Subprime Loans And The “Housing Horror Show”
The press looks at the new subprime report. “A new Center for Responsible Lending (CRL) study reveals that 2.2 million American households will lose their homes and as much as $164 billion due to foreclosures in the subprime mortgage market.”
“‘In the subprime sector, the most vulnerable borrowers are sold the most dangerous loans,’ said Mike Calhoun, CRL president.”
“In recent years, high appreciation in many areas has masked problems in the subprime market. CRL projects that the cooling housing market, will cause failure rates to rise sharply in many major markets. California, Arizona, Nevada, and greater Washington, D.C. will be especially hard hit.”
“‘Foreclosures can be a disaster not only for the family but for the community as well,’ said Pat Vredevoogd Combs, president of National Association of Realtors. ‘When one home forecloses, the surrounding houses lose value, too.’”
The Denver Post. “Subprime loans, which carry a higher interest rate, are designed for borrowers with impaired credit ratings. Once a niche market, they now account for nearly one of every four mortgages made in the U.S.”
“‘We all know that some subprime loans are a recipe for disaster if the family can’t afford them when the payment goes up,’ said Pat Vredevoogd Combs, president of the National Association of Realtors.”
“Realtors are concerned that many families don’t understand the risks behind their mortgages and that a spike in foreclosures could depress housing markets, Combs said.”
“Subprime loans that start out with low teaser payments that adjust rapidly higher after two years, known as 2/28 loans, are especially dangerous. Critics call these loans ‘exploding ARMs’ because payments can rise 30 percent or more from the payment amount that was used to qualify a borrower.”
“Even when home prices nationally were enjoying robust gains, about 13 percent of subprime borrowers lost their homes in foreclosure within five years.”
From Business Week. “The obvious question: If you have a lot of equity in your house and you’re having trouble making payments on the mortgage, why wouldn’t you just sell the house yourself, pay off the loan, and keep the equity?”
“‘Yes, they should sell. But most people put that off until the last minute and hold on as long as they can. There are not that many borrowers who are able to make the rational decision to sell and go rent. Most keep refinancing as long as they can,’ said CRL’s Mike Calhoun.”
“Randy and Jennifer Rimstad of Minnetonka, Minn., refinanced their mortgage in 2004 to replace a 50-year-old furnace and pay for their youngest daughter’s wedding. In May, their interest rate jumped to 8.55% from 5.55%, pushing their monthly payment from $1,654.81 to $2,295.68, and the Rimstads buckled under an adjustable rate mortgage they say they didn’t understand and could ill afford.”
“Then came the collection nightmare that tacked on another $700 or so in monthly payments. On Dec. 5, Option One Mortgage Corp., a Kansas City (Mo.)-based unit of H&R Block Inc. foreclosed because the Rimstads owed more than $18,000 in late charges and attorney’s fees, on top of their past-due payments.”
“Ivy Jackson, a director at the Housing & Urban Development Dept., is bracing for a lot more consumer complaints. ‘The speculation is the servicers don’t have enough people to handle the volumes. We’re hearing that they’re not set up to service [exotic] loans.’”
“Paying on time isn’t enough to protect customers from some wily servicers. A servicer might even pocket an extra payment and never credit it to a borrower. ‘I have audited loans where the consumer has made all payments on a timely basis, and yet the servicing company manufactured a default and, in some cases, completed a foreclosure,’ says Marie McDonnell, an Orleans (Mass.)-based mortgage finance analyst.”
From Forbes. “The deterioration of homeowners’ ability to keep up with mortgage payments will add oomph to calls on Capitol Hill for new regulation of mortgage lenders and brokers.”
“‘There is considerable discussion to enact a predatory lending law for these mortgage lending problems,’ says Keith Ernst, senior policy counsel for the CRL.”
The New York Sun. “A phenomenon made its debut in 1998, when the housing market was booming and stated-income loans (those based on what you tell the bank you’re earning) became the rage. Given widespread income exaggeration by eager home buyers, such loans soon became known in the real estate industry as the ‘liar’s loan.’”
“Interestingly, a recent sampling of 100 stated-income loans by an auditing firm in Virginia (based on IRS records) found that 90% of the income statements were exaggerated by 5% or more, while almost 60% of the stated amounts were exaggerated by more than 50%.”
“The president of Mortgage Brokers Association for Responsible, Steven Krystofiak, says he believes that of this year’s estimated stated-income loans, ‘most, if not all, are fraudulent.’ He points out that roughly $1 trillion worth of American home mortgages will be reset over the next year (about 11% of the $9 trillion of mortgages outstanding), most at higher rates because of the steep rise in interest rates in recent years. He says, many monthly payments could easily rise 50%.”
“In response to this financial burden, Mr. Krystofiak says, untold numbers of homeowners will simply no longer be able to afford their homes. They’ll face a double whammy: their mortgage payments will increase and they won’t be able to refinance because the value of their homes has declined. What’s more, he points out, they won’t be able to sell them because they’ll owe more money on their homes than they’re worth.”
“This housing horror show, he predicts, will lead to an explosive rise in delinquencies and foreclosures.”
“The latest word from the Mortgage Bankers Association tends to give some credence to Mr. Krystofiak’s concerns. About a week ago, it reported late payments and new foreclosures on American homes in the third quarter rose versus the prior quarter, and it predicted further growth as a massive wave of adjustable-rate mortgages reset at higher interest rates.”
“The bottom line from our mortgage broker is hardly encouraging: The full brunt of the housing weakness has yet to be seen. If he’s right, of course, hopes for a soft landing may be little more than a passing dream.”
‘Even when home prices nationally were enjoying robust gains, about 13 percent of subprime borrowers lost their homes in foreclosure within five years.’
I remember reading this statistic in the fall of 2004. It was when I was just starting to understand what was going on.
the great Roubini blogged subprime today.
20% of Recent Subprime Mortgages Will Go into Foreclosure…And Lending Distress Is Spreading to Unsecured Loans
“As I have analyzed in the past, if the housing recession leads to an economy-wide recession, we may end up with a systemic banking crisis that would dwarf in its size and losses the S&L crisis of the 1980s and early 1990s.”
hard to believe with the size of the mortgage market, this quote:
“The report, written by the Center for Responsible Lending, a research group in Durham, N.C., was based on data supplied by Moody’s Economy.com. Researchers examined more than six million mortgages made from 1998 until the third quarter of 2006; the report is the first nationwide study on the performance of subprime mortgages.”
I remember all those quotes from “experts” a year or so ago that went something like “We’ve never had so many subprime loans before, only time will tell how they pan out.”
Where were the “watchdogs” on this? Could it not be the greedy lenders/banks and private federal reserve that set this up??? Largest lobbyist group in DC “controlled our congress and gave big time to them; none other then the banking big shots
new in “advance” the out come. Sold to derritive/hedge funds and the gullible pension funds, not to mention the China investors. What a Scam! Nobody gave a dam and now here we are. The American way. God help us.
Jerry,
While the law is turning slowly to bag these criminals, maybe some law firm will take the lenders on in civil court. They are clearly playing fast and rough with our new communities and there are no shortages of F’d B’s and inoccent bystanders in this flim flam run up, followed by the 180′ tail spins. Some of these lenders have deep pocket partners. Ownit = HSBC & Merrill, Long Beach = WAMU, etc., etc.
If the profit motive is reversed to large liabilities, bingo, game over. Everywhere I look in Sacramento, there is mortgage fraud. Blatent mortgage fraud. Some lender called Pro30 Funding just popped up on the radar screen with two loans funded in December at $200,000 over the nearest market comp. It appears the borrowers, out of Union City, CA were family and friends, since they all lived in the same zip code.
Where were the “watchdogs” on this?
It’s called deregulation and the free market. The markets will solve this, we don’t need any “watchdogs.”
And it was the absence of any sensible regulation that created it.
Chris We don’t need any watchdogs or rules/ standards in lending of homes? The market will take care of this? Give me a break! Since when does 100% loans and 125% loan to value make sense? No Doc’s etc You are navie as hell if you think the market will take care of this. The ‘market boys” filled their pockets this year’s with Christmas bonus averaging 165,000. Turning billions and billions of mortgage dollars over was a Scam from the start and after the damage is over and million of familys ruined forever we can all look back and know in our hearts that the market took care of the problem. Isn’t this great!
Don’t sign something you don’t understand.
Don’t act hastily on important matters.
Don’t live below sea level 600 feet from the ocean.
This is what daddies used to teach their little ones back in the day - common sense. People haven’t been doing it lately, so, yes, the market will take care of the problem. The problem not being scams, of course, but lack of THINKING.
Rant on.
We Rent!, I agree. The problem with regulation is that people get complacent. They think that someone else will watch out for their best interests. The problem with that is that regulations are not written to protect the citizens, they are ultimately written in ways to allow the politicians to save face in the public eye, giving the PERCEPTION of protection, while at the same time not pissing off their campaign contributors. So we end up with toothless regulations that serve primarily to obfuscate rather than to protect.
I’ll add two to your list of common sense practices:
Don’t lie on mortgage applications.
Sell one house BEFORE you buy the next one.
Rant off.
The Fed is regulation of the money supply. So you’re proposing that we fix a problem caused by regulation with more regulation? Why not just get rid of the root cause?
Ben,
How can you and I and so many other contributors to this blog recognize and predict with uncanny accuracy the outcomes of this housing bubble yet so many regulators, industry insiders, and FBs seem surprised?
Because they really aren’t surprised…they were just lying.
rotfl.
I agree. We debate over what quarter will see certain milestones on the path down… Not if, just a narrow band of when. They missed the fargin forest! Grrrr….
Neil
Your question is a good one. However, you have to ask yourself how the FED (not the only agency, but the root driver) can worry about inflation when they create/cause it. There are many places for money to go besides things included in the CPI(derivatives, bonds, stocks, housing, etc). 373 trillion, or so, in derivatives that begin to chase hard assets will cause inflation like I’ve never seen. The job is to keep faith in the system.
The problem isn’t brewing, it has brewed. There is no way, based on data from the lending agencies (over 100% financing, no-doc, I/O, etc.) that the misallocation of resources will be paid. The question is the same as it has always been. Who’s going to pay?
It damn well better not be us…that’s all I have to say on that subject.
What would you do if you made to pay.
Answer #2:
Because most of us here on the blog do not have a financial stake or vested interest (i.e.: business or political aspirations) in making sure the status quo is preserved.
Also: most of us here do not ascribe to ‘politically correct’ methods of lending to minorities just because they are thought of in the past as minorities. ‘Minorities’ is a misnomer since in many cases, ‘minorities’ have become “majorities” in some areas of the nation.
~Misstrial
“Political correctness” has nothing to do with it. When anyone who can fog a mirror can get a loan, how could anyone be getting special treatment?
“When anyone who can fog a mirror can get a loan, how could anyone be getting special treatment?”
Because the change from a lending environment with downpayment and income verification requirements to one where anyone who can walk in the lender’s door automatically qualifies has a much disproportionately large effect on people of colors’ ability to qualify.
“how could anyone be getting special treatment?”
Answer: Legal mandate to so so.
“how could anyone be getting special treatment?”
Answer: Legal mandate to do so.
There was a push the past few years to “help” get blacks and Hispanics into this ownership society of ours. That was the excuse to push toxic loans on a large undereducated segment of the population. After all, these caring lenders only wanted to help these poor darker colored people own a piece of the American Pie - so they sold option ARMs to the poor bastards
In 2005 the Washington Post (I think) lamented how hard it is for (presumably illegal) Central Americans (lot of them around here) to buy property when the don’t speak English or have a bank account!! Then it described how some cleaning lady after great effort and kindness of a lender was able to buy her “dream” condo for $300k (!!) in some godforsaken Maryland suburb.
Thats what Frank Raine of Fannie Mae exec- Fannie Mae was pumping to the public. Too bad old Frank will be paying back his bonus … sadly the goverment did not slap criminal charges against him.
“There was a push the past few years to “help” get blacks and Hispanics into this ownership society of ours.”
Just scanning the Nov data quick figures for Los Angeles and have noticed astounding yoy % increases of 10-40% in some of the notorious LA inner city zips. Just a few examples out of many:
Maywood 6 homes sold median $473,000 41%. Bell 16 sold $499 10.9%. Watts 54 sold $400 20.3%. The topper is LA 90011 zip, the crappiest rundown area of LA, which showed 23 homes sold at $423 20.3%.
These are heavily Latino immigrant, almost 100 % minority areas, which just shows that lenders are simply throwing money into the LA ghetto areas, regardless of how badly run down these areas are. Am sure there are some instances of overappraisal fraud/mortgage kickbacks here. If you have medians approaching 1/2 million in these ghetto hoods then truly the entire mortgage lending industry has gone down the crapper.
Did you miss the part of the article that states that in terms of sheer numbers, the majority of folks with sub-prime loans are not minorities? Only in terms of % of race do minorities have higher numbers of sub-prime loans. Here you go:
It has nothing to do with “political correctness.” Sheesh. Talk about a phrase that has worn out its usefulness.
Are people from Quebec considered “Latinos?”
Excellent question. I cannot fathom the complete failure of so many “experts” who were being paid to attend to these issues. Either these people are completely blind or they are completely corrupt. In either case I would say the American taxpayers should open a class action suit in the event that any bailout is enacted. Each of the “experts” has accepted compensation fraudulently by failing to provided timely warning of this debacle. If those of us on this blog could see it coming it is beyond reason that the professionals missed it. I say ream em all and recoup as much as possible. IMHO
now you know why every advise they give has the words, *in my opinion*, *i think*, *i believe*, etc
You are absolutely right!!!! plausable deniability is what it is …. all the way to the bank.
Regulators of what exactly? They regulate nothing. Like the clowns at the SEC. Banks are behondr the law. They make the rules and if they don’t like the laws, they change them with their little puppets politicians. Or they simply break the law or bomb a country witk a lot of oil. That’s the type of regulation the world has. Hey buddy. You didn’t know ?
Anything goes. The INTERNET fraudsters, the telecon gangsters, the ENRON fiasco and now the real estate bust. Anything is allowed for these bandits from Goldman Sachs and company. It the real real ugly face of American business and the Empire. It’s as nasty, corrupted and vicious as the russian mafia. Meet the evil side of the USA.
I really see less and less difference between Bush and a south american dictator. Well you can still speak out and vote, but it won’t change a thing. Robert Rubin was from also Goldman Sachs. Sorry but USA in 2006 really stinks.
Amazing turn since then isn’t it? The silence of the bulls lately is truly deafening. They have no more ammo left. Their arguments are bankrupt…figuratively and literally.
One uptick and they’ll all be back. Ben will have a fulltime job just keeping the trolls at bay.
uptick in what exactly? Sales? Won’t matter because foreclosures/resets will do the trick. No, short of blatant hyperinflation, it’s done. No more housing party in SoCal.
“Blatant hyperinflation” will not save anybody who doesn’t have fixed paper. In fact, “blatant hyperinflation” will make the most over-mortgaged f*k’ed borrower rich, as long as his paper’s fixed.
And here I am replying to my reply -
p.s. The gold bugs who all think they’ll acquire vast riches from the “coming inflation” would be wise to over-buy a house, with fixed paper, today. Get moving guys, time is short.
DC_Too — Excellent point. Unlike the 1970s, when rampant inflation made Joe Soccer Mom types look like financial geniuses for having purchased a home with a fixed rate mortgage, the popularity of ARMs this time pretty much takes the rampant inflation option out of the Fed’s hands as a quick fix for the housing bubble*. Even with historically low mortgage rates, homes are not affordable without further price reductions, which in turn tends to make a current purchase a somewhat unattractive alternative.
*Unless they can somehow do so without allowing long term interest rates go up. Of course, a conundrumish absence of any inflation premium would go far to that end.
Actually, I’m in total agreement with you guys on hyperinflation (I’m actually in the deflation scenario camp), but I had to make my point.
IMO, a protracted period of high inflation (as opposed to Brazillian or Weimar-style HYPERinflation) is not completely out of the question. The housing bubble is only one of several threats facing the macro economy at the moment that the Fed is concerned with.
If I had to guess, I’d say the $8.6 Trillion National Debt & estimated $35 Trillion in unfunded S.S./Medicare future obligations are the two giant elephants in the room right now.
This is a housing blog, so naturally the discussion here tends to be RE-centric. I don’t know that the Fed really cares that much about house prices vs. its other problems right now, though. Inflation (especially the “off-the-books”/not-showing-in-the-CPI kind) would go a long way towards eroding those two mega-obligations.
I wouldn’t bet against higher inflation just yet. Also good to remember that high inflation cannot prevent housing values from declining in real terms, though it can support nominal prices.
How can high inflation be sustainable in a global economy? My point is, there are high pressures on wage growth here in the US, no? So inflation with wage increases, people can stomach. How the heck are people going to handle high rates of inflation with flat income levels?
in the spirit of “trying to understand what is going on”: I would appreciate some comments on the following:
1) Housing bubble largely caused by the new capability for “anybody who can fog a mirror” to obtain a no interest, no down home loan.
2) The new offerings of these high risk liar loans came about due to historic low interest rates based which caused securities market new-foundability to sell these loans to create new investment securities for a new market of people wanting higher interest investments, fleeing from T-bills due to the lower interest rates.
Is this correct? We can say the housing bubble’s (and pending mass foreclosure) root cuase was historically low interest rates.
sorry if this link has already appeared, but cnbc has a good article about how the banks, with no risk, repackaged these sub prime loans and sell them
http://www.cnbc.com/id/16299872
If you believe that inflation is an expansion of the money supply, then it shouldn’t be difficult to understand why home prices skyrocketed. As the money supply expands (and it doesn’t matter what is used for money), those with access to it first are the ones that benefit the most.
By making interest payments tax deductible, cutting FFR to 1% for an extended period of time, along with other “incentives”, it made credit plentiful with a very specified place for the credit (or money substitute) to flow…housing (that is where the tax deduction is helpful for intended flow). The more it flowed into housing, the more it allowed additional credit to come into existence to chase the returns.
Cutting margin requirements on the exchanges is quite similar. That act by itself is creating more money (as long as someone is willing to lend and borrow). At some point, it does need to be paid back. Those who were facilitating the trades/transactions already made their cut. Those who borrowed and haven’t sold are on the hook for a large repayment. The basis for the loans comes from the meager 10% (maximum) reserve lending requirements. The money in demand and time deposits (not the only…but the principle is the important part) are the foundation. When people who took out the money, can’t sell to recover the principal, and subsequently default, the foundation of the credit is also lost if it becomes wide spread.
FDIC is an insurance company. Like any insurance company, they don’t have capital on hand for devastating catastrophes. If the housing bubble isn’t widespread, I suppose FDIC won’t have an issue. If it is a national bubble with devastating results, I don’t think they’ll be able to cope on their own. I hope this helps with your question.
We all know who is on the hook if it is widespread. It won’t be the investment bankers with the large bonuses. That won’t make a dent in the problem. Only by privatizing the profit and socializing the risk are problems like this able to occur. We’re all on the hook, like it or not. If folks think otherwise, then you don’t believe that inflation is a tax, and the only way folks will realize it is a tax is through more knowledge of the financial system.
Thanks Kerk. I understand your points at least.
Your point #2 is extremely important. The extremely “visible” impacts of the Fed slashing rates to a 40+ year low and flooding the economy with easy money have been things like surging gold prices … surging oil prices … and YOY CPI inflation rates that topped out (so far) at 4.7% in 9/05, the highest since 1991.
The less visible impact has been inflation in any instrument that yields more than Treasuries. When short-term risk-free rates plunged to around 1%, investors the world over were forced to chase yield. So far, 17 Fed rate hikes have done little to curb their appetite, either. Look at cap rates in commercial real estate … yields on high-risk corporate debt (junk bonds) … REIT dividend yields … and until very recently, yields on high-risk mortgage debt. They’ve all been plunging because investors have been going crazy chasing yield. The demand for high-yielding mortgage paper was a major force that helped grease the wheels for the subprime lending explosion we’ve seen. But the tide looks like it’s starting to go out now — and that means we’ll soon find out who’s been swimming naked.
http://interestrateroundup.blogspot.com
Yes Mike and the people buying the mortgaged backed securities with the higher yields actually believe the govt implicitly guarantees them - hence they think these securities are just as sound as treasuries. That is the part I don’t get. People comparing these instruments to treasuries.
IMHO, the root cause of the housing bubble was the disconnect between those who originate the loans and those who expect to receive the payments. When banks used to originate the loans and hold them in their own portfolio, they were concerned about the risk of repayment. When the risk of repayment is passed on to a third party, the originator of the loan is going to be far less picky about who they loan to. In fact, since origination is a fee generator, they have incentive to lower the standards as far as possible to maximize the number of transactions. Hence, anyone “who can fog a mirror” can get a loan. This flooded the market with buyers who ordinarily would have been excluded from the home sales market. I believe this was the catalyst that put everything in motion. All the other factors such as low interest rates, low default rates due to rising prices, the religious belief in permanent appreciation, etc. were fuel to the fire, but the fire was started by the disconnect between loan origination and loan servicing.
Irvinerenter,
Was it some banking legislation that suddenly allowed banks to create mortgages and then off load those to the market, relieving their risk?
Low rate, some. The main driver has been loose (no) lending standards. These fools took out adjustable loans with starting rates higher than fixed products! Do you really think the stated interest rate made any differance in their decision? I think not, if the rate mattered to them they would have chosen the lower fixed rate. The choose the adjustable I/O crap because of the teaser payment period. It is a lie to say these loans are resetting, this is exactly what they were “set” to do. The claims of ignorance about the loan is mostly bullshit, these folks were blinded by greed (of appreciation) and made the decision to “gamble”. The vast majority of these people understood the loan terms well enough to know they couldn’t afford the purchase long term. Their purchase was based upong pure greed for appreciation. Any dipshit could take a quick look at these buyers and foretell problems. If you are exposed to many of todays buyers you rapidly see that they have no business even considering a half a million in mort. debt!
Just ignoring the numbers and focusing on the buyers is scarry in itself. Very young people with kids, no insurance, employed in transitory trades (RE), low wages, high debt, no credit history, shitty credit history, kickbacks, bribes, fake appraisels, lying realtors, lying lendors, lying sellers, lying politicians, lying economist, lazy inspectors, ignorant relatives, stupid peers, loose money and much more all aligned against them, but greed is the motivation of all (just ask Freud, his mom was HOT!!!).
“If you are exposed to many of todays buyers you rapidly see that they have no business even considering a half a million in mort. debt!”
Which is exactly why anyone who can afford half a million in mortgage debt would be well-advised to buy some popcorn and kick back for a while while the subprime debacle continues to unravel.
I so agree with you (although I don’t know about Freud’s mom, lol).
Having done Asset Statements for many of these people, I cannot think how they imagined they could afford these loans in the first place. They gambled, they applied, they lost.
~Misstrial
What all the sudden caused such loose lending standards though.
As Irvine Renter said, the disconnect between actual lender and borrower is what caused the loose lending standards.
It didn’t hurt that they stopped issuing the 30-year Treasury bond in 2001. This would force the long-term fixed income buyers to go into shorter-term debt products like the 10-year, which is the benchmark for mortgages. I do not think this was inconsequential nor coincidental.
Add to that the growth of hedge funds, derivatives markets, etc. and you have yourself the makings of a credit bubble.
THEN, the Fed lowered the FFR to 1%, creating even more downward pressure on other interest rates. This caused investors to chase yields around the globe.
For those of us who were looking for a place to keep our money in 2003/2004, we were happy getting 1.5%. Creates quite the incentive to put one’s money in riskier assets (like mortgages, which are considered fairly safe, historically speaking, because they are collateralized).
Just MHO. Sorry so long!
Thanks CA renter, so lots of this due to the low interest rates. Not sure I fully understand though the disconnect between loaner and buyer statement though. Is there something new that has occurred that allowed this new found disconnect that did not exisit before? My guess is no, and that it is a combination of the several points you outlined and there is no one single answer….
The main losers from foreclosures aren’t the lenders but the borrowers, he says. “There’s a high human cost of foreclosure and in our view an unnecessarily high cost.”
The foreclosee(s) might even decide to join that neighborhood mosque!
The main losers from foreclosures aren’t the lenders but the borrowers.
As it should be. All these so called borrowers with zero down stated income lying docs thinking they were on the gravy train to riches with zero risk.
They need to feel a little pain.
with businesses helping sucker in so many FB today, they’ve effectively cannabalized demand for decades. most likely they’ve created a whole new generation of people who think debt it bad and you should live w/in your means. sort of like what happened with the great depression generation. today’s FB’s kids will become the thrifty adults of the future. they’ll remember how they left the Ivy League early because mom and pop had their 5 spec homes underwater and etc.
if you look at our debt as a % of GDP, it took decades for it to start to really move up after the Great Depression highs.
most likely they’ve created a whole new generation of people who think debt it bad and you should live w/in your means. sort of like what happened with the great depression generation. today’s FB’s kids will become the thrifty adults of the future.
God, if only!/i> The current crop of amatuer specuvestors are not particulary introspective or big on taking personal responsibility for anything.
More likely, they’ll create a new generation of people like Casey Serin, who blame everyone else for their bad “luck” and will demand taxpayer-funded bailouts & mass debt cancellation. After learning nothing from their own past mistakes (because they are incapable of even admitting they made any), they will immediately seek out the “next sweet deal” for some easy money.
Sorry about the italics –trying to close
Here have on of my /b> i had an extra one.
Taking the opposite side, Bubble Butt…
While the FBs generally should not be bailed out, I feel the lenders, who make loans every day, all day long, should be the ones to hang. Home buyers puchase just a handful (if that) of homes over their lifetimes, while a lender knows what a buyer can really afford. People trust lenders because lenders used to let you know how much you could afford, as they wanted actual repayment of principal, at least. Nobody informed the buyers that the rules changed and the mortgage originators couldn’t care less if the borrowers could ever afford their mortgages.
Remember, speculators (and stupid sheeple) will ALWAYS exist. It’s the lenders who’ve kept them at bay in the past by requiring people to actually qualify for a loan. It’s the lenders who caused the run-up in housing prices.
It sounded to me strange that mass foreclosure could lead to finding sprituality at mosque.
Not a big stretch…Yes it is possible!
From my understanding , at least per the conservative or ultra conservative view of Islam, charging interest on money is not allowed.
Couple this with the fact that many Jews are involved with the Finance Industry , there IS potential for twist here.
Never thought this would come up in a HBB.
What?
Interesting…….
I did not frame the sentene here well. What I meant is: these two groups are at each other in middle east.
Hopefully things do not get twisted. In a mess, as financial community gets the blame from some people, then issue of interest rate can come and then can all these blames turn in a twisted direction….
Due to risk of being misunderstood, would rather delete/edit my post, but no such feature exist.
Charging interest is not a christian thing to do, even if the bible does not explicitly say so.
What excatly do you think the people Jesus drove from the temple were doing.
Rent2home said nothing about Christians or Christ.
“Randy and Jennifer Rimstad of Minnetonka, Minn., refinanced their mortgage in 2004 to replace a 50-year-old furnace and pay for their youngest daughter’s wedding”
Good lord. Well that will take all the fun out of looking at wedding photos. Look at that snazzy band that caused them to need a lawyer. Look that’s the $1000 cake that put mom and dad out of their house! How awful.
That’s pretty funny. You know it never ceases to amaze me the stupidity of people. If you are Pitt / Anniston and you spend $6 mil on a weddding, even if the marriage doesn’t last (which it didn’t), they still have plenty left over. But for regular workin folk, to spend over a couple hundred/thousand on a wedding makes no sense. Again, people trying to look rich and wasting money they dont have. My wife and spent about $40 in Vegas.
“My wife and spent about $40 in Vegas.”
Where did I get my learning?
We all understood that ‘wife and spent’ goes together.
My husband I spent about $35 in San Diego. Oh, then there was the “reception” at a bar over in the Gaslight District. I think that cost another $100. LOL
Hubby and I made it legal for under $200, including the rings! Our friends put on a lovely small dinner party for a few of our closest friends. It was nice.
Good grief, the amount that people spend on weddings is such a waste. Coming from a family of multi-millionaires, I can promise you that all rich people do not have super-sized weddings. Everyone in my family has had small, private ceremonies.
~Misstrial
To create a little balance among all this low-cost weddings - I do believe that a wedding should be celebrated with friends and family, from saved money of the couple. Maybe for a month income or two (borrowing from the ads for diamonds, which I would never buy).
I think that’s the big thing - having the couple getting married pay for it from their own, saved resources. My wife and I paid for our own wedding and honeymoon (although the sum of cash gifts from guests did put quite a dent in our total out of pocket costs), and we’ll ask our future kids to do the same. I think it makes it more special in three ways:
(1) It’s a maturation statement. I am no longer a child, but an adult starting a new life with my spouse. And what better way to show your graduation into adulthood than to pay for the ceremony yourself?
(2) It makes the event more special for the couple because they had to work hard to afford the ceremony
(3) It gives the new couple possibly their first real money talks. The wife may want to spend $x on the florist, but that may be 30% of the budget, so there’s some discussion and debate and compromise. Important practice for their future lives together. If it’s daddy’s money, though, there’s none of this discussion or healthy give and take.
Wow, I feel irresponsible in this group, having spent around $500 including the ferry tickets to Catalina to do it on the beach…
Aw, I got y’all beat! Got married in the middle of the forest by a preacher named Shorty, just two friends there, six pack of Coors light, gave Shorty a fly rod for doing the deal, then headed on back into town to the local Denny’s for a Friday night special turkey dinner. Our wedding presents to one another were mountain bikes, so I guess we did splurge a bit.
Heck, the amount of stories out there about home equity (or imagined equity) being squandered just on weddings alone could fill a whole other blog. That’s almost as bad as taking a HELOC out for a cruise and eating some bad potato salad.
lol; don’t forget about quinceaneras! Los Angeles times stated in a recent article that the *average* cost of one is $16,000.
Wow. I’ve helped some friends plan their quincenaras (sp?) before, and was always baffled by the obsession with it. They would spend so much time and money on these parties, and the families were NOT rich.
Add me to the list of those who can’t stand big weddings. We have three daughters, and they will get enough money to elope.
People spend more time & energy planning weddings than they do planning their **marriages**. Another one of those “emotional” decisions about one of life’s greatest investments, just like buying a house. The stupidity of the average person out there never ceases to amaze me.
“…In May, their interest rate jumped to 8.55% from 5.55%, pushing their monthly payment from $1,654.81 to $2,295.68, and the Rimstads buckled under an adjustable rate mortgage they say they didn’t understand and could ill afford.”
Their new son-in-law better be a Goldman Sachs partner. Shoulda stopped at the furnace.
Interesting anecdote. My inlaws live in Hopkins, which is right next to Minnetonka. They paid for most of our wedding in August 2005, which we did for about $4000 (including rings, dress, new suit, etc). Everything was paid for in cash.
Last winter something went screwy with their hot water heater and ruined the basement, including W&D, TV, etc. Because the insurance company found that it was a maintenance problem (dubious finding, but whatever), their homeowner’s policy didn’t cover any of it. Total cost of repairs and replacement was probably a couple thousand. Again, paid for everything in cash.
Between the two of them, they only make about $40k. But they’re very frugal and always pay cash. My father-in-law has a Mastercard, that he keeps locked in a desk and has only used it twice in something like 20 years for an emergency expense. It would never even occur to them to use a HELOC to pay for anything outside of a major medical emergency.
I do feel sorry for those folks who might lose their homes because their overextended themselves with a second mortgage–but they really have no one to blame but themselves. A child’s wedding is not something that you should overextend yourself for. And frankly, a 50 year-old furnace crapping out should not have been a shocker. Had they had sufficient savings (and perhaps cheaper tastes) they probably could have weathered it. Now, they may lose their home and their credit. If their youngest daughter just got married, then they’re probably less than 15 years away from when they would want/need (if for medical reasons) retire and presumably have no savings. What are they going to do then?
We live in Minnetonka, right next to Hopkins. There must be something in the water, which prevents big spending - NOT, the foreclosure rate in Hopkins is not too small either.
“Randy and Jennifer Rimstad of Minnetonka, Minn., refinanced their mortgage in 2004 to replace a 50-year-old furnace and pay for their youngest daughter’s wedding. In May, their interest rate jumped to 8.55% from 5.55%, pushing their monthly payment from $1,654.81 to $2,295.68, and the Rimstads buckled under an adjustable rate mortgage they say they didn’t understand and could ill afford.”
Why oh why would anyone use there home as a backdrop for borrowing? I mean use the credit card at least you can make the minimum payment for the next 24 years and still have a house to live in. This is almost like taking the kids college fund to the horse track thinking you can’t loose.
P.S. Ben what is the process for getting the above paragraph to be “quoted”?
note to self, furnace will help pay off itself, big huge expensive wedding won’t.
Depends on who she married…
“Why oh why would anyone use there home as a backdrop for borrowing?”
A lot of ‘financial experts’ have been advising the masses through every media channel (blogs, newspapers, television, books, radio, etc.) possible to borrow from their homes to pay down credit cards and other unsecured debt because of the lower interest rates and tax advantages.
Yes!! All this “liberate your equity” crap has generated lots of money for the banks, but it’s terrible for the homeowner. It just piles on the debt, “tax advantaged” or not.
The marketing of HELOCs to pay off unsecured debt in order to cash in on the tax savings is a pretty insidious scheme targeting unsophisticated borrowers. One the surface, a normal, intelligent but financially unsaavy borrower thinks that he’s being really smart, but not realizing the potential downside to restructuring it.
Of course, the best solution for this and other reasons would be to just eliminate the mortgage interest deduction…
Slightly different tax tack:
I shake my head whenever I hear about the great pain the “middle class” is starting to feel due to the encroachment of the Alternate Minimum Tax. I’m told that I’m a 1%-tile income, but yet I’ve only a few thousand in deductions above the standard deduction.
Seems to me that the only obvious way the “middle class” is touched by the AMT is through “buying” a huge home loan worth of interest and property tax deductions.
I bet the mtg. broker knicknamed Randy “Rimjob”
Hope it was a good wedding.
People are out of their minds….
In Mass, Foreclosures on subprimes are really hitting less affluent areas. Affluent and middle class areas have not seen too much action. Looking through the lense of foreclosures, all real estate looks to be getting “local” again.
Local? Not quite. These subprime foreclosures are going to kill the upgrade market just as credit tightens. The WSJ today had an article on what to do if you cannot make a 20% down payment… sheesh! Well… soon you will have no choice but to wait until you can make that 20% down payment. The size of the defaults prevents this from being local.
Wait… these subprime foreclosures hit the mid and high end market with a time lag. We’ve seen this all before.
Neil
“The WSJ today had an article on what to do if you cannot make a 20% down payment…”
What’s a downpayment?
I heard about those. I think they were common before flat screen TVs.
JA
You work at NEMC right?
“Realtors are concerned that many families don’t understand the risks behind their mortgages and that a spike in foreclosures could depress housing markets, Combs said.”
1. They still made, and continue to make, these loans.
2. The real concern here: …’could depress housing markets…’
That the RE industry’s past excesses may have an impact on future sales (and incomes) is intolerable in their insular world. The river they cry is for themselves, not the poor FB they sold down the river.
crocodile tears for those facing alligators.
At this time I remember Warren Buffet’s most excellent advice: Don’t buy anything unless you would be happy being stuck with it for five years (if the market shuts down). That applies to stocks, cars, marriages, and homes.
Oh… if the market shuts down, yes the salespeople must go find another income. I’ll file this under “not my problem.”
Schadenfreude… its such a basic but joyous pleasure.
Neil
Buffet had another one that applies to the housing/credit bubble: It is only when the tide recedes that you find out who was swimming naked…
E Schloemer at ‘Center for responsible lending’ on CNBC 1 in 5 sub-prime will go bad….40% of Hispanics recieve sub-prime. The tool at FBR Friedman -Ramsey was countering her findings,but she told him that since she did the study she was correct. Seems he was really flustered ,and kept basing his argument that they were untrue…nay I say he was panicked?
…as a followup to my post , Erin B. on CNBC just commented just after the interview :”the FBR guy sure seem flustered!? , and shaking” trying to keep the team calm…….
The guy from FBR looked like he was about to crap in his pants because he knew the study is right on the mark. Bet he’s calling home for his wife to bring him some clean underwear.
And then Cramer comes on saying that he doesn’t see credit problems yet and defends the subprime space. What a tool.
DebtVulture ” And then Cramer comes on saying that he doesn’t see credit problems”
I have known some hope-to-die dope feinds use better money/lending pratice’s than these monkees.
Wonder about the basis for the study in terms of home pricing? If a predicted 20% fail out of 2004/2005 sub-p loans, were her numbers based on a flat apprec. rate, a 5% drop in values, other? Given we see 35/40% drops in some areas, could defaults run to 50%, more???
I looked at CRLs math and I question the validity of the study. It is questionable statistics. This is not to say there is no problem, but it is a sensationalistic study.
CRL’s board is made up of poverty pimps , Julian bond type/NAACP members, and other assorted folks with AGENDA written across their foreheads.
I wish they were not associated with this report or CRL, because it reduces it’s credibility.
“CRL’s board is made up of poverty pimps , Julian bond type/NAACP members, and other assorted folks with AGENDA written across their foreheads”
Prediction:as soon as Foreclosures go up sharply in lower-income neighborhoods there will be cries for the Gov’t to bail out the FB minority homeowners. You can bet that groups like CTL will put the heat on the congress. Taxpayer-funded bailouts and BK stay laws will be coming into your local low-income hoods real soon.
The study actually says 1/3 of 2005/2006 sub-p borrowers will lose their homes. 19% refers to initial sub-p loans, while most sub-p borrowers go back to that well multiple times.
Where does CRL get their funding? Couldn’t find it on their site.
“40% of Hispanics recieve sub-prime”
People of lending were disproportionately targeted by predatory subprime lenders, which has huge political ramifications. I predict the newly Democratic congress will have a fingerpointing feast off the fallout.
People of color (not lending…)
People of lending were disproportionately targeted by predatory subprime borrowers.
Good one!
“People of lending” — is that the PC way to say “lender people”?
It’s the politically correct way to say “I see debt people.”
It’s the politically correct way to say “serf.”
“40% of Hispanics recieve sub-prime”
There might be another angle to this large surge of hispanic buying of homes in dumpy trashed-out dump zones in Scentral LA, compton, ect. It would be very easy to convert these SFH purchases into Multiple housing units, thru garage conversions, subdividing into duplexes, triplexes,putting up an unpermitted second unit, or even buiding an entire row of two story apts adjacent to the existing SFunit. Because of the laxity of LA code enforcement in the ghettos it would be relatively easy for Hispanic buyers to become renters/landlords. This might be one reason why prices i such LA dumps as Watts,Bell, Maywood,huntington park,wilmington, and LA inner city zips 90011, 90061, 90059, 90044,90001, are still seeing 10-30 % you increases.
For anyone interested, here’s the CNBC video link:
http://www.cnbc.com/id/15840232?video=156983242&play=1
Thank you for that link. Very interesting.
~Misstrial
Holy smoke was that guy uptight. It looked they had personally insulted him and he was about to cry.
Seriously funny video. Anyone else get the feeling Michael (?) has something to lose if the (very optimistic for them, IMHO) 20% default rate comes to pass?
A wave of mortgage defaults is cresting and about to break on the shores of the REIC.
“reveals that 2.2 million American households will lose their homes”
Anyone know what the foreclosures (FB) # and or $$ when housing went bust back in 1989-1991.
Dragged down very steep -35% in some parts of Northern California. Did not recover for 10 years. Must have been a pretty huge number.
Here’s a classic. Let me know if it comes thru. If not, how do I copy a picture I received from an E-mail?
http://mail.charter.net/do/mail/message/download?msgId=INBOXDELIM5313&part=2&l=en-US&v=charter
I received this from my brother, a mortgage broker in IL.
I don’t think it came through. When I pasted the URL a password was needed to get in.
If you have a pic you can send it to Ben at:
photos@thehousingbubbleblog.com
Upload it to a site like Flickr.com and link to it by right clicking on the image and grabbing its URL.
http://mysite.com/image.jpg for example
Steven Krystofiak, says he believes that of this year’s estimated stated-income loans, ‘most, if not all, are fraudulent.’
Methinks thou dost protest to much, too late. This is a character whose name hasn’t appeared, to me at least, before. Is he the pres of the MBA or something else?
Josh
On the Federal Reserve’s web site, Steve identifies himself as “President of the Mortgage Brokers Association for Responsible Lending.”
“Mortgage Brokers Association for Responsible Lending”
Why does that just scream OXYMORON to me?
How about “Mortgage Brokers Association for Irresponsible Lying” instead?
Perhaps no one in the media cared to ask him what he thought until they felt the sprinkles from the fan and wondered: How do you turn the sh!t off?
“refinanced their mortgage in 2004 to replace a 50-year-old furnace and pay for their youngest daughter’s wedding.”
If I was a master of the universe investing billions of dollars, one trend I would like on my computer screen would be a chart showing uptrends and downtrends in regards to money spent on weddings. As the money spent on weddings goes down, so may go the economy.
Look who’s proping up the Homebuilder’s stock:
CALABASAS, Calif., Dec. 6 /PRNewswire-FirstCall/ — The Ryland Group, Inc. (NYSE: RYL), one of the nation’s largest homebuilders, today announced that it received authorization from its board of directors to repurchase an additional $175 million of Ryland common stock.
With the stock trading at about $53 a share with an average volume of 3 million shares a day, that $175M represents one day of sales. That will do little or nothing to the stock price. They are hoping by their announcement that they will convince investors that the company believes they are at the bottom and that everyone should be buying. Look for a collapse in the price in the near future.
better get their money before the collapse
“Randy and Jennifer Rimstad of Minnetonka, Minn., refinanced their mortgage in 2004 to replace a 50-year-old furnace and pay for their youngest daughter’s wedding. In May, their interest rate jumped to 8.55% from 5.55%, pushing their monthly payment from $1,654.81 to $2,295.68, and the Rimstads buckled under an adjustable rate mortgage they say they didn’t understand and could ill afford.”
Their shallow spoiled daughter should have gotten married in the backyard.
My husband and I got married in his aunt’s backyard. It was really, really lovely. Flowers in bloom, birds singing…the perfect setting for “happily ever after.”
My wife and I had a really nice wedding at a bargain price, too. The only thing we paid full price for was the catered food, music and location. The rest: decorations, cake, flowers, photographer, video, etc. were donated or provided at cost by family members & friends.
Most people thought we spent much more than we actually did. You can have a very elegant but inexpensive wedding –if you’re creative, willing to put in some effort and not relying solely on the HELOC-ATM to pump out greenbacks.
Hear, hear. Forgive me, but I’m proud of this: My wife and I organized our recent Harvard Square wedding and reception for $10,090–not a lot at all by Boston standards. That includes *everything*; her father gave us $10K (cash-financed) and we were determined to stick to it. We estimate that we spent about $10K less than a comparable wedding just by putting in the hours.
It simply shocks us when we hear about acquaintances who go into debt and spend upwards of $50K on weddings. What a waste of money!
How would you like to be the daughter knowing that your wedding drove your parents out of their home and into bankruptcy?
Not a nice feeling for the daughter, but I don’t believe the story told is all that there is to it. Why did they take an option mortgage to refinance? Was it really the wedding cost that put them into the trap? Why didn’t the parents just say no?
have you guys noticed the gulf between the two views on the economy and housing bubble. if you’re a wall street type, economist or a republican you think the economy is dandy. jack welch said outsourcing works last night. larry kudlow is mr “greatest story never told.” these people “live” on wall street where there is no housing bubble.
the main street people, like dean baker and paul krugman, focus on more regular working people. they all seem to have a better understanding of the housing bubble and the economy. I think it’s because of that.
take these two article titles from today.
“Atlanta seniors get help with natural gas bills”
“Minks, Private-Jet Time Get Gift-Wrapped as New Yorkers Splurge”
what is going on?
I find the two views very telling. the subprime study should help wake-up wall street, but I think it’s too late. the cult of the bull is too engrained, even after 2000.
“take these two article titles from today.
“Atlanta seniors get help with natural gas bills”
“Minks, Private-Jet Time Get Gift-Wrapped as New Yorkers Splurge”
————————————————————————
Fine with me. As a BRK stockholder I own large highly profitable utilities and natural gas pipelines as well as NetJets, world’s largest private jet service provider.
Oh, let me tell you, those New Yorkers will say they “earned” every penny of it. Nauseating. Where’s Hedgefundanalyst? He hasn’t been seen since early December. He must have gotten his bonus and bought the Nation of Borneo.
It is not merely a gulf between two views on the economy—it is the ever widening gulf between two economies: those who work two jobs and barely scrape by and take home less than $25,000 a year, and those at the top 5 percent whose earnings (and holdings) have mushroomed exponentially in the past decade.
“have you guys noticed the gulf between the two views on the economy and housing bubble.”
Should it be any mystery why so many find Kudlow, Welch, the republicans (insiders only of course) and the rest of the shills so brazenly offensive? The constant drumbeat of “it’s a wonderful economy” is exactly what lost the republicans the house and senate. Joesixpack view their words as lies, even though the liars seem to believe their own words.
With the way Kudlow & Company (no pun) constantly pimp the great economy, one has to wonder if these guys were born and raised behind the whorehouse .
I believe you’re right Captain Credit. Most analysts think the Republicans lost because of Iraq. While that may be a big part of it, I think J6 is fully aware that the economy is dumping on him.
I read somewhere that a very large proportion of the population thinks we are in a recession already (I do as well). What J6 knows is: how easy it is to find a job for better pay than his current one, how much is his income buying relative to the past, whether his job is more or less secure than in the past, and if his wages & benefits package is getting larger or smaller. IMHO, healthcare issues (fewer employers paying for health insurance, and what is provided costs more, for fewer services) alone are enough to scare many middle-class Americans.
“have you guys noticed the gulf between the two views on the economy and housing bubble.”
Should it be any mystery why so many find Kudlow, Welch, the republicans (insiders only of course) and the rest of the shills so brazenly offensive? The constant drumbeat of “it’s a wonderful economy” is exactly what lost the republicans the house and senate. Joesixpack view their words as lies, even though the liars seem to believe their own words.
With the way Kudlow & Company (no pun) constantly pimp the great economy, one has to wonder if these guys were born and raised behind the whorehouse.
“‘Foreclosures can be a disaster not only for the family but for the community as well,’ said Pat Vredevoogd Combs, president of National Association of Realtors. ‘When one home forecloses, the surrounding houses lose value, too.’”
Where was all that community concern when they were pimping loans for the mortgage brokers who bought realtors cruises to Mexico? I swear I saw more mortgage brokers hanging out with realtors than I did buyers/sellers.
It’s all one big nasty, sloshy waterbed full of realtors, mortgage brokers, escrow officers, appraisers, inspectors, and city planners selling out towns for the highest bidder.
Community concern, my ass.
Next year the REIC will be campaigning to increase quota for immigrants from China,etc. They probably are always paying lobbyists for that. I’m pretty sure china could send over 100 million people and not notice they are gone.
Does it make economic sense to have 10 million vacant homes in US and global overpopulation? I’m not sure.
“Does it make economic sense to have 10 million vacant homes in US and global overpopulation? I’m not sure.”
Only if the homes prices are held above the market clearing equilibrium price indefinitely, while the investor-owners bleed.
If that’s how the government decides to “solve” the so-called “housing slump” (which the government’s own easy-money policies created), I may consider joining Randy Weaver’s outfit.
Check out the right column of this chart (”Rank by change in projected lifetime foreclosure rates from 1998-2001 annual cohorts to 2006 annual cohort”).
Santa Ana-Anaheim-Irvine: “We’re Number 1!”
Go OC!!!
http://www.responsiblelending.org/pdfs/MSA-foreclosure-rates.pdf
Warms my heart as an Irvine renter.
Probably time to buy if you’re looking at Edinger and Main Street.
I drove through those Columbus neighborhoods over Thanksgiving holidays, and I was almost knocked over by the for sale signs, particularly in the northernmost neighborhood where there is a lot of attached product. These units are less than 2 years old and probably filled with flippers and other FB’s.
Prices are still double what they should be. I can rent a place there for $2,500 a month or buy one for $875,000. Now that’s a tough choice.
I love how everyone is noting we’ve hit bottom, but the only homes I see removing their for sales signs either really cut the price or are taking their first break off the market in over 9 months… They’ll be back.
Buy or rent? That’s a $70k difference for me (post tax)… Me thinks I’ll wait.
Neil
But if we wait, we might get priced out forever. Maybe the cost of ownership can rise to 3 or 4 times the cost of rental.
NOT!
Can’t say I’m in any hurry.
My wife and I where looking to buy a home this year, but now my wife is saying “Lets just keep renting payoff most of our loans and wait for the market.” Sometimes I would disagree with her, but now I am going with what she said and just pay off bills and wait.
my rent is $875
If I bought this year my mortgage would have been $1800.
Now I know everyone here would said I am nuts to give up my rent of $875. You know what I was almost nuts but now I going to rent and save myself form a major headache.
Best decision you could possibly make.
Glad to see your wife is wearing the pants.
Now that is just not right.
Low blow, dude.
Sean should be shouting his gratitude to the skies for whatever power granted him a wife who has the economic sense of a pantswearer, rather than that of a nesting-instinct-addled Barbie doll.
“‘Yes, they should sell. But most people put that off until the last minute and hold on as long as they can. There are not that many borrowers who are able to make the rational decision to sell and go rent. Most keep refinancing as long as they can,’ said CRL’s Mike Calhoun.”
I am not sure how often the decision to sell and go rent is rational. Moving is a royal pain in the @$$, and renting is also a pain compared to the security of owning. Most homeowners would need a high and very certain premium to renting over owning to make this worth while. Given the massive propaganda campaign underway to reassure homeowners that the market will come back strong after a shallow dip in 2007, I can’t believe that anyone besides well-informed insiders like Dean Baker and Douglas Duncan (who have already cashed out and started renting) would have the confidence that such a costly action would work out in their favor.
I guess we here on the bubble blogs are truly exceptions to the norm?
We had the luxury of moving directly from a home we sold to the one we now rent as part of a relocation. The financial and psychological hurdles to selling the home you have lived in for 10+ years in a familiar neighborhood in order to rent nearby and arbitrage the bubble collapse are obviously much higher without the need to move as added incentive.
“renting is also a pain compared to the security of owning”
Unfortunately, none of these FB’s have any security in owning. They are either in blissful denial or stressfully waiting for the foreclosure.
renting is also a pain compared to the security of owning.
How so? I never have to:
–mow the lawn
–take care of the garden
–do or pay for repairs
–replace worn-out fixtures
Do I want to own in the foreseeable future? Yes, but not because it’s less of a pain.
‘When one home forecloses, the surrounding houses lose value, too.’
Or, to look at it another way, buyers find out that the price sellers are holding out for isn’t real.
Buyers find out that without readily available suicide loans, there are no GFs willing and able to pay wishing prices which are out of line with long-term affordability.
There was a ‘Toles’ political cartoon I cut out of the paper in 2005, it shows a couple sitting in thier living room inside a bubble labled “Housing Bubble”, where there are all kinds of sharp objects are lying around which are labeled “interest only”. The wife is saying to the husband “Greenspan says we’ll be okay as long as we don’t have a certain kind of mortgage”. The little guy down in the corner of the cartoon is saying “or live near people who have them”.
Check out the actual cartoon, it sums up the housing bubble (Washington Post, Tom Toles, July 25, 2005) :
http://www.washingtonpost.com/wp-srv/opinion/tolesv1.html?name=Toles&date=20050725
From the Forbes article Ben posted:
“The deterioration of homeowners’ ability to keep up with mortgage payments will add oomph to calls on Capitol Hill for new regulation of mortgage lenders and brokers. “There is considerable discussion by incoming House Finance Committee Chairman Barney Frank [D-Mass.] to enact a predatory lending law for these mortgage lending problems,” says Keith Ernst, senior policy counsel for the Center for Responsible Lending.
The Senate Banking Committee’s agenda under Sen. Chris Dodd, D-Conn., will scrutinize the home-buying process, too. “The amount of household and mortgage debt as a percentage of disposable income is at its worst levels in over a quarter of a century–putting countless Americans on the financial brink,” Dodd told a press conference earlier this month. “In many respects, the American Dream is at risk in a way it has never been before. I do not intend to preside over its demise, but rather to do everything possible for its revival.”
This stuff should scare every thinking person here. How can they (government officials) both tighten lending standards and expect to keep house prices propped up? Are they planning on forcing lenders to “work with” FBs rather than just letting the market play itself out? And if so, how on earth do they plan on paying for such an expensive, meddlesome program? I recommend reading the Forbes article all the way through.
I’ve been wondering about this. I can see something like 5 to 10 year interest only loans with a low fixed rate that can be refinanced whether you’re under water on your loan already. Subsidized by the federal gov’t. But they’ll probably be too late rolling it out.
“There’s a high human cost of foreclosure and in our view an unnecessarily high cost.”
Sen.Dodd…the “unnecessarily high cost” of foreclosure is in direct proportion to the greed and fiscal irresponsibility of the borrowers.
They never offered to share the easy money they anticipated making from their crackerbox houses…don’t ask me to spare them any sympthy or tax money now. Dodd is a jackass.
the bottom line is that the American economy requires a large debt load if consumers are to contribute the necessary 70% to the GDP. If they are tied up in high mortgage debt then they are not going to be strong consumers. It does not matter what the gov’t does, the American consumer has a negative saving rate ( borrows money to pay bills) so the economy at some point goes into recession and the problem get much worse.
In Japan, consumer spending accounts for around 50% of economic activity. Why is 70% so sacrosanct here?
> The Senate Banking Committee’s agenda under Sen. Chris Dodd, D-Conn., will scrutinize the home-buying process, too. “The amount of household and mortgage debt as a percentage of disposable income is at its worst levels in over a quarter of a century …
Until here, I am with Dodd: scrutinze, prohibit some lending practices, and drive more buyers out of the market for now. What better could happen to prices?
‘While one in five households with subprime loans originated in 2005 and 2006 are projected to foreclose, other families who took out these loans and then refinanced into subsequent subprime loans also will experience foreclosure. Using the best information available, we estimate that one-third of families who received a subprime loan in 2005 and 2006 will ultimately lose their homes.
Our estimated 19.4 percent foreclosure rate for subprime loans originated in 2005 and 2006 is in and of itself disconcerting, but it actually represents only the likelihood that one specific subprime loan will end in foreclosure, not the cumulative foreclosure rate for an individual borrower or household who took out that initial loan. While more research is needed, one study based on a survey of thousands of borrowers found that 60 percent of subprime borrowers do not “move up” into a prime loan when refinancing, but instead get another subprime loan.’
- Center for Responsible Lending
Buried in the report is a real shock. Read it and wonder.
It sounds like 19.4 percent of recent subprime purchases will soon be back on the supply side of the market, about the same time the subprime buyers are knocked out of the game by tightening credit standards. The vanishing subprime premium will land like a bombshell on the soft landing crowd’s lame predictions that the market will bottom out in 2007.
Superb commentary!
http://www.itulip.com/forums/showthread.php?t=723
Chew on this a bit. From that article
More than 20% of sub-prime loans made since 1998 will end in foreclosure. For comparison, the infamous “worst case” Houston housing market of the 1980s experienced a 15% peak foreclosure rate with 1 million homes abandoned. They are predicting a greater than 2x worse problem.
1 million homes abandoned in Houston in the 1980’s? Isn’t that, like, the entire city at the time?
It’s always nice to give some scale to issues like this - thanks Tx, good article.
Thanks, TxChick — I immediately printed that Torto Wheaton piece (William Wheaton is one of the country’s leading housing economists).
I wish they would not have sugarcoated their conclusions, though…
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VI. History Will Most Likely Repeat Itself
On the surface, the growth of the US economy has been impressive since 2002. Under the surface, however, there is a huge trade deficit, a Federal budget deficit, the absence of savings, and the possibility of growing inflation. Taken together, these could
lead to the Federal Reserve Bank raising interest rates more strongly than anticipated, generating a classic economic slowdown as has happened so often in the past. As in the past, the housing market would undoubtedly “correct” as well. This time, however, there
are two wild cards in the deck. Any economic slowdown could generate a much larger increase in foreclosures than in the past, and quite possibly a liquidity crisis that would generate an investor bailout from housing. With these two added factors a “correction”
could turn into a deep slump.
How many of the “concerned” (oh, and knowledgeable) Realtors out there said “No, wait a minute, maybe you shouldn’t buy this house using a subprime loan. You’ll be taking a big chance…that type of loan could really come back to bite you.” Most of them said that, I’m sure. Yeah, right…
“‘Foreclosures can be a disaster not only for the family but for the community as well,’ said Pat Vredevoogd Combs, president of National Association of Realtors. ‘When one home forecloses, the surrounding houses lose value, too.’”
Already you can hear them warming up their voices to start screeching for a bailout.
I wonder if I should just empty my retirement accounts and take the taxes/penalties now. It’s probably a bargain next to the taxes they’ll need to paper over this debacle. And I sure don’t expect to see that money at 59 1/2. Way too many people will have way too much incentive to steal it before then, given where things are headed.
I quit putting money in my 401K about the time I started reading this blog. Given the limited investment options, the chance that account will be worth anything in 20 years is just too low.
And here I thought I was the only one with that opinion about 401k/403b investment options.
http://www.thestandard.com.hk/news_detail.asp?pp_cat=1&art_id=34585&sid=11441858&con_type=1
Share prices of developers generally rose Wednesday, shrugging off concerns by stock analysts that overpaying for land at auctions could affect profitability.
Sino Land (0083), which paid HK$1.94 billion or 76 percent above the reserve price for a site in Kowloon Tong last month, jumped 4.13 percent, while Kerry Properties (0683) and Cheung Kong (Holdings) (0001) rose 1.11 and 1.97 percent, respectively.
Henderson Land Development (0012) gained 0.35 percent and Sun Hung Kai Properties (0016) 0.74 percent.
Tung Tai Securities associate director Kenny Tang Sing-hing said the stocks rose in tandem with the overall stock market, with the Hang Seng Index climbing 1.45 percent Wednesday to close at 19,240.12.
He said the effect of Tuesday’s auction - in which Sun Hung Kai paid HK$1.8 billion- 134 percent above the reserve price- for 12 Mount Kellett Road, was not significant.
However, analysts wonder whether Sun Hung Kai got carried away.
Investment bank Goldman Sachs was concerned over the level of the final price, arguing that even if the developer could increase gross floor area by 35 percent, the development cost for the site including land, construction and interest could top HK$37,600 per square foot.
By comparison Sun Hung Kai has sold 10 houses at its Severn 8 project, also at The Peak, at prices of HK$30,000 to HK$36,000 psf.
Goldman Sachs reckoned the company would need to price at HK$47,000 psf to generate a 20 percent pretax margin.
“Some investors may question whether there is a better use of the capital,” Goldman Sachs wrote.
Merrill Lynch noted the recent high land prices would make it hard for developers to increase their net asset values by buying land at reasonable prices and maintain margins - “unless residential prices move up substantially in the next few years.”
Hopewell Holdings (0054) chairman Gordon Wu Ying-sheung thought the winning bid at The Peak was too high. The government should resume regular land auctions, he said.
Meanwhile, developers are taking advantage of Tuesday’s strong land sale result to hike prices.
Sino Land said it would raise the price of an inventory house at its Mount Beacon project in Kowloon Tong by 50 percent to HK$30,000 psf, while its Vision City in Tsuen Wan and One SilverSea in West Kowloon will see price hikes of 3 to 7 percent.
Henderson Land vice chairman Colin Lam Ko-yin said his firm would hike prices at its Grand Promenade in Sai Wan Ho and other projects by a few percent.
“The flour is more expensive than the bread, so we need to increase prices,” Lam said
HK $47000 is approximately US $6000. 99 year land lease…balloon mortgage with 25% down.
Wow.
“Paying on time isn’t enough to protect customers from some wily servicers. A servicer might even pocket an extra payment and never credit it to a borrower. ‘I have audited loans where the consumer has made all payments on a timely basis, and yet the servicing company manufactured a default and, in some cases, completed a foreclosure,’ says Marie McDonnell, an Orleans (Mass.)-based mortgage finance analyst.”
That’s just f**king evil.
I wrote about this on another thread. My personal experience with Sprint went down like this: Paid my monthly long dist. bill on time. Before next bill cycle, long dist. service was terminated. Despite having a cancelled check in hand showing payment to Sprint, it took me roughly 20 hours over a period of a couple of months making customer service calls, faxing, and writing letters to legal departments and govt. regulatory commissions. Finally was credited the payment. I no longer do business with Sprint.
Imagine if your mortgage company did this. Without any warning, the county sheriff could be handing you an eviction notice because your payments were being credited to another customer. Nice.
Unfortunately it’s risk free for a business to play these games. Try and get paid for the time you waste sitting on hold or navigating through endless voice-recognition phone menus…. It’s no longer just HMO’s that play that game. You should write to the FCC and complain about Sprint.
Not really. You can play the same game with them. Just write a four page letter to their legal department and make hundreds of photocopies. You then mail it to the company on legal-looking paper so that their lawyers have to read through all of it. You send about three letters a week from different names/addresses and waste their time. Basically, just annoy and harass the heck out of them any way you can think of. Make a website and go on the attack. Post up signs along the road or highway to disparage the company.
I also had bad dealings with Sprint. I was charged approx $250 for a 45 minute call to Hong Kong in 2002. I was on their 5c/min plan which was popular at the time. Granted, I didn’t check what their international rates were… But when I looked up their published rates on their website, they had charged me MANY TIMES the worst rate I could find on any published plan.
So I called them up and offered them $50 for the call. They said no, so I said F-you. I paid zero.
Look at this:
A $40 billion tax bill signed into law Wednesday by President Bush extends several popular tax breaks and introduces a new one - tax-deductibility of private mortgage insurance (PMI).
Only homeowners with adjusted gross income less than $110,000 and who itemize their deductions will be eligible to reap the benefit.
Tax-friendly places 2006
Live in Northeast, pay through nose
State by state rankings
Stats on 51 big cities
But for those buyers, it will change the math of buying a house with a low or no down payment.
“I love it,” says mortgage broker Bob Moulton of Americana Mortgage Group, “Even though it’s limited in who can qualify, it helps people get into a home.”
Some people still haven’t thunk through the problems with 100% financing of low-income buyers just yet…
The gov’ment’s got the answer to the subprime lending mess: ZERO down loans for subprime borrowers.
“Federal regulators have issued new guidelines that will tighten lending standards, aiming chiefly at adjustable-rate mortgages. And the federal government, through the Federal Housing Administration, has attempted to reform its lending programs to better compete in the mortgage market.
The House has approved a proposal by the F.H.A. to eliminate the minimum down payment and raise the loan limits, allowing it to offer loans that would enable borrowers to avoid the risk of subprime mortgages.”
I can see it now: “Honey, we ain’t got the bread for the mortgage payment this month. Guess we gonna hafta do a midnight move. Shoot, we ain’t got nothin’ in this house noway, won’t hurt us any.”
“The gov’ment’s got the answer to the subprime lending mess: ZERO down loans for subprime borrowers.”
I thought that plan had already been tried and was wildly successful in pushing prices up to unsustainable record high levels? What am I missing here?
No kidding. All they’re doing is shifting the easy credit and default risk from private MBS investors to taxpayers –NOT a good thing. Expected, but not good.
Maybe good for keeping campaign contributions flowing, though…
I am really starting to wonder how long this madness can keep going. If the government now steps in to save the idiot masses from the consequences of their own greed and stupidity, then housing will never be affordable again (as long as the programs are in place) and the value of the dollar will basically go to zero since it is worthless: anyone can buy anything for whatever price and pay it back never.
Either the people running the show are incredibly stupid or this is what they want. I guess a nation full of debt-slaves is good, and anyone who tries to save money will have it rendered worthless thanks to inflation, “helicoptor drops,” and idiotic programs that let people buy anything at any price and never pay for it. What a joke!
What does the “Center for Responsible Lending” suggest to do to repairt the subprime crisis ? They write:
>Policymakers and regulators can and must act to stem the tide of home failures in the subprime market. To accomplish this CRL recommends that:
> Lenders ensure that every borrower is able to repay his or her loan without resorting to selling their property or refinancing under pressure.
For future lending, this makes sense. For mistakes of the past, this doesn’t help - the barn door was open too long.
> All parties involved operate in good faith and fair dealing to ensure a successful outcome.
Nice words, but what do they exactly mean by this? And do they think that EVERY foreclosure could be avoided?
> Lenders, local governments, and community groups implement strong programs to help troubled borrowers keep their homes.
What? To save troubled borrower financially is not to ask for responsibility for one’s action and is an invitation to irresponsibility, and this from the “Center for Responsible Lending”. And who should pay for the programs? Lenders won’t. Local governments can’t (pay). Community groups have better things to do than to save your financial a**.
>Changes must be made in the subprime market so that owning a home is fair, affordable and — most important — sustainable.
1. Decrease housing prices.
2. Prevent exotic, intransparent lending (no-doc etc.) that will drive prices up.
It seems that 1 and 2 will be taken care of by the market pretty soon. Let’s take care of people who loose their homes, but not of the property they gambled with and lost.
The name “Center for resposible lending” disturbed me somehow - would we not rather need more “responsible borrowing”, instead of irresponsible indebtness? Make the lenders explain their products clearly, but the borrowers have to learn more restraint.
Wrong. Half the population has an IQ under 100. There will always be willing FBs. The regulation needs to happen on the lending side because **their mistakes** will enact a cost on all the responsible people (like those on this blog).
We need full transparency in the MBS and derivatives markets — all the way from the top to the bottom. Eliminate the ratings agencies (okay, not really) and make the institutional investors do some due dilligence.
The lenders need to take it hard when all this implodes. Only then will we see responsible lending. Responsible borrowing is a consequence of responsible lending, BTW.
Even people with IQ below 100 can use some enlightment about the risks of borrowing. My new state made me take a short computer test before transfering my license from my old state to here. Maybe borrowers should take a mortgage test, before taking on the debt of their lifetime: no test passed - no mortgage deduction.
Failing borrowers might come us more expensive than failing lenders: calls for bailing out lenders carry not such emotional weight as calls for bailing out poor, poor borrowers who ended up in the trash, see CRL’s recommendations.
Transparency in the mortgage market is good, I agree.
Responsible lending will result not in responsible borrowing but restraint borrowing, for sure. I would prefer that people wouldn’t grab the candy in front of them even if they could, but maybe that’s naive.
I guess this is how we will compete with China, by making the dollar worthless.
What’s that? You pegged the Yuan to the dollar? Ha, you can’t buy anything either!
“A phenomenon made its debut in 1998, when the housing market was booming and stated-income loans (those based on what you tell the bank you’re earning) became the rage.”
Does somebody know WHY ALL banks swithed to this type of loans ?
In 1994 when i applied for loan i and my wife were requested to prove our income.
to prove my inclome ans my wif
Investors were chasing yield. Profit in the quarter, loss over the years - Cheers!
“Realtors are concerned that many families don’t understand the risks behind their mortgages and that a spike in foreclosures could depress housing markets, Combs said.”
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- This financing has been going on full speed ahead for, um , about three years. Total absurdity to say this crap at this time. Complete Bullshitake. Realtors know what their clients are doing. So do the Loan Officers.
And so do the regulators and the individuals & institutions who buy these loans.
Agree with you, total BS.
Once a small number of banks start leading the market with some feature the other banks must follow in order to remain competitive. This is one of the reasons regulation is so critical in banking. There is only the herd. Outliers die off quickly.
Not only were the subprime loans a ticking time bomb for the unqualified ,these loans were the major cause of the uptick in housing demand for at least 3 or 4 years .Of course the speculators would go on these low down loans because the ownership intent was a short term one .
The market became a buying on margin ,churning real estate ,as if it were stocks . No different than the late 1920’s stock market run up based in large part on margin,(easy credit ), buying coupled with a mania at the time .
2007 will be no different than the great “sell out ” down tick that took place in 1929 . With sub-prime lending people will not be able to hold out long term .
And I expect the “recovery” to take at least as long as the recovery from the Great Depression.