no matter how little Burger pays each month, the bank gets to record the full amount.”
I don’t get this. If the banks are recording negative am as income, wouldn’t they also record that money when/if it was paid off, and hence be counting the same money twice?
“…wouldn’t they also record that money when/if it was paid off, and hence be counting the same money twice?”
No. They still have to separate the interest from the principal repaid, per an old-fashioned amortization table. Only the interest (and penalties) is income.
No. This requires a simple accounting adjusment, debit cash and credit accts receivables. Watch the bankers cash flow statements carefully, however.
I looked up the financials for the banks mentioned in the article and they all have a boom in their investment portfolios and revenue kicking in around 2004. They also show significant increases in their net receivables. Interesting a couple of the banks had negative cash over a couple quarters per their cashflow statements. I pulled up the summary financials on yahoo finance.
I think the banks need their share of the blame. Every time I look up my fixed rate mortgage statement at the bank website. The biggest thing that I see is how much I could be “saving” if I refinanced now. Knowing to read the fine-print and “if it is too good to be true then….” means I will not move out of my nice fixed rate mortgage.
First I think it is *WRONG* to call this a “saving”. What is the meaning of “saving” if it is a neg-am product etc… They probably hedge to get over truth in advertising by weasel’ing out as “payment savings”, the gullible will always be gullible and these products are there to exploit them pure and simple.
Wow, that article is sobering, I know this board can sometimes take some glee in our housing crazed neighbors growing plight but reading between the lines of that article is scary. Every line is required is required reading but this line is my favorite (or is it least favorite)
….that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less….
If community college professors count as teachers, it’s possible that you can get to $100K or higher after enough time. And the pensions can be insane — something like 3% of salary for each year worked, with no upper limit — so you can retire at more than 100% of salary. My father’s approaching the point where in a couple of years, it will make him more money to be retired than to work.
er…this is a bit out of place. It was supposed to go back under one of the “teachers don’t make $100K” posts, way above.
darth toll; A great article on this very subject was written in 2002 and predicted the current housing mess.
http://www.larouchepub.com/other/2002/2924fannie_mae.html
lawsuits bubble
Is there a fund we can buy into for that? ^_^
Holy crap. This stuff is really crawling out from under the rugs all of a sudden.
Although I am a firm believer in personal responsibility (after all, we live in Bush’s “ownership society” now), I do have a great deal of sympathy for the people about to face the worst financial crisis of their lives. I simply cannot imagine being in their shoes. It’s almost like some sort of mass hynosis overtook millions of otherwise sensible Americans. A little common sense tells you that adjustable rate mortgages are fine when interest rates are high; suicidal when interest rates are abnormally low and have nowhere to go but up. But that’s just me. I’ve been cursed with common sense my whole life.
No one would have felt bad for these same people had properties continued to bubble over, and these same people would be jeering at those of us who opted to to gamble waving their winnings in our face and showing off the latest high tech livingroom and kitchens… Yes, many are going to learn a cruel lesson about gambling with someone elses money. With regards to the adjustable rate loans I have heard these on average are lower than traditional 30 year fixed, but average does not help when they are above average as will soon be the case.
Although I am a firm believer in personal responsibility (after all, we live in Bush’s “ownership society” now), I do have a great deal of sympathy for the people about to face the worst financial crisis of their lives. I simply cannot imagine being in their shoes. It’s almost like some sort of mass hynosis overtook millions of otherwise sensible Americans.
Oh please. Mass hypnosis? Try mass greed and stupidity. Try willful ignorance and blind herd mentality. Try rampant materialism and crass consumerism.
The coming crash is going to be ugly and unfortunately, a lot of undeserving people (i.e. the children of FBs) are going to get hurt along with the deserving. But in the end, there will be some hard-won wisdom and a return to traditional values and RESPONSIBILITY.
I like your post Sammy .
According to this article, even if interest rates go down or stay flat some people are screwed b/c their payment will soon reset to make up for earlier minimum option payments. Wow!
Wait! Maybe they can sell their home. No, there is the prepayment clause to contend with and as reported by the MSM, “slowing housing sales.”
There are no heroes in a declining market only stubborn die-hard fools. Save your cash and save yourselves! This is not a buyers market.
Just saw an interview with Home development secretary on CNBC. I was shocked when the person said that how the home wealth has helped people in financing education and other expenses through equity.
Hearing a comment like this from an official of home development was plain shocking.
Is anyone getting frequent refinance solicitations in the mail? It was quiet for a while and now the pace has picked up. I’m still getting lots of refinancing solicitations so this business is still going strong and working every angle. Today the offer was to refinance our $99,000 5.85% mortgage (our house in suburban Philly is valued at $500,000). The letter then advised us to take lots of equity out and refinance $400,000. Our payments would ONLY be $2,200/mo. Right now our monthly payments are $650. Falling values or not, mortgage banks must be making money or they wouldn’t still be making these offers.
I agree with all the comments about personal responsibility and that a person should pay close attention during one of life’s larger transactions.
That being said the BW article basically exposes planned predatorial criminal behaviour by the banking industry. I mean if a guy goes to Vegas and gets cleaned out thats one thing but going to your bank and getting cleaned out is something else. There will be repercussions in the banking and mortgage industry.
The only positive thing that will come out of this era is that bankers and mortgage brokers will take the place of lawyers as the butt of jokes. (I have a lot of lawyers in my family).
I happen to like Neg Am loans at 1%, the person that bought my overpriced So. Fla. home used this product, however I would not touch this loan for anything.
I don’t have much sympathy for people who knowingly took risks, but many others acted out of honest ignorance. Most of you here have put your trust in someone to do right by you — your mechanic, your dentist, your plumber. Tell me, if one of those people damages your property or causes you or yours physical harm, will you sit back and tell yourself that you “should have known better”? Do you check the oil filter when you go to Jiffy Lube to make sure the tech has used the correct one? Do you probe your own teeth to verify that the dentist has removed all the decay before filling the cavity? Did you crawl under your house after the plumber put the new copper pipes in to make sure he removed all the old galvanized pipe?
The fact is good, honest, hard working people are being led down a path to certain financial ruin by unscrupulous, dishonest lenders. The fact that they are not as financially saavy as you are does not excuse the intentionally devious behavior of the lenders. We regulate all sorts of things in this country. Dentists, mechanics and plumbers must abide by regulations and are held accountable when their malfeasance results in damage or injury to another. Why should mortgage lenders get a pass in this department?
Good points Linda .I guess the people that simply trusted these vultures with such a big money transaction will learn a lesson about trusting people when it comes to money. As far as Dentist ,mechanics ,and plumbers abiding by regulations ,I do my homework on them to, just in case they aren’t abiding by the regulations .It’s sad but in this day and age it’s prudent to protect yourself .Do you double check the cashier when you buy a bunch of items ,or do you just have faith that a mistake wasn’t made ?
I do wish that good ,honest ,hardworking people are not harmed by the greedy vultures .
Excellent post, Linda!