Mortgage Crisis

[Beta]

People need to know their limits financially.

DING!

[peterwho]

People need to know their limits financially.

DING! DING!

[TexOle]

I would like to thank my profs in Econ and Accounting. Even though I made a C in your classes I did learn something. I would also like to thank all the stupid people in America that can make others look really smart.

[UofMLaxGoalie11]

An ARM can be better for the consumer in certain situations. The real root of the problem is questionable lending practices by finance companies.

That is much better than instances where you need an ARM and a LEG.

I do live in an apartment. Many of these problems are on the homeowner. If you would not buy something else that you cannot afford then why do you make the purchase of a home that you cannot afford. I cannot afford a house, and I do not plan on buying until I can afford that purchase. My point was there are a lot of shady lenders that are out to make a quick buck by giving bad advice.

People need to know their limits financially.

[youtube]http://www.youtube.com/watch?v=MxFx0NzSjWw[/youtube]I think Ive posted this around before, but it applies again.

[dtrain34]

A fixed rate mortgage (all factors being equal) always has the highest interest rate, and subsequently the highest amount of finance charges. If you were able to lock one down a few years ago, that is now lower than what you could qualify for in today's market, than obviously that is a good thing. But back then you could have gotten a cheaper rate, depending on what type of financing you looked into. Fixed rates are great because they are the most reliable, but again they cost the most; when you include the charges in the front of the loan, and over the course of the life of the loan.

The mortgage crisis right now is not the consumer's fault. Well, for the most part anyways. They simply accepted a loan that they were approved for and allowed them the capability to afford a particular property. The problem lies in that people were qualified for Subprime mortgages using Hard Money guidelines, or Alt-A mortgages, using subprime guidelines.

The biggest problem right now, is that most banks are not portfolio lenders, and subsequently make most of their money from mortgage lending by selling their mortgages on the secondary market. Right now, no one is buying these mortgages. Banks are having to carry the note and assuming all risk, or sell the mortgages at a loss.

The majority of adjustable rate mortgages are attached to an index (the most common being either the MTA, COSI, or COFI). These indices 3-4 years ago were around 3%. You add a banks margin on top of this, and most people were qualified with an interest rate around 5%. Now, as these ARM's fixed periods are expiring, these same interest rates (with the margins tacked on) are in the mid 8%'s.

You couple this with the fact that homes are appreciating at a rate lower than that of the Fed's rate, and several people who were responsible and had very good intentions, are now either upside down on their home or are experiencing extreme payment shock.

It is true, some people are incredibly short-sighted or too loose with their expenses. By that is always the case at any point of time. It's not like the country on a whole in the last year decided to start spending frivolously and living above ones means.

There are a number of factors that have caused this very serious financial crisis; just like there were a number of factors that lead to such a promising mortgage market only a few years ago.

All industries are cyclical....I just pray for this country's sake, that this cycle doesn't last too much longer than the forecast of next fall.

If any of you are in trouble, or have a friend of family member that is, shoot me a private message. Sometimes unfortunately all you can do is buy someone time, but many times if things are done properly, you can help people hang on to their homes and avoid having to short sell the property or enter into default. The biggest problem is that most people wait until it is much too late to ask for help. It is pretty hard to qualify for affordable financing on a property that has several mortgage lates or has begun the foreclosure proceedings.

To answer Sonny's original question, in my opinion the government shouldn't do anything to help these lenders. This has happened before. New Century was not that old of a bank, and actually gained such prominence rising from the ashes of several other lenders and acquiring their loans. Unfortunately, they acquired too many bad loans, which lead to their demise. Right now there has been a "knee-jerk" reaction. Banks don't know what they can sell, so they are holding things off. Banks will be forced to respond, it will just be with much tighter qualifying standards for potential borrowers.

What we really need right now is a combination of a Ronald Reagan/Bill Clinton. I don't really think that exists.....

[Jana]

Since I'm in the biz, I suppose I should contribute my 2 cents:

The market is correcting, and there is short term contraction in available credit. This will loosen up over time. Some people will get hurt. Many pension plans worldwide will take a hit, just as they did in 2001 when the dot com frenzy came to an end.

A few years ago, the ARMS were at a far better rate than the fixed interest loans. If you got into a hybrid product, the loan was fixed for the first 3, 5, 7 or 10 years. That made a lot of sense for people who knew they would refinance or sell before the fixed period ran out. ARMS are sophisticated products (Pay Option ARMs even more so) and most people who got into them did not receive the education they should have from the loan officer before agreeing to lock in the loan program.

The fast and loose nature of subprime and Alt A was indeed due to the lack of regulation - by the loan officers at banks or independent brokers, by the underwriting guidelines, and by the secondary market which was buying up the loans (notice that I don't blame the government here). At every juncture, the pressure was "get the deal done" because every player at every juncture was paid upfront - not as a monthly residual as many in insurance are paid. As was noted in an earlier post, there were very very few requirements at some institutions - not even a HS diploma - to broker loans. For a while in 2002-2003 it seemed every 6th person you met was "doing loans" part time. None of these people were licensed.

The pre-qualification of buyers, and the lack of requirements for them to have "skin in the game" (a significant down payment) meant that there were suddenly far more people bidding on homes. This pushed up prices, because instead of 1-2 buyers putting in offers, there were 10-12 people.

Licensing is now being forced by the state legislatures onto loan officers. IMHO, the test to become a loan officer should be just as difficult as becoming a CPA, taking the bar exam or taking medical boards. This is the biggest purchase most people ever make in their lives.

The Mortgage Insurance providers (such as MGIC) are receiving significantly more claims and have had to write down earnings, just as many insurance companies wrote down earnings with high claims after Hurricane Katriana. This may push up rates for future buyers who need to purchase mortgage insurance as a contingency of their loan program.

The market is indeed correcting, and we will see stricter guidelines - back to the days of early 2001 before the interest rates kept going downward at a surprising pace.

What would make the mortgage world a better and more ethical industry?

1. As mentioned, obstacles to entry to become a loan officer - licensing.

2. Altering the pay structure of mortgages - so loan officers are incented by monthly residuals. This gives them motivation to put people into loans that they can afford to pay, and won't default.

3. More due diligence on the part of bond traders - who purchase mortgage backed securities on behalf of their clients (usually pension fund managers and hedge fund managers), to ensure the mortgages will not default.

4. A wider spread of interest rates based on "skin in the game". Bond traders should not buy subprime loans unless the interest rate truly offsets the risk of default. The current algorithms in use clearly didn't predict the rate of default. People who put 10% down should get significantly better rates than people who put no money down. The rate should be even more rewarding for people who put 20% down. These people have proven they are savers and are less likely to abandon their homes, because they are investing their own money.

5. More emphasis / outreach / education / investment by banks and mortgage companies on seminars for proper budgeting and saving - in advance of buying a home. Instead of the current 2 month of savings required - 6 months should be required. People should have 6 months' of expenses set aside anyway. For high risk borrowers, they should have to prove they can save, even if they made past mistakes and their FICO scores are terrible.

I've received a few panicked calls recently from borrowers - most are mortgaged to the hilt, have crazy ideas of their current home's value, massive credit card debt, 2-3 car payments, lines of credit, and less than 2 months worth of expenses saved for emergencies.

I do try to help them, but sometimes they won't listen to my advice (sell the $500k house, suck it up and pay capital gains, pay off your credit cards, and buy a $250 condo with payments you can afford). A lot of people are believing the Flipping TV shows, and go to the real estate investment courses. They have stars in their eyes, spend far too much time on Zillow.com. For some of them, banktupcy will the only way out.

[Sonny]

This didn't take very long at all..... Maybe if I move to LA, I can get the govt. to pay for my new rims and big screen TV?

Should city bail homebuyers out?
Alarcon wants Los Angeles to help those facing foreclosure

BY KERRY CAVANAUGH and GREGORY J. WILCOX, Staff Writers
Article Last Updated: 08/21/2007 10:48:36 PM PDT

Housing experts painted a grim picture of Los Angeles' real-estate market Tuesday as City Councilman Richard Alarcon called for city, state and federal funds to help bail out city homeowners who can't pay their mortgages.

Warning that the region is embroiled in a foreclosure upheaval, Alarcon said he's also considering asking lawmakers to declare a state of emergency to direct state and federal money to counseling and loans for people about to lose their homes.

Alarcon has proposed using city money for an emergency-loan program to help homeowners on the verge of foreclosure.

But he and housing advocates acknowledged that the problem is growing so quickly that $5 million or so in city money would only help a fraction of the homeowners in default.

"We're seeing people who borrowed $600,000 and can only afford $300,000," said Lori Gay, president and CEO of Los Angeles Neighborhood Housing Services.

LINK:
http://www.dailynews.com/news/ci_6683739

[Jolly Roger]

So let me get this straight, Alarcon wants to loan money to people who cannot pay their current mortgage? I think that's just delaying the inevitable and passing the cost to the taxpayer.

How about people take responsibility for their actions, pay the consequences for their errors and live within their means.

Oh, I'm sorry, that contradicts our current "glorify the victim" state of mind....

[GrayBear]

The mortgage crisis right now is not the consumer's fault.

The entire situation, possibly, but the shortsighted mindset necessary to delude purchasers into gambling on a boundlessly fluid rate while leveraging themselves in extravagant ways elsewhere in their lives is . . . it's entirely their fault:

I've received a few panicked calls recently from borrowers - most are mortgaged to the hilt, have crazy ideas of their current home's value, massive credit card debt, 2-3 car payments, lines of credit, and less than 2 months worth of expenses saved for emergencies.

Live by the sword . . .

[StrykerFSU]

http://sports.espn.go.com/espn/page2/story?page=easterbrook/071106&sportCat=nfl

The TMQ, Gregg Easterbrook, had some interesting things to say about the mortgage "crisis" and housing slow down. It's about halfway down the column, here's an excerpt:

The sense that tighter credit and falling housing prices create some kind of "crisis" -- George W. Bush and Hillary Clinton have both said that of mortgage economics in recent weeks -- is an example of the modern urge to declare everything an emergency.

Last week's New York Times estimated the real estate cooldown will reduce the appraised value of the U.S. housing stock 10 to 20 percent. Even the high end of that estimate would leave U.S. housing worth substantially more, in inflation-adjusted terms, than a decade ago, meaning the typical homeowner who plans to sell is still better off.

What about people who jumped into the hot market from 2002 to 2005 using gimmick loans and might face default? There's no doubt many were snowed by mumbo jumbo from mortgage brokers, and no doubt many never read what they signed. But reading before you sign is, after all, your responsibility -- not a responsibility that should be passed along to fellow taxpayers who did read before they signed.

He also cites a paper by Anthony Downs of the Brookings Institution that says this about the "crisis",

The facts hardly indicate a credit crisis. As of mid-2007, data show that prices of existing homes are not collapsing. Despite large declines in new home production and existing home sales, home prices are only slightly falling overall but are still rising in many markets. Default rates are rising on subprime mortgages, but these mortgages -- which offer loans to borrowers with poor credit at higher interest rates -- form a relatively small part of all mortgage originations. About 87 percent of residential mortgages are not subprime loans. Subprime delinquency rates will most likely rise more in 2008 as mortgages are reset to higher levels as interest-only periods end or adjustable rates are driven upward. Unless the U.S. economy dips dramatically, however, the vast majority of subprime mortgages will be paid. And, because there is no basic shortage of money, investors still have a tremendous amount of financial capital they must put to work somewhere. On the immediate problem of mortgage defaults, some aid to the subprime borrowers might be justified, but bailing out the lenders even more than we have up to now would create a moral hazard by merely encouraging them to do it again.

[laxfan25]

Since all politics is local, there was an article this week in the Grand Rapids Press that housing prices here are down 30% from a year ago (Oct '06 to Oct. '07) They attribute part of this to the large number of foreclosed properties that banks are unloading - they'd rather take a hit on the price than hold onto and have to maintain these properties.

I'd also be little more understanding of the folks that got taken in by fast-talking mortgage brokers in the subprime market. I'm fairly well-educated, and I will admit that I did not read all of the boilerplate text in the 2 inches of documents I signed at any of my closings. I knew I was getting a fixed rate mortgage though at this %, the payment would be x. I'm sure the salespeople glossed over the negatives of the deal as they were pocketing their commissions very soon after completion.
If the mortgage companies will work with these folks to keep them in their houses rather than foreclosing, I think it is better for everyone concerned.
I don't have the same sympathy for the large investment houses that have suffered losses in their hedge funds over this - those are the ones you don't want to bail out in order not to encourage more of this in the future.

[OAKS]

Graphs from http://agonist.org/ian_welsh/20070823/h ... angover_be

[StrykerFSU]

Admittedly, I am not really qualified to argue the finer points of the real estate situation other than to say that I have a mortgage. We haven't seen much of a slowdown here in Tallahassee and I still anticipate making a bundle when I sell my place next year. Perhaps it won't be as much as it appeared the house would be worth two years ago, but it will still be worth much more than I bought it for in Fall 2003.

I highly recommend the Downs paper, it's not that long and pretty straightforward.

http://www.brookings.edu/papers/2007/10_mortgage_industry_downs.aspx

As of mid-2007, data show that prices of existing homes are not collapsing. Despite large declines in new home production and existing home sales, home prices are only slightly falling overall but are still rising in many markets. Default rates are rising on subprime mortgages, but these mortgages—which offer loans to borrowers with poor credit at higher interest rates—form a relatively small part of all mortgage originations. About 87 percent of residential mortgages are not subprime loans, according to the Mortgage Bankers Association’s delinquency studies.

As of September 2007, National Association of Realtor data show that the median price of existing homes sold was down only 4.2 percent nationally vs. one year earlier, though down 8.8 percent in the west. These data show that prices of existing homes are not collapsing, despite large decreases in both new home production and sales of existing homes.

The subprime mortgage market has recently generated the most concern that credit markets may completely seize up and paralyze the economy. In fact, subprime mortgages form a relatively small part of all mortgage originations.
...among all U.S. residential mortgage originations, subprime loans altogether comprised a cumulative total of under 13 percent from 1994 through 2005, though they rose to 19 percent in the year 2004 and 21 percent in 2005, according to the Mortgage Bankers’ Association (MBA). This means at least 87 percent of residential mortgages as of mid-2007 were not subprime loans, according to the MBA’s delinquency studies.

Nothing in this world lasts forever, and the recent unprecedented prosperity in housing and real estate markets is no exception. Activity in U.S. residential markets has already slowed down, and that slow-down will probably continue for the next year or so, though it may recover after that. But in commercial real property markets, though interest rates are appropriately rising somewhat, there is still considerable capital looking for someplace to go.