Home Loan ‘Culture’ Creates ‘Empire Of Debt’
The Washington Times has the last of their series on home loans. “Federal banking agencies, concerned about the potential for abuses in mortgage lending, are going after the worst practices in the industry. A directive last month from the Federal Reserve and four other federal agencies targets the proliferation of loans offering interest-only payments for extended periods and adjustable-rate mortgages that offer the option of paying interest only, making a minimum payment each month or adding in principal. That includes about half of all mortgages made last year.”
“The regulators also expressed concern about the growing practice of “layering” risky mortgages on top of already dicey lending practices, such as requiring no down payment or proof of income from borrowers.”
“But many inside and outside the mortgage industry question how much impact the banking directive will have, because so many mortgage brokers operate outside the banking system. Only those that are subsidiaries of banks would seem to be affected. ‘Banking regulators actually have fairly minimal control or even influence over a huge portion of our economy,’ said Christopher Cruise, a Washington mortgage broker. ‘I’m not saying we’re thumbing our nose at the regulators,’ he said. But ‘if I’m a street-level originator licensed by the state of Maryland generating 20,000 loans in a year, and I find rich investors to buy them, nothing the [Office of the Comptroller of the Currency] says has any impact on me.’”
“Mortgage companies such as Countrywide, the biggest nonbank lender in the country, appear to be unaffected, he said. ‘I think they own a bank, I don’t think the bank owns them. They sell their mortgages to Wall Street,’ he said.”
“Mr. Cruise noted that debt appears to be addictive for some consumers who simply cannot save or go without lavish things. Some will refinance their mortgage at Christmastime, for example, so they can splurge on expensive presents.”
“‘I feel like a drug dealer,’ he said. ‘I’m horrified at the empire of debt we’re creating.’ Mr. Cruise said some of his customers are so intent on getting loans, they won’t take ‘no’ for an answer. ‘We’re enablers. We’re just middlemen. In a sense, we profit from their foolishness.’”
“Most mortgage brokers today are in their 20s or early 30s and have not lived through a deep recession or other ‘worst-case scenario’ in their adult lives, Mr. Cruise said. ‘I’m not sure the loan officers themselves know what could happen’ if rates rise precipitously or the economy plunges, he said.”
“Jack M. Guttentag, a retired professor from University of Pennsylvania’s Wharton School of Business, said it’s not clear whether the guidelines will change anything. ‘What a broker or loan officer tells a borrower is pretty much up to them, so long as they comply with the disclosure laws,’ which don’t prohibit most current practices, he said. ‘That is part of the market culture, and the regulators would have their hands full trying to change it.’”
“Mortgage brokers also are right to question whether the directive applies to them, because the Federal Reserve has, at best, distant control over what the nonbank subsidiaries of bank-holding companies do, he said. ‘Many potential borrowers are shocked to discover that there is no registry of bad apples, and no system to certify good ones,’ he said.”
“Some financial analysts say the banking directive will have a definite impact on banks as well as on investors who have been using interest-only loans to purchase property. David Lereah, chief economist with the NAR, says he expects the directive particularly to discourage speculators who ‘flip’ properties in transactions that require minimal down payments and liberal loan terms. ‘There will be fewer investors in the market this year,’ he said.”
“Deborah Lagomarsino, a Fed spokeswoman, declined to say whether or how the Fed would ensure that its directive is followed by the many mortgage companies not directly regulated by the Fed.”
This will be one to remember when the taxpayers are asked to bail-out the mortgage industry.
That includes about half of all mortgages made last year.”
need we say more??
OT, just heard on the radio that Centex is having a 12 sale here near Seattle. Previously, this area has not had some of the reductions in prices other areas have had. Either Centex has a cash flow issue or this area is starting to slow also. I am hoping for the later.
Maybe this will finally create a tax revolt in this country if we have to bail out the overconsumption by a bunch of the have it now generation.
Sounds like I need to track down some relatives in a foreign land to stash away my assets when this thing hits the fan:
Treasury Dept. claims power to seize
gold and silver — and everything else.
“‘if I’m a street-level originator licensed by the state of Maryland generating 20,000 loans in a year, and I find rich investors to buy them, nothing the [Office of the Comptroller of the Currency] says has any impact on me.’”
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But aren’t some REITs busily selling their MBS’ now? How many will they buy if they are selling the ones they have now?
The yield curve is inverted now. That says there is no advantage in buying debt that matures several years out when you can get the same yield with short maturities. So why buy a bundle of mortgages maturing 15 -30 years from now, particularly when the terms of some make no sense whatever. Increasingly, it will be demonstrated the ARMs, I/Os, No Doc loans are a bad investment.
I think the independent mortgage companies are going to find it tough going even though the FED doesn’t control them.
“Most mortgage brokers today are in their 20s or early 30s and have not lived through a deep recession or other ‘worst-case scenario’ in their adult lives, Mr. Cruise said. ‘I’m not sure the loan officers themselves know what could happen’ if rates rise precipitously or the economy plunges, he said.”
These 20-30 year old mortgage lenders also only see the fact they are making six figures on commissions racked up selling loan products to all the suckers out there who beleive the value of their homes only goes up…
What they don’t see coming are
- the dozens of class action lawsuits on the way.
- more settlements between state attorney generals & lenders (similar to Ameriquest).
- Home values flattening, even declining, drying up the source of cash out & re-fi loans (Di-techs even offering 125% financing on your home).
- Home sales (existing & new) declining, drying up the source of new home loans.
- Lay-offs which have already started at many of the big lenders. Countrywide let 300 people go in Florida, Ameriquest let about 1500 go, and many smaller lenders and simply closing up shop.
- Mergers and consolidation in the industry, leading to more lay-offs and office closings
- waves of forclosures when all these exotic loans begin to mature causing public outrage over preditory lending and possible further declines in home values.
Its going to be ugly in the mortgage business over the next couple years and I am glad… I hate mortgage brokers, especially the 20 somethings who are living it up right now in their mcmansions & bmw’s. Pink slips are coming and us repo men are not far behind… There’s going to be a golden age in the repo business. I am thinking of packing up and opening up shop in Southern Cal.
Comments on CFC’s mismatched workforce count and loan growth:
http://www.xanga.com/russwinter
“‘I feel like a drug dealer,’ he said. ‘I’m horrified at the empire of debt we’re creating.’ Mr. Cruise said some of his customers are so intent on getting loans, they won’t take ‘no’ for an answer. ‘We’re enablers. We’re just middlemen. In a sense, we profit from their foolishness.’”
That’s an interesting and insightful comment. Really, I never though of it in quite this way; but, these borrowers are suffering from an obsessive disorder much the same as an alcoholic. I am not sure whether we should loathe or pity them.
“‘I feel like a drug dealer,’ he said.
Quote of the decade, hands down.
Here’s the best part. The information we know now is only the visible tip of the iceberg. If we know now that half of all of the loans made last year were ARM / NegAm and undocumented, read fraudulent, then what about for the years prior? This is going to make the S&L crisis seem like a grade-school conflict and Enron and Wolrdcom pale by comparison. Greenspan, whatever else you may say about him, nailed the issue when he said that the sheer size of Freddie and Fannie (and by extension, the morgtage industry) were a danger to America.
believers in the fed gov to help this or health care or anything else are idiots
I bought some gum today
To see if I’m solvent
I focus on the taste
The only thing that’s real
The pocket has a hole
The old familiar rip
Try to buy it all away
But they remember everything
What have I become?
My sweetest friend
Everyone I know
Goes away in the end
You could have it all
My empire of debt
I will let you down
I will make you broke
I wear this false toupee
Upon my SUV
Full of broken toys
I cannot repair
Beneath the stain of time
The new carpet disappears
You can move to where you like
I am stuckright here
What have I become?
My sweetest friend
Everyone I know
Goes away in the end
You could have it all
My empire of debt
I will let you down
I will make you broke
If I could start again
A million bucks before
I would keep my place
I would rent today
Feepness,
That is pure genius.
Hah, that is hilarious! Did you know that Johnny Cash covered that song on one of his last albums? I actually have never heard the nine-inch nails version….
I like the Cash version. Gets (got) a lot of airplay on 103.1 here in LA.
Great song, great Feepness modification!
Thanks!
I love both versions of the song but the Cash one gives me chills everytime I hear it…
I knew a guy who worked for New Century, he said the same thing “he felt like a drug dealer” and that it was just like the movie “Boiler Room”. You are pushed to sell people loans and get the highest interest rates, the most points & fees you can. You either push the most risky & costly products or you find another job. He admitted to altering and lying on 75% of the paperwork on loans he sold.
The comment about people in their 20s and 30s not having lived thru a real recession/RE dump really does explain a lot. As someone who did live and work through it on the creditor/bankruptcy side, I can only watch in amazement at what has gone on the in the past 5 years. Through my admittedly very conservative and skeptical eyes, the danger signals began appearing as early as 1999. Who would have guessed it would go on another six years though. But you know what they say - the bigger the bubble, the bigger the bust and this one ought to be a doozy.
The biggest lie sold by government is the one that says if we just….. (pass one more law, appoint one more regulator etc)… all human failings will be eliminated and we’ll have heaven on earth. The fact of the matter is that there will always be booms and busts, bad loans, recessions, droughts and the like. The problem is that the snake oil salesman want you to aviod realistic preparations and prudent behavior and instead buy their false remedy. That is the biggest travesty of the current times. People are being sold a bill of goods by realtors, mortgage brokers and their own government. In stead of working hard, saving and living in suitable dwellings they’re being encouraged to bury themselves in promises that can’t be kept. It’s a moral rot that’s showing up increasingly on the financial balance sheet.
I thought the regular posters here might enjoy this link:
http://thegreatbustahead.com/
I just found this page. His arguments seem to be backed up with facts and make sense. I think his start-date will be pushed back ~ 8 years because boomers will continue to work longer than previous generations, but eventually a combination of desire, exhaustion, age, age descrimination, and ill health will force them to retire.
What’s interesting to note is that the generation of 45-54 year olds coming behind them will have LESS spending power than previous generations, because such a large % of their spending will go to cover housing costs (and investments in rental properties that have real rates of return of 3%-4% and do not add much to the economy). What this means is that in about 15 years we could see a convergence of generational and demographic factors: boomers forced into retirement having to cut back spending and save; the mid 30s to 50 crowd, who power the economy, spending such a large % of their income on housing that other purchases fall.
We could see a recession that the Fed would not be able to control through inflation. People would be saving, saving, saving for the first time, and few will be spending. I wonder how we can start to prepare for this now!
is there anyone who can stop this mess?
So instead of the banks being on the hook for the impending mound of bad loans, the investors will? If so, will taxpayers be on the hook? Or is it unknown at this point?
so i get calls all the time “do you want to re-finance?” i say “no, i’m a renter”. half the time they say “would you like to be a homeowner?”. it just seems wrong to let people pile on so much debt so easily. i remember when people getting into credit card debt was a big story. while the everyone was watching that, all this popped up.
check out this ad from Westchester County, NY CraigsList:
UNBELIEVABLE
********************************************************************
Each year, you save more money BUT
The Prices of Houses Are Going Up Faster Than You Can Save.
Are you rooting for the real estate bubble to burst?
(so prices, in desirable communities, will decline to a level you can afford)
Are you clinging to the remote possibility that prices might decline as
Your only chance to “get in the game”.
Don’t worry!
I have several mortgage professionals
who are willing to finance the 5 bedroom house below with
NO Down Payment & NO Income Verification.
This is NOT a … “No Money Down … Owner Financing … Gimmick”.
These loans are underwritten by prominent, well known lending institutions and
my mortgage professionals are ready to finance the 5 bedroom house below
(which is conveniently located only 45 minutes from NYC in the Irvington School District)
with NO down payment & NO income verification.
If you have a good credit rating (not excellent, just good),
you WILL qualify for this financing.
Once you have had a conversation with my mortgage professionals,
(and you are comfortable with the monthly payment that they outline),
you can buy the 5 bedroom house below with
NO Down Payment.
Don’t fool yourself.
Home prices are not coming down!
And neither are interest rates!
Skeptic-just read that one on craigslist - (along with a couple for 100 year mortgages - did you see those?) Man, the sharks are getting hungrier and nastier -guess we should expect that.
Meanwhile any fool who types in “reduced” “negotiable” and/or “motivated” on nyccraigslist can see prices ALREADY are going down, and inventory spiking.
btw, did you see the pictures for that 5 BR house? It looks like an abandoned shack about to collapse under its own weight. any bank that gives someone $629k to purchase that POS deserve to go under
The exterior photo made me laugh — reminded me of slapped-together beach bungalow - without the beach.
Unfortunately, there are enough foolish people in the US whose only metric of “affordability” is the initial monthly payment!
What this means is that house price will rise to the point that only people who are willing to get intererst-only or “reverse ammortization” loans will be able to “afford” them.
Honest hardworking Joe Taxpayer, who would never be stupid enough to purchase a home with an adjustable interest-only or negative ammortizatoin loan, gets priced out of the market.
The saving grace is that rent prices aren’t driven by the same economics (so you can still get cheap rents), and eventually there will be a big crash.
However, somehow, we’ll all end up paying for the foolishness of others. For example, the Government will get used to the inflated property tax base caused by inflated prices, and raise taxes to compensate when the bubble pops.
http://www.startribune.com/535/story/232409.html
There are signs, however, that consumer credit quality — borrowers’ ability to pay back loans — is beginning to slip.
Rising interest rates and energy costs are fueling a rise in bankruptcies and credit card and mortgage delinquencies, according to a recent report by Wells Fargo & Co.
That spells bad news for the banks that would be forced to absorb the costs of bad loans. What’s more, few banks are properly protecting themselves by setting aside sufficient reserves to cushion themselves, analysts say.
“We are not saying the sky is falling, but the party may be over,” said Ed Kashmarek, a Wells Fargo economist who wrote the report.
But ‘if I’m a street-level originator licensed by the state of Maryland generating 20,000 loans in a year, and I find rich investors to buy them, nothing the [Office of the Comptroller of the Currency] says has any impact on me.’”
___________________
Fine. Make sure all the buyers of these MBSs know about the true risk, and inform them that, under NO circumstances will taxpayers cover their losses.
Problem is, FNM, FMC and other “Fed” lenders will be covered. If they do it by somehow inflating money supply (and keeping housing prices at the “permanently high plateau”), even the lowly, scum-of-the-earth lenders will get bailed out by savers.
I wish there was some way to change all this. Ideas???
Ca Renter - There is no way the feds can bail this out. There are something like $17 trillion in mortgages out there. If 20% - one in five - default, it would be $3.4 trillion in debt to be relieved. Our current total national debt is approx. $8 trillion. We would add 50% to our total national debt in one fell swoop? Tell me, which foreign investors will think it’s a good idea to lend the US money by buying our bonds under those circumstances, knowing that the money is to be used exclusively for propping up corrupted, busted, bankrupt institutions?
Sorry it took so long to see your post. I agree FCBs will NOT lend us money if we hyperinflate. If it were to happen, it would be such an extreme measure, and the govt would have to accept that we could not rely on foreign money for a long, long time (if ever). I **doubt** it would happen, but things are getting really weird right now. I just don’t know what we can believe at this point.