Are YOU Listening, Rick Santelli?
Rick Santelli's CNBC populist outrage whining rant on the so-called "deadbeats with the extra bathroom" has garnered a lot of attention. But few people have really looked at the numbers behind how we got into this mess and who really is affected by it.
While it may be good television to pander to the traders at the Chicago Mercantile Exchange or the Chicago Board of Trade or the New York Stock Exchange or NASDAQ, or your buddies on morning televsion on CNBC, MSNBC and all the other cable outlets, the reality is no one on television or elsewhere in the media has approached this problem from an objective viewpoint and with the appropriate statistics to explain the problem.
Let's call it the "Enronization" of America. For if you look closely, you will see a pattern emerging -- not just of boom/bust cycles, but of a methodology of creating expensive but worthless "products" designed to extract as much money as quickly as possible from the hapless saps uninformed consumers who bought it, hook, line and sinker.
While one can make a reasoned case that you don't "need" technology and fancy websites with flaming logos (the dotcom boom/bust) or fancy energy and oil derivatives (Enron boom/bust), housing -- and this is about housing, not just home sales -- is a very different matter. Everyone needs shelter.
Everyone needs shelter and there are only two ways to get it: you either rent or you buy. And the damage done to housing by this boom/bust affects everyone.
California is a bellwether of what is in store for the rest of the country. The independent group, the California Budget Project (www.cbp.org) has taken a comprehensive look at California's budget problems since 1994. Starting 2000, the CBP has published "Locked Out" a series of detailed reports on the status of California housing crisis. The 2008 report is startling. In studying the numbers, you see the problem in a whole different light. This is a housing crisis, not a foreclosure or subprime loan crisis.
The harsh reality is that the financial community is to blame for not putting a halt to the sale of over-priced homes by just not writing mortgages on them. Not because there was something wrong with prospective homebuyers, but the home sale was flawed. How do you justify inflating the cost of a home by more than 200% in 5 or 7 years? How do you knowingly write a loan for that house? They did it because they could sell confusing mortgage products to customers in need of housing. And it would make the lenders loads of easy money.
OWNING VS RENTING
"California has the second-highest share of renter households among US states. More than four out of 10 California households (41.6 percent) rented their homes in 2006, compared to approximately one-third (32.7 percent) of renter households in the US as a whole. (New York is first.) California was one of just 10 states - including Oregon, Nevada, New York, and Texas - in which more than one-third of households rented their homes in 2006," the CBP reports.And when it comes to paying high rental prices, Californians are second only to Hawaii. The CBP says, "Consequently, many Californians, particularly low-wage workers, struggle to afford to pay rents. A Californian who earns the state's minimum wage of $8.00 per hour in 2008 would need to work 83 hours per week, year-round, in order to afford the statewide Fair Market Rent (FMR) of $868 per month for a studio unit." In some parts of California, like Orange County, a minimum wage worker must work more than 100 hours each week to afford that studio apartment.
The lack of affordable rental housing is at the heart of the problem here. From the CBP, "In contrast to single-family home construction, multifamily construction continues to lag behind the level achieved prior to the 1990s. On average, developers built 50,172 multifamily units each year between 2000 and 2007, compared to an average of 93,085 units annually in the 1980s.Boosting construction of multifamily units could help to increase the state's supply of affordable rental housing."
Why is affordable rental housing important? Because people have two choices for shelter: rented or bought. So what about Californians who bought their shelter?
The CBP report can be jaw-dropping. One rarely says that when reading statistics. But here are a few that characterize what California homeowners and homebuyers are going through. "California's housing market has entered a period of turmoil following a boom in which home sales and prices soared. Although the housing market has tumbled, the median home price throughout the state remains unaffordable for most Californians. Despite high home prices, the state's homeownership rate increased modestly during the boom as lenders loosened underwriting standards and promoted loans with risky features, such as adjustable-rate mortgages with short-term promotional or "teaser" interest rates. Many Californians have experienced "payment shock" as low promotional rates have jumped to higher levels after as little as two years, helping to trigger an increase in mortgage delinquencies and foreclosures across the state," reads the opening paragraph of the report's homeownership section.Key bullet points to remember:
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homeownership increased modestly,
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home prices are unaffordable for most Californians,
- lending practices led to "payment shock" and have triggered an increase in delinquencies.
It gets worse from there.
"During the housing boom, lenders relaxed underwriting standards and promoted relatively risky loans that allowed more consumers to qualify for financing. Lenders increasingly allowed borrowers to put little or no money down, provide few or no details about their income and assets, and spend more than 30 percent of their income on housing costs - the limit recommended by the federal government. Lenders also promoted a variety of loans that allowed homebuyers to borrow larger sums than they could have with a conventional fixed-rate loan as well as allowed many borrowers with weak credit histories to qualify for financing.
These loans include:
- Adjustable-rate mortgages with short-term promotional interest rates.
- Nontraditional mortgages, primarily interest-only and "payment-option" loans.
- Subprime loans. (During the housing boom, subprime loans were often structured as ARMs with low promotional interest rates, and many had interest-only features. While many subprime borrowers have weak credit histories, a substantial number of credit-worthy borrowers have received subprime loans. One analysis found that more than half of subprime mortgages in 2005 (55 percent) and 2006 (61 percent) were made to borrowers who had credit scores high enough to qualify for conventional loans with far better terms.)"
Additionally, in order for Californians looking for homes to buy, they had to look in cheaper areas of the state, commute to their jobs longer and (surprisingly!) buy smaller homes. One study reported by the CBP found that: "More Californians bought smaller homes than in the past. For example, approximately one-third (32 percent) of Californians who owned a home for less than two years in 2003 bought homes with two or fewer bedrooms, compared to one-quarter of Californians who had owned their homes for 10 or more years." (So the Santelli rant about buying a home with the "extra bathroom and flat screen TV" really doesn't fly.) In short, they bought smaller homes further away.
But the painful truth comes when you examine the home price/buyer income disparity.
From Locked Out: "Despite the downturn in the housing market, California continues to face a shortage of housing that is affordable even for middle-income families. Because housing costs have outpaced wages and incomes of many Californians, the state's residents spend a large share of their incomes on housing, leaving less for food, clothing, health care, and other necessities. Some Californians live in overcrowded conditions or are homeless, while others have sought less expensive housing far from major job centers."
"Housing costs have outpaced the wages and incomes of many Californians. For example, the cost of the state's median-priced home nearly tripled between 1989 and 2006, increasing by 193.4 percent.In contrast, the state's median hourly wage - the wage of the worker at the middle of the distribution - increased by 60.3 percent and the state's median household income rose by 67.6 percent during the same period. Rising rents in the greater Los Angeles area, which has nearly half (48.6 percent) of the state's population, also outpaced Californians' wage and income growth between 1989 and 2006, with the exception of high-wage Californians - those at the 80th percentile - whose wages kept pace with the increase in rents in the greater Los Angeles area.
The incomes of many renter households in California have not kept pace with inflation. The income of the typical renter household - the renter household at the middle of the distribution - declined by 4.3 percent between 1989 and 2006, from $39,210 to $37,537, after adjusting for inflation. The inflation adjusted income of low-income renter households - those at the 20th percentile - declined even more steeply during this period, falling by 10.5 percent, from $17,741 to $15,880. Although the inflation-adjusted income of the typical owner household increased modestly between 1989 and 2006, the income of low-income owner households only slightly outpaced inflation."
The short take: if you are not rich in California, you are struggling to make ends meet.
The measure is, "how much income does it take to buy a home in California?":
"Despite the wide variation in home prices, buying a home anywhere in the state remains a daunting prospect for many residents. The income needed to purchase the median-priced home with a 30-year conventional fixed-rate mortgage and a 5 percent down payment exceeds the median household income in every county. For example, Tulare County's 2006 median household income was $41,933, but a Tulare County household needed an annual income of at least $55,973 to afford the median-priced home in August 2007."
Let's put it in other terms: The median home price in California was $465,000 in 2007. To afford that home, the family income had to be at least $113,162 if the could afford a fixed rate 30-year mortgage with 5% down ($23,250.00) ;or an income of $95.295 with a 20% down payment ($93,000.00). Remember that the house's value ballooned from $200,000 in 2000, to its current price, meaning the homebuyer paid more than $265,000 over the "real" price of the home. And many California buyers were forced to engage in bidding wars to buy their homes, inflating the "worth" of the home even more.;At no time did ANY lender stop the sale of a home saying it was overpriced. No, they encouraged homebuyers to use one of the fancy loan instruments they sold.
Here's who could NOT afford that median-priced home:
Occupation and Median Hourly Wage
Dental Hygienist.....................$79,082
Registered Nurse....................$75,650
Police Patrol Officer................$71,136
Fire Fighter............................$60,549
Elementary School Teacher.....$57,506
HUD Low-Income Limit............$52,000
Carpenter...............................$50,170
Auto Mechanic.......................$38,355
Secretary...............................$32,864
HUD Very Low-Income Limit....$32,500
Construction Worker...............$31,658
Bank Teller............................$24,939
Child Care Worker..................$21,195
Retail Salesperson.................$20,987
(Commodities traders and loud-mouthed talkshow hosts can afford the home at it's inflated price. Ain't that a shame?)
The fact remains that 92 percent of all homeowners pay their mortgages on-time. The problem for many of the California buyers is that their loans are structured so that there are substantial prepayment penalties, as home prices drop their mortgages exceed the values of the properties which were overvalued in the first place, in the tight credit market even borrowers with good credit and conformning (fixed rate 30-year loans) cannot get refinanced, and those who need refinancing the most (those with ARM loans) simply cannot get the loans they need.
The so-called "moral hazard" of people simply walking away from their homes to take advantage of the bailout is more unlikely because of the tight rental market and the lack of affordability there. Plus, renters need credit, too, so they can lease an apartment for their families. "Walking away" would leave these Californians homeless.
But homelessness is increasing. People are staying in homes until they are foreclosed upon. Where they go from there and what happens next is best illustrated by Stockton, CA. It is rapidly becoming a modern day ghost town as more and more inflated loans come due, housing prices plummeted, former homeowners are forced to leave, businesses in the city close, employers and employees cease to make money, bills (including mortgages) go unpaid, more homes go into foreclosure and the cycle continues.
I could not wish that fate upon my worst enemy. But that is exactly what Rick Santelli and his ilk are wishing for Americans, not only in California, but Florida, Colorado, Nevada, Georgia, Michigan, New York, New Jersey, Ohio, Washington, Oregon, Arizona, Texas, Louisiana and every other state in the union.
It is the Enronization of housing and the economy,
Excellent work!
I appreciate your bringing the "Locked Out" report to our attention. But more importantly for presenting truth to confront the corporate media lies. The effort is definitely on to paint those crushed in this wealth grab as no-good low lifes scamming the system. Even Obama keeps repeating that the folks who by whatever means have continued to pay their mortgages as those "doing the right thing." How about the crooks and the facilitators of crooks "doing the right thing?"
But I digress.
Thanks for the hard work of digging out the information.
February 20, 2009 11:38 PM | Reply | Permalink
Jade
Today found myself surrounded by a group of $500K a year men at lunch and I was outgunned without any factual ammunition against their support of Mr. Santelli remarks.
I knew he was raving about the housing market failure without having ever experienced true loss. How does one convince others like him how narrow and self serving their point of view can be? Facts!
Next monday I will be better prepared.
Thank you for your contribution.
M. Paul
February 21, 2009 1:23 AM | Reply | Permalink
And when it comes to paying high rental prices, Californians are second only to Hawaii.
Let me be a witness!
February 21, 2009 4:53 AM | Reply | Permalink
Thanks for this! I've always wanted to get beyond the broad brush national housing statistics, and the vague talk of the jingle mail threat, to get into the gritty local or regional reality. THis was very useful!
February 21, 2009 8:27 AM | Reply | Permalink
Great work as always!
February 21, 2009 9:12 AM | Reply | Permalink
REC'D!
SEND IT TO SANTELLI! I AM!
February 21, 2009 10:04 AM | Reply | Permalink
Jade you really put together a nice argument for boycotting Santelli and CNBC.
I was Watching McGloughlin Group last nite. There were the two repubs blaming all our current economic problems on poor people.
Blaming the powerless.
It is good to see good arguments written so well.
February 21, 2009 10:10 AM | Reply | Permalink
I just watched Santellis rant, Jade, as well as Gibbs rebuttal. Anyone see the utter irony of a fatcat loudmouth ranting about handouts on wall street?
If that exchange didn't wake people up to the utter immorality and inanity of these jerks, I don't know what will.
I've said it before and I'll say it again, we need new pundits. What are you doing?
=D
February 21, 2009 10:17 AM | Reply | Permalink
LOL... I'll agree that we need new pundits... or at least better access to those we do have to be able to present long-form rebuttals to them.
February 21, 2009 1:55 PM | Reply | Permalink
"I've said it before and I'll say it again, we need new pundits. What are you doing?"
Second Bwak's idea, Jade.
February 21, 2009 10:21 AM | Reply | Permalink
Third!!!
February 22, 2009 12:43 AM | Reply | Permalink
Santelli exemplifies today's principled conservative - totally self-centered. There have NO other principles. They are not fiscally conservative for it is apparently okay with Rick for the government to give him and his Wall Street buddies taxpayer bailout money, just don't ask THEM to do the same for anyone else. I could respect a consistent conservative position, but the hypocrisy of conservatives such as Rick make ME want to rant!
February 21, 2009 10:25 AM | Reply | Permalink
Santelli is a reporter. I don't think he got any bailout money. He used to be a trader but no longer.
February 21, 2009 6:08 PM | Reply | Permalink
Regarding renting versus buying:
I think Jade has highlighted something extremely important. Here, in the northeast (PA), rather pedestrian one-bedroom apartments are renting for about $1K/month. That's the same as the base mortgage (minus property taxes and insurance) on my 2,600 sq.ft. 4-bedroom colonial on 2-acres. Given such economics it's no wonder so many people are/were looking to buy instead of rent. Something seems very wrong in the rental market.
February 21, 2009 10:33 AM | Reply | Permalink
First, I apologize for the screwed up formatting. I'll see if I can fix it to make it easier to read.
Second, thanks for comments and rec's.
Third, we should try to find or pull together statistics for other states and hard hit communities. This is a pattern that has repeated itself all across the country.
When you look at how these mortgages were structured, and what the benefit to the financial community would be, it has Enron written all over it. To continue to characterize this as if the prospective homebuyers/homeowners are all to blame is reckless and just plain wrong.
February 21, 2009 10:46 AM | Reply | Permalink
Posted at: http://tpmcafe.talkingpointsmemo.com/talk/blogs/wvbiker/2009/02/the-brainwashing-of-middle-ame.php
Our local newspaper here in our part of middle America (Ok, so we went for W twice and McCain) is pretty pathetic anyway. Not only does it print the AP articles without fail, we get editorials from the far right pundits that are so far right that they are unknown to most (Dale McFeatters ?). Michael Barone's column appears regularly. Heck the damn paper is run by Repub Ohioans.
Today's edition features the new economic guru Rick Santelli and his views. The front page headline claims: " Bailout for Homeowners Stirs Up Strong Feelings". Inside is a Washington Post article (rare for our paper to reprint a news article from the Post- usually only the conservative op-eds from the Post make it to our paper) with the headline: "Anger Over Mortgage Aid for Homeowners Portends Class Fight".
The local TV stations are not much better. Fair and Balanced My Ass!
Now so far the only complaints I have heard locally are about the bailouts the banks and Wall Street are getting. The reality on the ground here is that the factories owned by out of staters are just now starting to close and putting lots people out of work (timing wise, we are always behind the biorhythms of the rest of the country). These are people who have always paid their mortgages on time and will be hurting soon. They will be glad that they have avenues for relief. However, with this kind of leadership from our local media, no doubt our DINOs (Democrats in name only) will paint our historically blue state red again in 2012.
Please make the brain washing stop !!!! The spin dry cycle is making red water pour from my ears!!!
February 21, 2009 12:48 PM | Reply | Permalink
Great post Jade. I have a couple comments (one micro technical and one macro) and a question. My main point is we need to balance the system, as one of the last places we need huge swings in price in my opinion is housing.
You asked how lenders justified lending when prices doubled in 5-7 years. One problem is the appraisal system. There are three approaches they take to valuing a house, and all three tend to drive the values obtained upward in an expanding economy such as California, but they also drive them sharply back down in bad times. It's a triple whammy, and in a nutshell, lenders really can't rely on an appraisal as an accurate long-term valuation of a home in California.The three approaches are comparable sales, income, and cost.
The comparable sales approach looks at the nearest similar homes and how much they sold for. Appraisers look for values that bracket the purchase price (i.e. one sale on the high side and one on the low side). This is easy to find when the market is booming - the oldest sale is the lower end, and two more recent sales are higher. But what this means is each subsequent appraisal finds the homes in the same area are worth a bit more each time, and voila, both lenders and sellers can "justify" a higher sales price. Appraisers usually emphasize this approach as it is "most accurate" as the buyer and seller have agreed on a price.
The cost approach is just that - how much it costs to build the home. But this approach is based on estimates from a book which is typically not up to date, so it usually isn't weighted like the other two. But remember how scarce construction labor was or materials after 9/11? This drives up construction prices, and drives up the cost approach value. Strike two.
The last approach is the income approach, which means how much would the property yield in rent payments, and applied over time, how much is the property worth. As you note so well in your post, available properties to rent are scarce also. This drives up the value the income approach yields.
Simply put, the current appraisal approaches inflate the value of homes in boom times. Sellers and lenders rely on the appraisals to justify the values, and they were working hand in glove. Now there are rules in place (FIRREA) that govern this, but do you think lenders used appraisers who consistently came up with lower values than the purchase prices?
Here's the last part of the problem. The appraisers work for the lender. The lender doesn't have as much incentive to close the deal at the highest price as the seller, but they still have an incentive to close the deal. So do both real estate agents, who don't get paid unless the deal closes. So the only one in the transaction with an incentive to get the lowest price is guess who? The home buyer. We ought to reverse this system and allow the home buyers to engage the appraisers, for starters.
But the bigger question is this: how do you deal with the popularity of California? It's a nice place to live with a great climate, and lots of people want to live there. That factor alone (increased demand) drives up the price of housing compared to worse places to live, say for example, Aleutian Alaska.
An old economics professor of mine went on a similar rant as Santelli when arguing with a more liberal student (not me), and his case was the only fair way to handle supply and demand was "price, always price." My opinion is I have no problem with wild price swings with most things. But I don't want wild price swings in food, shelter, and clothing. So how do we keep the wild price swings out of housing?
February 21, 2009 12:57 PM | Reply | Permalink
Excellent points!
You have the "popularity factor" (or desirability factor)of some locales (the south or southwestern sunbelt), availability employment, and other "tangible" intangibles like the availability of specialized healthcare or public transportation or education. (How many people do you know who move to an area because of the "good schools?")
And your point on the appraisal of property is dead on.
It's interesting that until this current boom/bust cycle, housing prices were pretty much immune from wild swings. People expected their property to appreciate modestly but steadily over the life of the mortgage. They tended to buy a home and stay put in the neighborhood, add on if they needed more space. The idea of buying and selling for quick investment was foreign to them.
And since homeownership has been the basis of acquiring family "wealth" over generations, protecting the family investment was paramount. We tended to be "homesteaders" in the past.
Time to re-think the tax benefits of ownership to encourage long-term ownership again? Regulations to cap valuation at no more than 5% per year (which is more than the 2 or 3% that had been traditional but less than the 20% we've seen in the last few years?) Incentives for people who rent to continue to do so? Incentives for the housing market to build affordable homes below the median pricepoint?
February 21, 2009 1:45 PM | Reply | Permalink
Well written, and compelling post Jade. Thank you for putting it together. Peel away a layer of the onion to reveal the underlying one, and they all seem to be geared toward extracting wealth from the real producers in our economy. I hope all of us " hapless saps/uninformed consumers" don´t wait till it's time to storm the castle before demanding that our needs are met as well as those who are poised to do the extracting.
February 21, 2009 1:03 PM | Reply | Permalink
Excellent, and very thought-provoking as always, Jade. I want to ask these people who are so bitter about helping people caught in this mess:
"Your taxes pay for the fire department. If they come and put out a fire in your neighbor's house, would that piss you off because your house didn't catch on fire too?" (And then I'd like to turn a fire department hose on them for good measure!)
February 21, 2009 2:45 PM | Reply | Permalink
Not that many years ago my parents lost a goodly amount of money investing in Lucent Technologies (the old Bell Labs division of AT&T -- what could be safer?).
It turned out that Lucent loaned its money to deadbeats (a Turkish internet company with no customers, for one example) who then, "bought" the routers enabling Lucent to book a nice profit.
The government (S.E.C.) let my parents down.
Are you ready to make their losses good, CVille Dem?
February 21, 2009 8:06 PM | Reply | Permalink
We've all lost money on stocks, and when we buy stocks we all know it is an option. A house is a different thing, and there is plenty of blame to go around...I'm sure you can dredge up an example of someone who put no money down on a house they should never have bought in the first place, never read the loan agreement, and bought 3 flat screen TV's when they should have done everything they could to keep up their payments.
That is not the typical example of people losing their homes. I agree with your unstated assumption that if everyone had been savvy and responsible this would be a smaller problem, but with job losses and the housing bubble it would still be a problem.
Losing a roof over one's head isn't the same as losing money from an investment -- and I have lost many thousands from my retirement funds, and am plenty worried about it.
Sorry about your parents; I lost money on Lucent too. I even lost money on Hewlett Packard.
February 22, 2009 10:31 AM | Reply | Permalink
. . . when we buy stocks we all know it [losing money] is an option.
And yet, according to the bleeding hearts on this thread the reason why mortgagors should be bailed out is because the government (Fed, OCC, Consumer Protection, etc.) let them down.
Well, the government (SEC) let my parents down, too (had it blown the whistle as it should have done, they wouldn't have invested).
Soooo?
February 22, 2009 1:54 PM | Reply | Permalink
"The harsh reality is that the financial community is to blame for not putting a halt to the sale of over-priced homes by just not writing mortgages on them."
Come on, Jade! No one was forced to sign their mortgage docs. If buyers thought the price was too high, or there was even a chance that the interest rate could be too high after it started to adjust, they could have walked away. If buyers thought the lenders they were dealing with were dishonest or greedy, they could have walked away. It's not a lender's job to figure out what you can afford or how much of a financial cushion you need to avoid falling behind on your mortgage. If it's your home, your mortgage, and your finances, it's your responsibility to figure out what you can afford. We will never be free until we start taking responsibility for our actions and our decisions.
Do you think we should just have socialized housing, or no private ownership of real estate?
February 21, 2009 3:00 PM | Reply | Permalink
It is a lender's job to determine if the money being lent, (which does not belong to the lender, but the depositors), is going to a sound client. Banks do invent money by lending out about four times their actual deposits, trusting that their customers won;t all show up at the same time. Any bank that simply assumed borrowers were both sound and honest would be toast in a hurry. But that is precisely what happened, with originators filing applications faster than they could write them, and secondary underwriters not bothering to check them out. Everything was fine for a while.
Brokers are known to have promised utterly untrue features. They are known to have prepared mortgage documents in Spanish, but left the balloon and variable-rate info untranslated. They are known to have issued loans without ever seeing the properties.
Yes, the lenders screwed up. They had the cards, they had the choice to lend. That idiotic speculators were running amok is not the only thing wrong. It is also wrong that lenders were stupid enough to trust their fantasies of mortgages being automatically safe investments.
We usually assign responsibility proportionally to the freedom of action, and capabilities, of the parties involved. The borrower has no obligation to the lender beyond the contract. But the lender has obligations to its depositors and other investors, while it also has the freedom to accept or deny, to set rates, to set payment schedules, and it of course has the freedom to hire a professional appraiser.
But because the lender could avoid risk by simply originating, and selling the loan down stream, keeping the fees without any further work or risk, its normal due diligence was not necessary, and the bundlers didn't care, either. They were making too much money to want to invite a slowdown in the flood of easy income. Anybody that asked awkward questions was not a team player, and any institution that was too cautious was not making the big bucks.
Can we just have some decent oversight, like requiring so much on deposit for all leveraged investments? Like requiring derivative products to maintain a real relationship to real dollars? Like requiring financial products to be explained in simple terms so that the bankers can understand their own risks?
February 21, 2009 3:22 PM | Reply | Permalink
I agree, Tom. If it isn't the lender's job to qualify buyers, then why do you have to get an appraisal and fill out reams of financial information before you get a loan? It is the banks who are the professionals here; they do this for a living, whereas buying a house is actually a rare thing, and there are many responsibilities involved. I agree the borrower has a responsibility as well, but much of this is worded in a way to confuse them rather than help them.
I applied for a home equity loan a few years ago, when the interest rates were low. I did it solely so that I could invest in some stocks. I had a guaranteed rate locked in, and when I went in to finalize it they had raise the interest two points. I walked. And I demanded my $350 "loan origination fee" back. They called me and the rate kept going down. I was disgusted (and since I didn't really need it, I had some power). I got my $350 back, and I told the weazel that I hoped he learned a lesson; that I certainly had.
Sooooooo I didn't invest in the stocks that are now worthless anyway, so I was better off. Most people are not in the position I was in. They have a contract, and they have a closing date, and if the bank changes the rules and sorrowfully says that they unfortunately can't honor the "locked in" rate, what can those people do? It happens all the time.
February 21, 2009 3:59 PM | Reply | Permalink
I think that's a perfect example of how to deal with a shady lender - they change the deal, you walk. I wish prospective homebuyers were following your lead. A lot of other people would have fallen in love with the idea of buying those stocks, so they would have signed the loan docs anyway. Then if the stocks lost a lot of their value, they would start blaming the lender months or years later for changing the deal before the docs were signed.
There's absolutely nothing inherently wrong with mortgage products like ARMs but if you don't understand them, you shouldn't borrow under those terms. A lot of people got ARMs and assumed they could sell for a profit or refinance at a low rate later, which is the same thing as betting your house on the movement in housing prices or interest rates. It's a sad story, but it doesn't justify a taxpayer bailout, subsidized mortgage rates or any other government action that takes freedom out of the housing market.
February 21, 2009 4:36 PM | Reply | Permalink
Edited for veracity.
February 21, 2009 4:49 PM | Reply | Permalink
You used my experience to justify the opposite of the point I was making. I was in a very unusual position; if I had signed a contract and had to buy a house on a particular day I would not have been able to walk.
Lenders pull stuff on people all the time, at a very vulnerable time, at that. All lenders aren't disreputable and all borrowers aren't as responsible as they need to be, but bottom line -- this mess really needs the whole village to fix it.
February 21, 2009 5:28 PM | Reply | Permalink
When lenders are doing their job - determining if the money they're lending is going to a sound client - they are making sure that the bank doesn't end up with a bad loan on its books. They're not making sure that the borrower is making the right decision for himself - that's the borrower's job.
I agree with most of your description of the way mortgages have been originated and passed on to other parties that didn't do any adequate due diligence. The institutions that bought those loans from the originators should be held responsible for their bad decisions (i.e., not bailed out). But even when mortgage originators aren't doing any reasonable credit analysis, borrowers are still responsible for figuring out what they can afford and living within their means.
The decent oversight you described doesn't stop anyone from borrowing more than they can afford or living beyond their means, so it doesn't address the root of the current problem. Banks that overexpose themselves to derivatives, overleverage themselves or don't understand the risks they take should be allowed to fail. The average depositor is kept whole by the FDIC, the bankruptcy court distributes the remaining assets of the bank and everyone moves on, just like a million other failed businesses.
February 21, 2009 4:24 PM | Reply | Permalink
The decent oversight you described doesn't stop anyone from borrowing more than they can afford or living beyond their means, so it doesn't address the root of the current problem.
Not true. Greenspan's decision not to regulate the mortgage lenders (2002-2007) allowed predatory lending. The former standard of lending - the borrowers ability to payback a loan - was ditched in favor of the lenders ability to sell the mortgage to a third party for securitization and resale.
The old standard would have stopped most from borrowing more than they could possibly afford.
February 21, 2009 5:07 PM | Reply | Permalink
Again, you insist that someone other than the borrower is responsible to figure out what the borrower can afford. Jade says it's the lenders, you say it's the regulators. I say it's the borrowers themselves, because taking responsibility for our own decisions is the only way to have a truly free country.
If either lenders or regulators are responsible for figuring out what a borrower can afford, how do they do that? They use the same formulas (mortgage payment to income ratio, total debt to income ratio, etc.) for everyone, ignoring that each of us has different preferences, different lives, different responsibilities apart from our mortgage obligations, different levels of job security, a different willingness to maintain some emergency savings in the event we lose our jobs, etc. If the magic lender/regulator ratio for debt to income is 35%, is that right for everyone? Of course not! We should have the freedom to figure out for ourselves how much we can afford to spend on our housing, just like we have the freedom to decide how much we spend on everything else.
You're blaming Greenspan for predatory lending? How many homeowners were forced by Greenspan to sign their mortgage docs? ZERO! CVille Dem said it best - if a lender tries to push you into a bad loan, walk away.
February 21, 2009 5:34 PM | Reply | Permalink
freedom,
I don't disagree that individual borrowers took on too much risk, and perhaps should have walked away. And if a single lender was acting irresponsibly when originating the mortgages, then they ought to fail. But what you must understand is systemic risk. Single, or even groups of irresponsible borrowers don't have the power to bring down the whole system. But the lenders, investment banks, sellers, realtors, appraisers, and insurance companies involved had quarterly profit pressure to keep the game going and build the house of cards higher.
Gradually over time, individual banks sold more and more of the loans they originated; bundled more and more of them into packages and sold them in the market (CDOs). They lowered their underwriting standards, again, over years. So instead of doing conventional 80/20 mortgages they sold those and did 90/10s. Then 100%. And less documentation. And the list goes on. But it wasn't a few single banks! It was ALL of the big ones (Citi, Wells, BofA, Wachovia, US Bank, Key, etc) most of the medium ones, and many of the small community banks as well. It was quasi-government sponsored lenders like FNMA, FHLMC, GNMA, etc. It was non-bank lenders like Greentree, Conseco, etc. If everyone you knew was rushing in one direction, racing to see who can be first, are you one of the herd, or do you wait to see what happens? In business, they ride with the herd, which was heading for a cliff.
When your entire banking system, and the investors who bought the CDOs (think mutual funds, and pension funds, and municipalities) who were rated AAA by the ratings agencies, and insurance companies (AIG, etc) who sold credit default swaps to insure against losses they never thought would happen, what do you do?
Morally, I don't disagree that we shouldn't bail out those who were irresponsible. But if your neighbors house is burning along with 10% of the neighborhood, they may have all helped light the candles that caused the fires. But we want to keep the other 90% standing. So for right now, it's time for the hoses. They'll be plenty of time later for the regulations and lawyers so "this never happens again."
February 21, 2009 5:33 PM | Reply | Permalink
Not only is it to "qualify" buyers, but to also determine the value of the collateral -- the property -- for loan.
February 21, 2009 5:13 PM | Reply | Permalink
The problem with your analysis of the problem is that you miss the obvious and then jump to the ridiculous conclusion of "socialized housing."
"It's not a lender's job to figure out what you can afford or how much of a financial cushion you need to avoid falling behind on your mortgage."
That is EXACTLY the responsibility of the lenders, otherwise why bother to have people "qualify" for loans. They know -- as does HUD -- that people who spend more than 30 percent on housing (it applies to renters as well as buyers) are more likely to have difficulty affording other necessities, like transportation, healthcare and food.
The problem that you seem not to be able to grasp is that the disparity between income and housing affordability -- for both renters and buyers -- is so great, and the LACK of affordable housing so acute that buyers and renters do not have the luxury of choice. It is the false choice between unaffordable rental property and unaffordable dwellings for purchase. I'd advise you read "Locked Out." There is even an executive summary so you don't have to read the whole thing (although that would be ideal.)
February 21, 2009 4:40 PM | Reply | Permalink
Lenders qualify borrowers because lenders want to keep bad loans off their books, not because they're obligated to manage the personal finances of their borrowers. If the government is forcing everyone to conform to a one-size-fits-all ratio of housing expenses to income, we're not living in a free country. You say that ratio works for a lot of people, and that might be true. Lenders should be free to use whatever qualifying criteria they want. If they do a bad job of qualifying their borrowers and end up with too many bad loans on their books, they shouldn't be bailed out. However a lender chooses to qualify their borrowers, the borrowers are still responsible for managing their own finances.
When people in California were signing up for mortgages they couldn't afford a couple of years ago, the ratio of the cost of owning a home to renting was as high as it had ever been. In other words, renting was a LOT cheaper than buying. If more people had remained renters instead of spending more than they could afford to buy a house, there would be a lot fewer foreclosures today.
But again, our disagreement boils down to this - I think people are responsible for their own finances, and apparently you don't.
February 21, 2009 5:53 PM | Reply | Permalink
No. The lender tries their best and has lots of procedures to determine the proper loan amount. But in the end it is the borrower's responsibility to decide if they are taking on an appropriate amount of risk
February 21, 2009 6:11 PM | Reply | Permalink
Lenders qualify borrowers because lenders want to keep bad loans off their books, not because they're obligated to manage the personal finances of their borrowers. If the government is forcing everyone to conform to a one-size-fits-all ratio of housing expenses to income, we're not living in a free country. You say that ratio works for a lot of people, and that might be true. Lenders should be free to use whatever qualifying criteria they want. If they do a bad job of qualifying their borrowers and end up with too many bad loans on their books, they shouldn't be bailed out. However a lender chooses to qualify their borrowers, the borrowers are still responsible for managing their own finances.
When people in California were signing up for mortgages they couldn't afford a couple of years ago, the ratio of the cost of owning a home to renting was as high as it had ever been. In other words, renting was a LOT cheaper than buying. If more people had remained renters instead of spending more than they could afford to buy a house, there would be a lot fewer foreclosures today.
But again, our disagreement boils down to this - I think people are responsible for their own finances, and apparently you don't.
February 21, 2009 6:57 PM | Reply | Permalink
It's not a lender's job to figure out what you can afford or how much of a financial cushion you need to avoid falling behind on your mortgage.
Why not? They deliberately misrepresented the wisdom of these loans, as Jade noted, more then half of the ARM loans went to people who qualified for traditional 30 year fixed rate mortgages. As we stand idly by watching this con game, are we not going to arrest the con-artist? I suggest we have a responsibility to call it what it is and punish the perpetrators.
February 22, 2009 12:56 AM | Reply | Permalink
There is value in having the freedom to decide for yourself what loan is best for you. Being qualified for a 30-year fixed doesn't mean a 30-year fixed is best for you, nor does it mean you want a 30-year fixed.
Are you saying lenders told their customers they were actually getting 30-year fixed mortgages and switched the paperwork at closing, sliding ARM paperwork in front of them at the last second? Or they told their customers that "ARM" meant "30-year fixed rate?" Wherever that happened, I'm with you - let's put them in jail.
Con games and fraud don't explain the current spike in foreclosures. What happened was that a lot of people decided that could buy a bigger house with an ARM, and took the risk that they could refinance or sell before the rate adjusted. They could have taken less risk and chosen to buy a smaller house with a 30-year fixed, but they chose to take the bigger risk so they could have the bigger house. That's not a con - it's poor judgment.
You want to prosecute a lender for enabling a borrower's bad judgment? Good luck. Every day someone tries to sell me something I don't need. There are ads on this website selling garbage that no one needs (apparently someone lost 30 lbs of stomach fat in 8 weeks by obeying this one rule...as seen on Rachael Ray, so it MUST be true). Are they going to jail too? You can put every salesman on Earth in jail, it still doesn't absolve borrowers of their responsibility to manage their own personal finances.
February 22, 2009 2:04 AM | Reply | Permalink
Of course they do. Makes a lot more sense then your explanation, frankly.
February 22, 2009 7:21 AM | Reply | Permalink
Allow me to chirp my agreement. Nice and concise. Nothing to add really.
February 23, 2009 1:50 AM | Reply | Permalink
You still haven't given an example of a borrower who was forced to sign his mortgage docs. Signing a contract without reading it isn't the same as being the victim of a con. Betting your house on the movement in housing prices and interest rates isn't the same as being the victim of a fraud.
And neither of you have a problem forcing your kids to pay the bill when others lose their houses by not reading what they signed or losing a bet on the real estate market. You'd rather teach them that whenever they sign a contract, they can just tear it up whenever they want and send the bill to someone else's kids. That's perfectly fair, and not selfish at all!
February 23, 2009 4:06 AM | Reply | Permalink
You've really got me grinning.
It's a very subtle confidence game, but a con job nonetheless. It's from an industry responsible for billions of dollars. To anyone who knows anything about lending and economics, numerous people at TPM evidently, the acceptance of these ARMs makes no sense, in particular when borrowers have good credit.
What we are proposing is a way to move the game forward, to hold the lenders accountable. We are demaning that they be trustworthy. That they impart professional, solid advice. They have not.
To suggest that because we cannot stop all the cons we should not stop any is defeatist. It's surrender. It's a willingess to accept the way these scoundrels have treated people as though there were nothing wrong with it. I think that it is wrong and should be revealed. Why can't we have standards in our society?
The major problem at this moment is related to not one or two lenders playing a con game, but hundreds of thousands. We are looking at a financial catastrophe that will effect all of us, regardless of how we got here. If we salvage our economy by putting debts on ourselves and our children, but save the country, I'm in agreement with it. To remain passive and have the whole thing collapse around me so that these pieces of paper and metal discs that we call money have value is what I will advocate we save.
Whether this StimPack means some borrowers are spared the full effect of a lesson in "Trust No One", is fine by me. I would rather the lesson be that those lenders behave scrupulously. That has been the greatness of this country, IMHO. We should retain those standards, and not allow ourselves to sink completely into a lawless society where we inhibit anyone from getting ahead by watching passively while these cons slip away with their money and further dismantly a very civilized society. It is that grave.
February 23, 2009 6:40 PM | Reply | Permalink
I'd still like to see an example of a borrower who was forced to sign his mortgage docs. With the "hundreds of thousands" of lenders who were playing the same con game, surely you find an example of a borrower who was denied the freedom to walk away from one of these criminal lenders.
What you're proposing is a way to make paying your mortgage optional. A way to sign a written agreement and then ask the government to force the other party to ignore it. You're claiming that having the ability to walk away from a written agreement is a way to prevent us from descending into a lawless society, and ignoring that taking responsibility for the commitments we make in written agreements is exactly what keeps our society together.
Look at all of the completely arbitrary restrictions you want to impose on the freedom of others just to force everyone else to live the way you want them to live. You say ARMs make no sense, but they make plenty of sense to those who don't borrow too much. Many ARMs have interest rate caps, allowing the borrower to figure out if he can still make his payments at the maximum rate. Of course, you need to actually read your mortgage docs to do that kind of analysis. The "numerous people at TPM" need some remedial finance if they don't understand that.
You say lenders must be "trustworthy," which to you means a lender that takes responsibility for the personal finances of those who borrow from him. Most mortgages are 30-year loans. Is a "trustworthy" lender supposed to regularly visit the borrower over that 30-year period to make sure his mortgage payment is still bearable? Do lenders need to offer free credit counseling to meet your standard of trustworthiness? Is there some way that lenders can contact you to obtain an official Certificate of Trustworthiness so everyone can be sure that a particular lender has met your standards? Or is it possible that because different borrowers want different kinds of loans, we should give lenders the freedom to decide what kinds of loans they want to offer, and we should give borrowers the freedom to decide for themselves which lending terms are "acceptable" and which lenders are "trustworthy?"
February 24, 2009 5:38 PM | Reply | Permalink
When we bought our house, our only house, we were given the name of a lawyer by my soon-to-be boss, and that lawyer advised us on where to get our loan, plus he went over the papers the day before we closed. That was in the days when a bank actually held the loan. We were forced into an ARM, only because we were from out of town (some technicality I never really understood), but we ended up paying off a 15 year loan in 4.5 years. (I still can't believe it - but the reason is a very long story.)
But the moral of the story, I think, is that we live in a country where we cannot trust a lender - and someone was wise enough to steer us to a lawyer, who watched out for our interests (I hope!).
I persist in the belief that finance and economics should make sense to the average person. Papers you have to sign should make sense. Conditions of a loan should make sense.
At the same time, I look around and I see institutions right and left that are now looking at insolvency unless they cut everything to the bone. I'm talking Harvard, which was overleveraged. I'm talking a local Medical College, which overbuilt and was thus overleveraged.
It's not just your average person who is caught in this mess. They were luring people into home equity loans and institutional loans at the same time as they were bundling these loans and luring investors.
It was one big scam on both sides of the fence! With the folks in the middle raking in the dough!!!
February 21, 2009 4:10 PM | Reply | Permalink
Some proposals for reducing wild swings in housing prices might include:
- only allow fixed-rate mortgages (ban ARMs, option ARMS, pick-a-pay, etc.),
- require a 20% down payment except for first-time home buyers (and for them, limit loan to income and total loan size),
- require full documentation of income and assets,
- require that applicants claiming to buy a residence actually live there (and aren't buying investment properties, which require different mortgage underwriting standards), and
- secure primary residence mortgages with all the assets of the borrower, not just the mortgaged property.
Note that the most abusive of mortgage lenders, such as Golden West, IndyMac, and Countrywide were all headquartered in California. The California network of independent brokers and mortgage wholesalers appears to have been pretty abusive, so there is probably a problem with regulation by Sacramento.
Also consider increasing property taxes on vacant land near cities and towns, in order to encourage development in a compact land use pattern with homes close to jobs. This would also penalize the holding of land for speculation.
There may also need to be changes in taxes and regulation to make multiple dwelling unit construction more attractive in close-in areas.
February 21, 2009 4:20 PM | Reply | Permalink
Back in 2002, several states tried to regulate against predatory lending. Georgia, New Jersey, New York and New Mexico were among the states that tried to impose legislation on the downstream secondary mortgage market if they were not willing to ensure that the loans they bought were not predatory.
Enter the federal government in the form of the OCC, a component of the US Treasury department. The OCC is in charge of regulating national banks, who complained about the states attempts to regulate their secondary mortgage activities.
The OCC nullified the state laws as they applied to National banks in 2004, which had the effect of leaving few, if any impediments to predatory lending.
February 21, 2009 5:31 PM | Reply | Permalink
Portland, Oregon has an Urban Growth Boundary designed to ensure dense populations closer to the city with inherent protection of farm land. After all, this IS the land of milk and honey the pioneers left the East Coast to farm. :-{)>
But it rains a LOT so stay where you are!!! We're full!!! :-{)>
February 22, 2009 1:14 AM | Reply | Permalink
Hi Merrill -
Here's where we have to be careful - if you set a price ceiling (that's like rent control) then it tends to lead to greater shortages. There are some customers where an ARM makes sense - if you are 100% sure, for example, that you will move before the rate changes, or if you can afford the higher payment. As for the 20% down payment, both democrats and republicans supported loosening these rules over the years, so more people would be able to own homes. It's a laudable goal, but this is one of the unintended consequences.
I'm absolutely with you on speculative mortgages - I think to maintain greater home value stability, this is an area where speculation, if allowed at all, ought to be carefully regulated and taxed.
February 21, 2009 5:14 PM | Reply | Permalink
Unfortunately for many homebuyers the ARM reset in as short a timeframe as 6 months.
The surprising thing is that in 2007, 61% of homebuyers in CA could have easily qualified for conventional fixed-rate mortgages and did not need ARMs or subprime mortgages. Why'd they end up them? Because that was what the LENDER packaged, at substantially higher interests rates than what the homebuyers would have paid with a standard conventional mortgage.
February 21, 2009 5:27 PM | Reply | Permalink
Jade, that's a great point, and it matches my experience working with borrowers at a community bank here in Colorado. The VAST majority qualified for fixed rate financing. Very few took ARMs. So if 61% ended up in ARMs, it was a sales (r)job, and the lender breached their duty to both get the borrowers the best loan possible and minimize risk to the shareholders.
February 21, 2009 6:10 PM | Reply | Permalink
Doggone nice piece Jade.
Now if some of our legislators could take some time out from raising campaign dollars and read this or otherwise obtain some genuine facts maybe they would be more careful about the legislation they enact.
I wonder how many care enough to make the effort? Never mind. With the state of things we already know the answer to that question.
February 21, 2009 5:44 PM | Reply | Permalink
I remember seeing an article of Santelli's rant posted on HuffPost and the title told me it wasn't worth reading. We should just ignore these people. If nobody pays them any attention their arguments won't be heard.
Most weeks I find myself on the WH contact form complaining to Obama about this very stuff. Jade, you should send this as an actual letter to Obama. So far he isn't showing the gumption to really do anything concrete about the way the citizens of this country have been scammed. Maybe this would light a fire. How much evidence is it going to take to get Washington to clean up this mess? I think with only one exception the top execs in all the major banks are still holding a job. That is so wrong.
February 21, 2009 6:02 PM | Reply | Permalink
I respectfully disagree. Do NOT ignore them. This is the news in the echo chamber and parts of teh country as above noted are receiving reinforcing "news". This SNAFI is a scam, it is organized crime, these people were not trustworthy bankers, they were con artists and con artists belong in jail, IMHO. That is what we should be echoing in the chambers and the street. It's all right here! More then half of all ARMs went to people who had good credit.
February 22, 2009 1:18 AM | Reply | Permalink
Let's see if I have this straight.... If there had been more "affordable housing" to rent, the marginal borrowers would forgo the dream of owning a house for themselves? I don't think that's right.
Moreover you think it's appropriate for taxpayers to subsidize these mistakes? Rather than the banks and agencies who facilitated it?
Jade, you seem like a nice lady. Passing on gossip and prejudice is not a good thing for anyone. By the way, Santelli has argued strenuously against bank bailouts. He's not what you think he is.
February 21, 2009 6:14 PM | Reply | Permalink
The point is that these "homeowner" bailouts are, in reality, bailouts of the lenders and the investors whose greed got them into the pickle they now find themselves.
Santelli -- arguing against Liesman's "we've got to save the banks" schtik -- has been virulently opposed to these investor bailouts since back to Lehman, maybe Bear Stearns.
February 21, 2009 8:22 PM | Reply | Permalink
First off, shooter242, this is not "gossip and prejudice" or whatever nonsense you said. The mere fact that you resort to an ad hominem attack (or attempt one) speaks to the fact your arguments are thin, having not done the necessary research to back them up. The statistics and analysis were originally produced by the California Budget Project. Here is their mission statement:
ABOUT THE CALIFORNIA BUDGET PROJECT:
"Our mission: The California Budget Project engages in independent fiscal and policy analysis and public education with the goal of improving public policies affecting the economic and social well-being of low- and middle-income Californians.
The CBP believes that information can help give voice to those who often go unheard in budget and policy debates. “Knowledge,” as the saying goes, “is power.” Since 1995, the CBP has worked to make the budget more understandable and to shed light on how budget and related policy decisions can affect the lives of low- and middle-income Californians.
Through its published analyses, educational activities, and technical assistance, the CBP is a resource for advocates, community leaders, policymakers, and members of the media. The CBP’s work is widely regarded as timely, reliable, and accessible. CBP staff are frequent speakers at meetings and conferences throughout the state. The CBP also offers an active training program on the state budget, budget process, and fiscal policy issues.
The CBP is a nonprofit organization. Support for the CBP comes from donations from individuals and organizations, subscriptions to our publications, and grants from private foundations.
Core Principles
Four core principles guide the work of the CBP:
Independence: The CBP provides fact-based, nonpartisan analyses of state fiscal and tax policies and their implications for all Californians, especially low- and middle-income residents.
Fairness and Equity: The CBP’s work is grounded in the fundamental belief that government should work to improve the lives of the people it serves. The CBP maintains a deep commitment to ensuring that public policies and programs respond effectively to the needs and interests of lower-income individuals, families, and communities throughout California.
Integrity: The CBP conducts its work with the highest level of intellectual honesty, accuracy, and objectivity in order to effectively inform state fiscal, tax, and other public policies.
Empowerment: The CBP provides accessible, useable, and timely information on state fiscal, tax, and related public policies in order to expand civic engagement in policy debates.
Many of you who have adopted the philosophy that it is the borrower's sole fault, fail to recognize the cancerous nature of the problem --that is, the homeowners you say are scrimping and saving to make their payments and shouldn't be burden with the bailout are exactly the people who are most vulnerable to falling victim to it next.
If you set aside your prejudices and read the report (and I'd suggest you read all of the previous reports as well, beginning with 2000), you'll find that this is a systemic problem that has been growing. The lack of affordable housing on both sides of the equation -- both rentals and purchases -- has been a continuing problem in California and elsewhere.
The report notes that homeownership -- the "American Dream" -- is not possible or affordable for everyone. However, everyone should have access to safe affordable housing.
The problem as I see it is made more acute by a system of lending that IS predatory, that IS calculated to make the lenders more money. When a homeowner in the shrinking middle class CANNOT afford a home without putting his or her financial future at risk, something is wrong.
When a home appreciates in value far above the norm, for no explainable or definable reason, and lending institutions do not question the astronomical increase in value, and instead continue to package loans where the risk to the consumer is untenable, something is decidedly wrong in the lending marketplace.
Understand you have homes that are worth substantially less today than the mortgages that bought them yesterday, you must look at the valuation of the home in the first place.
IF:
a)mortgages were written by the lending institutions knowingly -- and they do know what reasonable appreciation for a home should be --
b) and specialty financial instruments and practices were designed to continue to sell these loans,
c) sell pieces of loans to other institutions, market investments in rickety "securities" based on these loans to other banks, large institutional investors like CALPERS on the bet that this balloon would continue to inflate,
THEN the blame for this problem does lay at the feet of these financial institutions.
My point is that the same people who were investing your money in the dotcom boom/bust -- where companies with no earnings history or hell, even any earnings at all were pumped up with ridiculously high valuations;
were the same people who pumped billions and billions into the financial fraud that was Enron -- where fractional shares of energy futures in fictional companies were sold and resold at ever inflating prices with promises of ever-increasing returns on one's investment and claimed that these investments were so "sophisticated" they were nearly impossible to explain to even their senior management;
ARE the same people who claim ignorance with how mortgage back securities and credit default swaps and the other financial trickery they used to bolster the value of loans they KNEW were written on property that had skyrocketed in value to a point were there was no possible connection to reality.
My point is that the underlying philosophy of selling a product you know is worthless in a manner you know puts the BORROWER at greater risk than the home is worth, and puts your INVESTORS at greater risk than the investment dollar can ever payback, and you do so to simply make a fast buck -- which they did -- then you are at fault for the mess you've created. And the people you've damaged along the way, deserve to be made whole again. That includes borrowers who are making payments and those who have been caught in this perfect storm.
There is no way in hell, that EVERY buyer in Stockton, CA -- one of the hardest hit cities in this crisis -- all colluded to stop paying their mortgages, go into foreclosure, lose their homes, and credit just for the hell of it.
What people are characterizing as a failure of "responsible people," or a "foreclosure crisis," or "mortgage meltdown," I see as a larger systemic problem with investment and finance. It is a problem that started with 1980's junk bonds and continues today.
February 22, 2009 1:10 PM | Reply | Permalink
"When a home appreciates in value far above the norm, for no explainable or definable reason, and lending institutions do not question the astronomical increase in value, and instead continue to package loans where the risk to the consumer is untenable, something is decidedly wrong in the lending marketplace."
The volatility in real estate prices isn't the real issue here, Jade. If you bought at the top of the market, but you bought within your means, you would still be able to afford to make your mortgage payment even while the value of your equity went down. The high rate of foreclosures doesn't come from a loss of equity, it comes from a failure to make mortgage payments. It comes from borrowers agreeing to make mortgage payments they can't afford. You think we would be better off if lenders were forced to manage our finances for us, but I think there is a great deal of value in giving homeowners the freedom to make those decisions for themselves.
With all the information you've posted about the California Budget Project, you haven't given a single example of a borrower who was forced to sign mortgage docs. Where in that report does it say homeowners are (or should be) absolved of any responsibility to manage their own finances because conspiring lenders forced them to sign mortgage agreements?
February 22, 2009 8:40 PM | Reply | Permalink
As I have said before "FU ..." well, you know what I mean. And NBC is still playing the Santalli bit and calling it news. And I really used to think you couldn't get any worse that Murdoch, I guess you never really know just how bad it can get when big business feels threatened.
February 21, 2009 6:46 PM | Reply | Permalink
Excellent research, Jade!
On Reich's recent post I commented about how trust was broken. I truly appreciate the nugget you provided here: "One analysis found that more than half of subprime mortgages in 2005 (55 percent) and 2006 (61 percent) were made to borrowers who had credit scores high enough to qualify for conventional loans with far better terms.)" Which is why I am proposing we seek some heads. Perfectly qualified people were sold junk when they qualified for other programs. This was by design. Slick financial experts exploited the ignorance of borrowers.
When will we stop blaming the victims and hold these perpetrators accountable? I would go so far as to suggest we not give those borrowers complete absolution. They have some culpability, but to suggest that because they either did not read, or did not understand a complex financial instrument and relied on a professional for assistance who deliberately led them down the path of self-destruction is unconscionable, IMHO.
February 22, 2009 12:36 AM | Reply | Permalink
ARMs debates are so yesterday!
Check today's LIBOR; ARMs aren't the problem. The problem is crashing home prices and unemployment, and thirty-year conventional mortgages are no panacea.
February 22, 2009 1:59 PM | Reply | Permalink
I find this part of your argument incongruous:
One of the reason housing prices got so high was because so many more people were invited to the home-owning table.
In the pre-easy-credit world I grew up in in the Midwest 60's and 70's, dental hygienists were not the type of worker that owned their own home, but dentists did. Carpenters and construction workers did not own their own homes, contractors did. It was rare to see police officers and fire fighters as home owners. Auto mechanics did not own their own homes, they were damn poor; shop owners might. Retail salespersons, bank tellers, secretaries did not own their own homes, unless they were "empty nest" stay-at-home moms who were going back to work part time. Many of the others who labored at such jobs were "old maids" who still lived with their parents.
Take a look at an old 50's TV show like "The Honeymooners." A bus driver and a sewer worker can only afford to rent dumps, even without dependents. Though the Honeymooners set was exaggerated "dump," otherwise, that was the reality for such jobs before easy credit.
Without the kind of credit instruments created in recent years to enable them to do so, many people could never get together the required 20% down payment without receiving it as a gift from their own parents. If your parents couldn't afford such a gift for you, you might rent for 15 years while trying to scrimp for a down payment and finally get a home about the time your eldest was already in college, which is what happened to my parents. You might not ever do so, though, because you didn't have credit cards, lived paycheck to paycheck, and continually raided that savings for things like those braces for the kids.
It was not uncommon for wealthy landlords to own whole blocks of houses of "flats," where such people rented. Nowadays, it is common for houses on these blocks to be owned individually. With that individual ownership came more competition for each of those properties, and higher values.
I am not arguing that more people shouldn't own homes, I am all for it. I am pointing out that the way it was done caused some of the problem we are in now. And yes, it got criminally out of control.
February 22, 2009 2:26 PM | Reply | Permalink
Point(s) taken.
It was appropriate to prohibit the lazy red-lining of neighborhoods, but it became all supports for all sectors of housing activity. Easy money raises prices, as we have also seen in college tuition.
February 22, 2009 8:47 PM | Reply | Permalink
Let 'em rent!
February 22, 2009 3:02 PM | Reply | Permalink