I agree that getting screwed is largely their fault. It's not nice to laugh at them though as they're apparently poor, probably uneducated, and likely somewhat desperate. Those are the types of places where lenders probably make it look cheaper to buy on a zero-down or no-interest loan than rent. You have to blame the lenders too for setting up people with loans they KNEW the borrowers wouldn't be able to afford when fully indexed in 1-2 years. That shows a level of corporate deception and it's likely the brokers didn't do anything but point to the teaser and promise good things. Being poor is sort of cyclical problem because as you say, why not just read the paper? How long did it take for professionals to decipher Enron's filings? Can you pull apart Haliburton's financials and understand them? Reading those loan documents is like a foreign language to people and when you get a broker telling you that something is this and that and they're from a banking institution like Countrywide or HSBC people are going to trust them because they can't afford a lawyer to glance over the paperwork...that's just silly. Your reaction seems reactionary and just because your level of education is likely higher than theirs and your resources are much greater, that doesn't make them idiots. It makes them victims in waiting and I do believe a lot of the blame needs to be laid on the heads of lenders. If you look at lenders right now who's loans were comprised of 50% ALT-A loans last year, and you look at their pattern of selling shares, you can see that they knew there was a time limit, not necessarily to demand maybe, but to the whole ticking time bomb.
It's sad, but it was inevitable. I am glad that officials are doing things to prevent urban blight. Unlike some on ET, I have a background in Sociology, and I think it good are appropriate for government to protect society from it's own stupidity at times. Maintaining a neighborhood is a small price to pay to stem the flow or crime seeping into neigbhorhoods. Recall how Guliani in NY enforced j walking and worked up from there to turn the tide of urban blight in NY. This may sound prejudice, but here goes. I grew up in large city in So Cal, Costa Mesa, of 100k ppl. The part of the city predominantly Hispanic had the highest street crime which actually wasn't much relative to say LA. They always had the most trash on their streets and graffiti too. Pretty soon gangs starting hanging on sidewalks, cars were getting broken into and housing getting robbed, etc. When ppl lose respect for their neighborhood they say screw it and their goes the neighborhood. The city met with Hispanics leaders and created and plan to clean up the blight, enforce littering violations, crack down, harrass more like, on gangs and pretty soon the gang members quit or moved elsewhere and crime started dropping.
Lenders should entirely eliminate adjustable mortgages, and only offer fixed rate mortgages with at least 10-20% down. I know that would cause a huge decline in real estate prices, and people wouldn't have to pay $900k for a 1 bedroom in Manhattan.
WHATâS CAUSING the current crisis? LENDERS HAVE been pushing sub-prime mortgages with full knowledge that borrowers wouldnât have the financial means to pay them off. But the danger was papered over by how the loans are structured. Most commonly, payments in the first two or three years of a sub-prime mortgage are quite low. They cover just interest on the mortgage, not any of the actual loan amount, or principal--and sometimes not even the full interest, leading to situations where the principal actually rises in the first years of the loan. Thus, under this structure, an initial payment on a $200,000 adjustable rate mortgage might start as low as $643 a month--less than the average rent in many markets--but then rise to $1,578 by its sixth year. Meanwhile, the overall loan amount, or principal, rises from $200,000 to $214,857. Basically, you end up worse off several years into the mortgage then when you started. While these practices have been going on for some time, they were masked when housing values were increasing. In that environment, borrowers could more easily sell their homes--usually, for more than they paid--before the higher payments kicked in. Now that the housing market has dried up, families no longer have that option, as there is no way to sell the house for as much as they paid. The result is clear--delinquencies and defaults on mortgages are skyrocketing. In the sub-prime sector, delinquencies are up to 13.5 percent of total loans--from 12.8 percent the previous quarter--according to the Mortgage Bankers Association. And thatâs just the tip of the iceberg. According to a new Center for Responsible Lending study, 2.2 million American households are at risk of losing their homes this year due to foreclosures--worth an estimated $164 billion--in the sub-prime mortgage market. This crisis is part of the broader attack on the U.S. working class. The big increases in housing prices helped make up, at least partly, for the stagnant incomes and dismal job growth numbers of recent years. Though the housing boom was centered in the middle class, at least some working families were able to take advantage of easier access to mortgages--to buy homes, watch the value rise, and then re-sell quickly. More commonly, workers were able to pull equity out of existing homes--by refinancing at low interest rates, and taking the difference in cash to supplement household income. This is a big reason why the savings rate in the U.S. dropped into negative territory for the first time since the 1930s. But if rising housing values helped compensate for stagnating or falling wages, that period is now over.
Overall, according to the Economy.com Web siteâs estimate, $2 trillion in adjustable-rate mortgages (ARMs) began resetting at higher rates late last year, leading to a rise in payments on these mortgages of $50 billion a year by 2009. One analyst estimated that 19 percent of the 7.7 million ARMs taken out in 2004 and 2005 are at risk of default today.
I read through some of these numbers and I think how can these talking heads think the housing market has bottomed, what kept this economy hot the past 5-7 years was people sucking billions of dollars from their houses. Now with foreclosures at fresh highs, arms resetting and a consumer who cant borrow against their houses like they used too, where will this money come from. Here are some more numbers you should keep in mind. Next time they say housing has bottomed read this over and over: In 1980, the total amount of outstanding mortgage debt in the U.S. was $1.4 trillion. By 1990, the amount had more than doubled to $3.8 trillion. But things really began taking off in 1999 and 2000, when outstanding mortgages rose from $6.3 trillion to $13 trillion as of the end of 2006. As a whole, about $6.5 trillion in mortgage debt (about half of total mortgage debt) is now held in these kinds of securitizations, according to government data--an increase from $372 billion in 1985. You have the creation of an entirely new financial instrument--one that is capable of transmitting the crisis of one sector of mortgage loans throughout the financial world.
S2000...thanks for that info. It's very well written. The subprime sector is definitely scary...but the lack of care, at least publicly, about the resetting of these ARM loans is what has me on watch. This is a huge huge problem. I find it hard to believe that a family, even one with good credit that took an ARM loans, is going to go with this flow: - Buy a house during the 04-05 bubble years which was grossly 3-10% more expensive than a similar home might be now. - Pay the teaser on it for the last 1-2 years when it comes due to reset - Pay the "full indexed" rate on a property that is not only worth 3-10% less than it was 2 years ago, but also likely have a higher principle amount on the loan because the original loan was negative amortizing. It's hard for me to believe we won't just see people walking away from houses. I would. These companies knew fully well that most of the borrowers would never qualify for fully indexed rates. They knew that unless values kept going up allowing people to refinance or their income magically went up by a large amount, this resetting of rates was going to see all these foreclosures. It's a bigger mess than they lead you to believe and subprime might be the fastest moving...but it's ARM and other creative loans that were made that are going to start affecting the market. Now that lenders have to tighten their credit qualifications, there is no doubt that the market is headed for a massive downturn. And guess what? The lenders were the ones who did this to themselves...they set themselves up for it by trying to squeeze more profits from a pool of deteriorating quality borrowers. It's sad but true. Countrywide made over $600 billion in Alt-A loans last year...that's 30X their market cap...it's amazing to me that people are so ho-hum about it. Cheers.
No empathy from ET'ers for those impacted by the sub-prime shakedown. That's good. Kinda like the Spartans in the new movie "300." We're coming in to an incredible buyers market in the next 2 years imho. If inflation ratchets up at all then higher interest rates in addition to the the tightening in lending which is already beginning with regard to loan origination in the US. Next we'll see some do gooder legislators trying to legislate common sense in the form of lending reform. We've got a first class wave of cheap real estate coming into supply ina few years. We are eventually going to get a prolonged 9-24 month economic downturn as well which will feed the defaults. Once saturation is achieved by the "bargain shopper" buyers some sweet long-term deals will come around. In the meantime that's why equities are most likely the place to be for awhile. Buy the big dip and trade the small dips. Protect your downside with hedges.
I have a question... Related to this quote (rhetorical of course)........ Being poor is sort of cyclical problem because as you say, why not just read the paper? How long did it take for professionals to decipher Enron's filings? Can you pull apart Haliburton's financials and understand them? How many ET'ers hold on to an instrument when it is losing them money???? If you are dumb enough to sign a mortgage you cant afford, because you are being greedy and now you are being bit in the xxx, you got what you deserved. English is a subject in elementary, middle and High School. It is a Basic requirement of anyone brought up in our educational system to have a working knowledge of the english language... So is Basic Math.... If your debts are 3K a month and you take on another 1K, you have 4K in debts, if your income is 2.5K/ month, then you are in a bad position. if you think a loan will help you out of that situation, and you havent changed what you did to get in the situation.... you are sorely mislead... and Greedy.... These people paid the price. I was taught, the only security is the security you provide yourself. there is no such thing as Job Security. I learned that at age 16. People want security while the smart financial person is screaming save. Then they invest , but dont take the time to learn about investing. If you dont know about it, either learn it or stay away. PERIOD!!!! Just my position. BTW I have family in Euclid and Shaker Heights. I used to hang out in Wickliffe, which is a dump now. Jobs leave, but if you didnt manage the money you earned, whose fault is the fall out???? I was taught to set aside no less than 6months income, and at least 2 years worth. (I had a smart Pastor who taught us these simple money management things back in the 80's) Right after the pathetic recession of the 70's People dont listne, they dont learn and then they cry when they get bit from ther choices.... As the Commissioned song is entitled.... Cry On......