mortgage crash coming?

Parent Cafe
41

<p>dstark, you say rate cuts? Why that’s only the tip of the iceberg! It will be Federal bailouts with the government taking the loans off the hands of the wealthy and well-connected on Wall Street. Those of a certain age may remember the Savings & Loan bailout. History repeats. Our friends in power have tightened the screws on the bankruptcy laws so the average schmoe who’s in trouble is stuck. But I bet it won’t be long before you hear our leaders spouting lines about “maintaining the liquidity of the system” and “the crucial importance of finance in a strong economy” as they hand our tax dollars to the rich. They made a killing getting loans into the hands of everyone they could persuade to scrawl a signature on a document (“no paystub to verify employment or income? No problem! We can give you a loan”) and then “packaging” the loans into “tranches” which they sold at gigantic profits. Now that it turns out that loans that can’t be repaid aren’t worth very much, the next step will be the bailout. Watch how fast the President who has promised to veto a bill extending health care to children rushes to sign this one.</p>

<p>ucsd<em>ucla</em>dad, see post #1. You can blame the individual, or you can realize we’re not Vulcan robots that are emotionless rational beings. People are swayed by what the read and see, by what they see their neighbors doing, by the stories they hear. This is hardly a new phenomena; ever hear of the Tulip Bulb craze? In this particular case laws and regulations about lending were ignored or swept aside to let the pyramid scheme keep going. “Stated income loans”, anyone? As long as suckers kept taking out loans and paying more and more for houses, it all looked rosy. Just like the pyramid scheme always does – until the day it doesn’t. </p>

<p>I always wonder about those of the libertarian bent who want to put all the onus on the borrower. To them the evil from the era of Dickens was Dickens; if he hadn’t written those darn books the government would have kept its cotten-picking hands off the sanctity of free contracts and not put those labor laws in place. Imagine, regulating the working conditions one can agree to, the hours one can work, or the authority of parents to determine what’s best for their children!! Keep goverment out of the factory floor, right? And in the present era the only problem with regulators is that we have regulators; the free market takes care of all, right?</p>

42

<p>The problem with predicting the bubble is when you least expected is when the bubble is going to burst. People are blaze about housing bubble because it has been predicting since 2002. I think it’s finally hit the mark.
I know somebody who was umemployed, yet he was qualified for a loan to purchase a house for $700K. He was not stupid, the lender was. Luckily, he sold his house for a profit shortly after he purchased it to some other realtors. But if he didn’t, there is nothing to go after a guy who has been unemployed for 7 years, nada. The bank has to take a loss.
The problem this time is not the interest rate, it’s still low comparative to the 90s and the 70’s,it’s the easy credit that is the problem. The FED can’t lower interest rate anymore because they may have to keep interest as is to defend the dollar which is at an all time low.</p>

43

<p>Mikemac, I agree with you.
UCSD… I think you are missing what really goes on.
Watch and see who benefits when the government gets involved (which it will because the free market is a fiction). It’s not going to be the home buyers. They are toast.</p>

44

<p>The Fed hasn’t defended the dollar for years. The rate cuts are coming. We have to lower the cost of capital to the securities firms and the banks.</p>

<p>We have to protect Wall Street. We can’t let market forces cause any problems for Wall Street. ;)</p>

45

<p>

But these are really business deals. If people over-extend they’ll likely end up losing as will the banks who are willing to lend them the money in the first place. I lay all the blame squarely on the shoulders of the borrower. If a lender makes a poor investment decision and ends up losing based on that, then that’s squarely on their shoulders. </p>

<p>

Okay. I think many others are the ones who are missing what’s going on. They want to always blame the institutions who loaned them the money they themselves asked for rather than look inwardly at why they were willing to over-extend and were willing to take the risk. Rather than buy the more modest home with a comfortable margin they opt for the bigger, fancier home in the better neighborhood along with all of the other luxuries they ‘want’ but must leverage themselves to the max for. I don’t blame them for ‘wanting’ it but a responsible person needs to look at the reality of what they can reasonably afford. If I leveraged myself to acquire everything I’d ‘like’ to have I’d probably be one of those in default as well.</p>

46

<p>“But these are really business deals. If people over-extend they’ll likely end up losing as will the banks who are willing to lend them the money in the first place. I lay all the blame squarely on the shoulders of the borrower. If a lender makes a poor investment decision and ends up losing based on that, then that’s squarely on their shoulders.”</p>

<p>The above paragraph makes no sense. Do you blame the borrower solely or do you blame the lender too? There is enough blame to go around, don’t you think?</p>

<p>Nobody cares about these borrowers. They couldn’t afford the homes before they bought them, the couldn’t afford the homes when they bought them, and they won’t afford them in the future. They have no money so who cares about them?</p>

<p>We are going to bail out the banks. We are going to bail out the securities firms. Companies that make investment decisions for a living. Companies that made a fortune during the housing bubble loaning money to people who couldn’t afford the loans. Companies that made a fortune in the private equity bubble. That is who we are going to bail out. We have to help the banks and securites firms because they have loan commitments of what, $500 billion, of private equity firm paper and nobody wants to buy that paper. Our free market system is going to have the government lower the cost of capital to make it easier for these security firms to hold this paper or at least hold it long enough until it becomes enticing for institutions to take it off their hands.</p>

47

<p>While of course the ultimate fault lies with the overextended borrower, let’s face it, most people are not financially smart. When mortgage brokers tell them everyone is borrowing 5 times income they believe them. Why would a bank do it for them if everyone wasn’t doing it? </p>

<p>In expensive places like NYC they have no choice if they want a decent place to live. And yes, they’ve seen real estate just keep going up. Most of these people thought they were being conservative! </p>

<p>We’re also seeing educated people lose jobs in industry to other Countries at a more rapid pace than we’ve ever seen. People are unemployed and not even counted in statistics anymore because they are know as permanently unemployed. Lots of the forclosures are middle class people who’ve been forced permanently in most cases into lower paying jobs.</p>

<p>To picture the average person being foreclosed on as greedy is just not right in most of the crazy markets that are bursting.</p>

48

<p>What’s really funny though is that almost no one on Wall Street, in banker level jobs, has a mortgage. The buildings they buy in usually demand at least 80% cash to buy in!</p>

49

<p>

I think they’re both accountable for their own actions. In the case of a default/repo generally both lose. If the borrower was highly leveraged at the time of borrowing the money then I think they’re setting themselves up for a default and shouldn’t be blaming anyone else for these problems. Likewise, if the lender loaned the money to an over-leveraged person then I think the lender is also accountable for causing their own loss. Lenders take a risk when they loan money. They’re betting that they’ll end up ahead as a result and if they make a poor business decision then they’ll lose. If they do it chronically then they’ll probably end up out of business. The borrower is taking the risk that they’ll be able to pay the loan back without entering default and in the case of housing, usually betting that the market will increase within their expected timeframe.</p>

<p>

Well, I think the lender cares about them from a purely business perspective. Lenders don’t want people to default since the lender usually loses on the deal and will, as I stated above, eventually not make it in business if they chronically make poor business decisions.</p>

<p>Let’s not lose sight of what people have and want today compared to previous times. Take a look at the house that the typical family of your parents’ generation had versus the typical house today. People generally don’t ‘need’ what they have - they ‘want’ what they have. People buying newer homes today (me included) live an a significantly larger house than they actually need or even managed to grow up just fine in. A lot of people now don’t want a basic Chevy, they want a Lexus or Mercedes, etc. to the point where they’re willing to leverage themselves (oftern through leasing) in order to attain it.</p>

<p>As long as the mortgage lenders are being harangued, why not also rail about the auto dealers who go to lengths to convince people they shouldn’t buy the car they ‘need’ but rather, the much more expensive car they could possibly manage the monthly payments on as long as they have no kinks in their road of life. Most of you who’ve ever dealt with a car dealer know what I’m talking about. Some people now are consenting to far more in monthly payments than is reasonable for their financial situation through longer term loans (with minimal to zero down) and leases (where they’re essentially renting a car).</p>

<p>And why not harangue electronics, furniture, and department stores who’ll gladly ‘sell’ them items that aren’t essential at zero down and hefty monthly payments plus interest.</p>

<p>And let’s not forget about the credit card companies who are actually willing to let someone use credit to buy things and then charge them interest for the priviledge. </p>

<p>And there will always be many other situations where companies and individuals are willing to extract money from an individual who makes poor or uninformed ‘business’ decisions about the financial matters at hand.</p>

<p>So, I know I might sound cold but the sooner people figure out some fiscal responsibility and learn to distinguish between ‘wants’ and ‘needs’, the better off they’ll be.</p>

50

<p>UCSD… the reason people don’t care about auto loans and furniture loans and other consumer loans is because we don’t have over $100 billion loans with default issues in those categories. </p>

<p>As for the lender caring, well the original lender sold the loans to investors. The loans were packaged as AAA paper. What happened was a firm took a bunch of junk loans, packaged them together and then said because there were so many loans in a package your risk was diversified and you now had AAA risk. </p>

<p>The original lender made a lot of money doing this. Maybe he really believed that if you had enough junk in your portfolio, your junk was elevated to high quality status. Maybe he didn’t care and was more interested in the immediate buck rather than any long-term fallout. Maybe he thought real estate prices would continue to go up and borrowers could sell the real estate to pay off the loans. I really don’t care because…</p>

<p>You keep talking about the borrowers and their mistakes. I keep telling you, the borrowers are not going to be bailed out.</p>

<p>The pros are going to be bailed out.</p>

51

<p>

I don’t think they should be - any more than people should be bailed out of consumer debt via bankruptcy.</p>

<p>

I don’t think they should be either. Let them suffer the consequences of their poor business decisions.</p>

52

<p>I like your consistency, UCLAdad. Most people want to skewer the borrower, and let the lender off the hook.</p>

53

<p>

I think for amusement I’ll bookmark this page. I’ll be looking for your post of complaint when the government bails out the big lenders “to safeguard our financial system”. Does the phrase “too big to fail” have any meaning to you? Let’s not forget how the Feds rushed to bail out Long Term Capital, how they swallowed all the bad debt from the Savings and Loan crisis (remember Keating?)</p>

<p>The dominoes are starting to fall faster now. Just a few days after announcing they’re in trouble American Home Mortage is gone. Poof, the 10th largest retail issuer of home loans. Countrywide was before them, but everyone said “well, they’re a sub-prime lender, it will stop there”. But AHM was prime and almost-prime loans. Gone, too.</p>

<p>I certainly don’t expect to change your philosophy here. Each man stands tall and alone, right? Yet its funny to see by your screen name that you have 2 kids in UC schools, kids attending top colleges at below-market rates. They’re being subsidized, paid for in great measure by the 74% of California adults that don’t have a college degree. Now I don’t think the UC system is bad and should be closed; I have a degree from a campus (gives me a bias, I suppose). But I don’t pretend that I’ve gotten to where I am all on my own. I’m part of a community, I owe things to it and get things from it. And I don’t believe that things run perfectly on their own, that all we need is government to enforce the rules and get out of the way. Regulation has its role. Certainly a role when the banking system has run amok and is making loans to anyone willing to write down a large enough income to “qualify” for it and sign their name, a system that knows it will be bailed out when the party is over (and the profits are safe in their pocket).</p>

<p>

I wonder if I’m the only one who finds this absolutely chilling. The Founding Fathers of this country specifically granted Congress the right to set uniform bankruptcy laws. U.S. Constitution. Article 1, section 8. It has been a part of this country since the very start. I’m glad we don’t live in a society where debtors are imprisoned or sent to workhouses, that in this country the most mis-fortunate among us who have lost all (perhaps thru sickness, accident, flood, etc) are not forced to spend the rest of their lives crushed by debt. For more than 2 centuries this country has recognized, even placing in its most central document, the right of citizens to discharge their debts under the right circumstances. Said circumstances, I suppose you’d say, that don’t and can never exist.</p>

<p>So what do we do in your system, UCSD, with those that just refuse to pay off their debts that they can’t discharge in bankruptcy? You know, the lazy, the crippled, those dying of cancer. Strip every asset from them except the shirt on their back? Put them to work on a farm or a factory until their debt is paid? Sell their organs, at least the ones they have two of? Whip them regularly, or maybe just public chidings? I’m anxious to hear how you plan to ensure debtors don’t just avoid discharge but actually repay what they owe.</p>

54

<p>Well Mikemac, I hope I’m amusing you more than chilling you.</p>

<p>And what do you expect Mikemac - should people be permitted to leverage as much as they feel like without regard because they’d be bailed out by…somebody? What do you think should occur when someone bought way more house than they should have and then eventually got themselves into a position where they could no longer pay?</p>

<p>I do think our bankruptcy laws are often abused - especially in the area of consumer debt. I do think there’s a problem when people run up large debt buying plasma TVs, expensive vacations, expensive cars, dump their money into expensive restaurants and then end up declaring bankruptcy to wipe the slate clean. </p>

<p>And, I fail to see what having my kids attend a public University has to do with this subject at all. You’re not suggesting that taxpayers should subsidize people who choose to buy more house than they should are you?</p>

55

<p>Mikemac, your points have too much real world wisdom to appeal to the logical theoriticians of the world.</p>

56

<p>

When I last refinanced my loan in order to get a lower interest rate I ended up going with a different lender than Countrywide since they couldn’t match the lower rate of the other lender - and Countrywide was my lender at the time. </p>

<p>If CW made a huge amount of bad loans they couldn’t sustain then they should be out of business. They shouldn’t be bailed out.</p>

57

<p>Investment banks won’t need any bailing out on this housing crisis. It is the lenders (commercial banks), especially subprime lends, that will need bailing out. Remember the S&L bail out? Wall Street made a lot of money during the bail out. IBanks went in to bid 80 to 90 cents on the dollar for those non performing loans from the government or lending institutions, structured securities backed by those loans and were able to make 5 to 10 points off them. Most IBs do not own those loans. They buys those loans then sell them off to investors (through structured deals or whole loans). Experienced Wall Street firms will be able make a nice profit again this time around, and many originators will go down the tube. </p>

<p>FYI - mortgage holders out there, if your rates are too high and can’t afford the payments, try to negotiate down your rates. Your bank would be happier with lower rate loans, but performing (a loan that has 3 months on time payments). It’s much easier for them to sell performing loans than non-performing loans.</p>

58

<p>Most people like to bash Wall Street for many problems. But in the mortgage business, WS has provided a very efficient source of funding for the mortgage originators, therefore cut the mortgage costs for the consumers (points, servicing fees, legal fees, appraisals, etc). There is no where in world that is as cheap or easy to get a mortgage as in the U.S. Through the efficient mortgage pricing, it has allowed many people in the U.S. to own a home. Of course, WS did it to make money, but the consumers have also profited from the efficiency of the market.</p>

59

<p>When people and markets are panicking, it is usually the best time to start looking for companies to buy. With American Home Mortgage going under, that means their customers are going elsewhere. I have been trying to find companies in which to invest that will survive any mortgage meltdown. Any else investing?</p>

60

<p>

Sure sounds like a good idea, but according to recent newspaper accounts this is advice from a bye-gone era where the local bank knew you and held your loan.

</p>