Mortgage Meltdown

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People all over the country are losing their homes, in rather startling numbers. Because of a meltdown in the subprime mortgage market, in Detroit, one out of every 21 mortgages foreclosed last year. In Colorado, 1 out of every 33; in Georgia and Nevada, 1 our of every 41. The national rate is 1 in 92, which last year meant a million households. Estimates predict another 2 million could lose their homes in the next few years.

As a result, subprime lenders — companies that lend money to people who wouldn’t otherwise qualify for loans because of bad credit history and the like — are shutting down or going bankrupt in record numbers. And this is causing scary ripples in the larger economy. Not just in the housing market, but on Wall Street, too.

How did this happen? The housing bubble is partly to blame. Bolstered by the hot real estate market, subprime lenders made loans to people who probably couldn’t afford them (and conversely, people took on loans they couldn’t afford, or thought they could afford but now can’t). Now that the market has cooled down and the terms of their loans have switched from their initial, enticingly low rate to a higher new one, people are defaulting on their payments. There are accusations of predatory lending, but also of unsophisticated consumers getting in over their heads. It’s pretty messy. (For a more complete and pretty accessible explanation, check out this report [pdf] from Congress’s Joint Economic Committee.)

We’re not entirely sure what shape this show is going to take yet, but we know we’d like to find a good “explainer guest” to sort out all the financial mumbo-jumbo. We’d also like hear the stories of people directly affected by the crisis. We’re tempted to take a race and class lens to this story, as minority homeowners and minority neighborhoods have been severely, and disproportionately, affected.

So tell us how this crisis has been affecting you or your neighborhood or your city, and help us figure out how to shape this show.

Ira Rheingold

Executive Director and General Counsel, National Association of Consumer Advocates

Guy Cecala

Publisher, Inside Mortgage Finance Publications

Mariah Crenshaw

Cleveland homeowner facing foreclosure due to subprime loan

Member of ACORN

Extra Credit Reading
Hearing on Subprime Mortgages: Clay on Race

Beth Ann Bovino, Left Out In The Cold: The Impact From The Sub-Prime Mortgage Collapse, 3 Quarks Daily, May 14, 2007: “While it is obvious that homeowner defaults hurt mortgage-lenders and homeowners, these defaults must be put in a broader economic context. Questions include: How will they affect the broader housing markets? Will it spread into the larger economy? Who will be hurt and how? What will the impact of sub-prime problems damage credit availability?”

Greg Ip and Damian Paletta, Regulators Scrutinized In Mortgage Meltdown, The Wall Street Union, March 22, 2007: “Changes in the lending business and financial markets have moved large swaths of subprime lending from traditional banks to companies outside the jurisdiction of federal banking regulators. In 2005, 52% of subprime mortgages were originated by companies with no federal supervision, primarily mortgage brokers and stand-alone finance companies.”

Robert Reich, The Fed and the Sub-Prime Lending Debacle, Robert Reich’s Blog, March 22, 2007: “The Fed’s decisions can either be a great boon to poorer Americans or a huge curse, depending on how responsibly the Fed manages the credit markets. In this respect, it’s done a lousy job in recent years. In the early 2000s, rates were so low that banks didn’t know what to do with all the extra money they had on hand. But instead of keeping an eye on bank lending standards, the Fed looked the other way.”

JP Smith, You remember the black home ownership rates Bush flaunted?, black…MYstory, December 20, 2006: “What Bush didn’t tell about black home ownership, or even home ownership in general, was that too many of these home were purchased with subprime loans. In other words, with loans having high interest rates and unreasonable terms.”

The Holy Fatman, In the Well, DUHHHH, department, Holy Buck, Fatman!, December 20, 2006: “Not many college students graduate with the ability to even balance their checkbook, pay off their credit cards monthly or open savings accounts, let alone IRA’s and 401K’s. They ruin their credit by the time they graduate and when the times comes to buy a home, they are meat for the subprime lending beast.”

Casey Serin, Last Foreclosure… No Houses, No Money, No Stereo, I am Facing Foreclosure .com, April 27, 2007: “Today I lost my last property to foreclosure. The worst part is that BOTH the first and second approved the short sale but the first (Countrywide) refused to give the buyer a small extension to close. They had a solid offer for $300,000 on the table!”

Alec MacGillis and John Solomon, Edwards Says He Didn’t Know About Subprime Push, The Washington Post, May 11, 2007: “Edwards said yesterday that he was unaware of the push by the firm, Fortress Investment Group, into subprime lending and that he wishes he had asked more questions before taking the job.”


  • http://www.bicyclemark.org bicyclemark

    I very highly recommend Max Keiser of http://www.Karmabanqueradio.com and Al Jazeera English. Max and Stacy have been explaining the burst of the housing bubble and the fall of the dollar on their podcast for many years and now it seems the world is finally seeing the reality of what they’ve been saying all along. email karmabanque at gmail dot com. Tell them bicyclemark referred you. (if email doesnt work, contact me Ill put you in touch directly)

  • http://fadedflowers.blogspot.com Tlazolteotl

    A couple of blogs for you:

    Calculated Risk

    The Big Piccture

    Are the two I read regularly, that deal with the macro-economic issues involved with the housing bubble, lending practices, housing start/sales statistics, etc. These are the most interesting blogs I know of on the subject.

    Another few that I know of:

    Housing Bubble

    The Housing Bubble Blog

    These are more real-estate oriented, less macro-economics.

  • http://www.citytowninfo.com avecfrites

    Economist Robert Schiller did a nice graph showing the housing bubble. If we follow the historical pattern, we should see a 30-50% decline in housing values from the peak.

    People already have higher levels of debt than anytime in recent history, and Wall Street is using ever more exotic hedging vehicles which result in greater levels of leverage than ever before. I’ve got a bad feeling about all this.

  • plnelson

    People already have higher levels of debt than anytime in recent history, and Wall Street is using ever more exotic hedging vehicles which result in greater levels of leverage than ever before. I’ve got a bad feeling about all this.

    Ditto. I’ve always been very fiscally conservative. I always pay off my credit cards in full every month, I pay cash for cars and other major purchases. I’ve never had any student loans. WRT to my houses I’ve always had fixed-rate mortgages and always aggressively pre-pay principle, and every time I’ve refinanced I put money IN at the closing – I’ve never taken cash out of my mortgage to pay for anything else. My wife and I live frugally and save about 30% of our gross income for retirement.

    Most branches of philosophy dealing with ethics or morality address ethical or moral issues between individuals. They can describe the philosophical dynamics of one individual doing something that harms another person.

    But here you have a case where a collection of people, perhaps the majority in the society have behaved in irresponsible or stupid ways WRT to saving and debt, which will not only hurt them but everyone else as well! If we have a recession, as some are predicting, as a result of all this debt, then even sensible, rational people who saved up and avoided debt could still suffer by losing their jobs, seeing their savings decline, etc. I think the moral aspects of being fiscally irresponsible should be explored.

  • rc21

    pln, but that would mean discussing personal responsibility.

  • enhabit

    i was at a conference recently where our hud secretary gave a speech on the glorious success of the administration’s push for home ownership….the international audience seemed embarrassed for him…as was i.

    imagine and it isn’t difficult, what would happen if say, one of america’s car companies folded outright…

    what would happen to the debts of all those employees?

    especially their mortgages?

    what would be the effect on the economy of such massive default?

    how far would the cascade go?

    as far as china where much of our nation’s debt is held?

    our nation’s debt habits have a toxic potential…

  • bryongw

    I think you’d find Dean Baker, at the Center for Economic Policy and Research, an ideal guest for this show–especially if you’re looking for someone who can cut through the financial mumbo jumbo.

    http://www.cepr.net/index.php?option=com_issues&task=view_issue&issue=11&Itemid=22

  • Robin

    Thanks for the recommendations so far. I think I’m probably going to stay away from Schiller, just cause he’s such an obvious go-to guy to talk about the housing bubble, and I think it would be nice to have some fresher voices. Dean Baker is great though, bryongw. I’ve talked to him for other shows and I like him. I should definitely give him a call. Good blog recommendations, Tlazolteotl. Thanks.

    Also, check out this totally fascinating guy I stumbled across yesterday. You want to talk about personal responsibility? Sheesh. I think he’s compelling because his situation is so extreme. What I can’t quite tell is how representative he is of this story. Maybe he’s perfectly representative because he made so *many* bad decisions that he covers the whole spectrum. Or maybe he’s just too far out there to be representative of the average homeowner who’s getting screwed right now, and he would distract any conversation back to his own story. At any rate, I’m hoping to talk to him.

  • herbert browne

    RE ..’I think the moral aspects of being fiscally irresponsible should be explored..”-

    If we’re considering MACRO here, will we be discussing the decades of the Defense budget?

    RE ..”We’re tempted to take a race and class lens to this story, as minority homeowners and minority neighborhoods have been severely, and disproportionately, affected..”-

    If so, please consider also the yupwardly mobile “house flippers”- people who run around looking for something to buy & resell in “hot” markets. The West Coast has seen quite a bit of this, esp San Diego County.

    For a concise, historical timeline of the S&L meltdown near the end of Reagan’s presidency, see

    http://www.fdic.gov/bank/historical/s&l/

    and find some interesting policy nuggets interspersed… ^..^

  • plnelson

    RE ..’I think the moral aspects of being fiscally irresponsible should be explored..”-

    If we’re considering MACRO here, will we be discussing the decades of the Defense budget?

    A big defense budget is not intrinsically fiscally irresponsible as long as we have a balanced budget, as we did under Clinton.

    Likewise a big house is not intrinsically fiscally irresponsible if the owner can afford it with a comfortable cushion to handle economic downturns, etc. My wife and I have fairly expensive house but our remaining mortgage is tiny and we could pay it off with available cash if we thought that was wise (which we don’t). What WOULD be irresponsible would be to have a house like ours but with a half-million-dollar mortgage, one average income, and no savings!

    The philosophical question is whether people have a moral obligation to behave responsibly if their irresponsible behavior would harm others. The extreme individualists, e.g., libertarians, don’t recognize collective moral responsibility. They don’t see any social units bigger than the individual. So if someone behaves irresponsibly and loses his house, that’s as far as the moral question goes. If lots of people behave irresponsibly and cause the whole economy to go into the toilet, taking sensible, rational people down with it, they don’t have a philsophical framework to discuss that.

  • tbrucia

    It is strange for those of us who lived through the oil busts of the 1980s and the Savings and Loan Crisis in Houston, Texas, to read about the ‘mortgage crisis’ — again. As the Houston Chronicle pointed out in 2001: ‘… In early ’82 oil prices began falling, stagnating at about $27 in ’85. Then the bottom dropped out, and prices fell precipitously, finally reaching $10 a barrel in January 1986. — With 70 percent of jobs in the Houston area depending directly or indirectly on the oil industry, the bust was in full flower. Construction all but came to a standstill, and some financial institutions failed, while others tightened credit. — Thousands were thrown out of work.’ When housing prices dropped below the outstanding mortgage values, and the equity ‘went negative’, the unemployed simply moved back into apartments and left the lenders to search for them. If the ‘deserter’ had a positive net worth, some lenders would track them down and try to get them to honor their debts. If the defaulter was (mostly) broke, the lenders simply wrote it all off. Interestingly enough, some lenders let folks live in houses after they had defaulted simply to keep the empty properties from being vandalized or fall into disrepair. In some neighborhoods (I’m thinking of ‘The Katy Prairie’) one could drive through subdivisions with hundreds and hundreds of houses where more than half were empty — with grass up to your waist — each bearing their small blue signs marking them as ‘repos’. For those interested in the (apparently now forgotten) Savings and Loan Crisis, here’s a good link: http://www.fdic.gov/bank/historical/s&l . — A personal note: Our next door neighbor rented his ‘starter home’ to a co-worker and bought the residence next to ours. They were both laid off the same day. Fortunately his wife had a job as a nurse and they were able to sell the ‘new house’ and move back into their former residence. His friend moved back into an apartment. — Here we go again! My wife and I survived the crisis — and paid our mortgage off as soon as we could. It was incredible news a few years later when Texas’ legislature voted to allow ‘home equity loans’ (which had been prohibited since the Great Depression). We both thought, ‘These folks are off their rockers!’ Based on our experiences, we came to several conclusions: (1) housing prices can drop and drop and drop but there’s about a two year delay for that process to begin (hope does NOT spring eternal — it has a shelf life). (2) Cash is king when housing plummets, and some real bargains are to be had when folks are suffering ‘hard times’. (3) It takes five to eight years for people to forget the lessons of the past, so if you have a good memory, you have an advantage over the average person. (4) People survive meltdowns, but companies and neighborhoods don’t. — So, welcome to the real world, America. It is your forgotten past, and the reality of Black Swans …

  • enhabit

    while overall home ownership stats haven’t crept up that much since 1960 @ 62-68%

    http://www.census.gov/hhes/www/housing/hvs/historic/histt14.html

    vacancy rates during the same period were fairly consistant @ 1.7% until midpoint 2006 when they suddenly spiked to 2.8%

    http://www.census.gov/hhes/www/housing/hvs/historic/histtab2.html

    what had once been usury..remember usury laws?..is now “unregulated” commerce. interest rates can top 30% on some credit cards today..such interest rates used to be illegal! and these “interest only” mortgages that can balloon dramatically and fataly…yikes

    as with taxes, not everybody can fathom what they are signing..and in this case emotions are at play..needing a home can be like needing a mother.

    keep creativity out of the mortgage world!

    btw simplify the tax code too while you’re at it..if two people with professional masters degrees can’t understand their taxes..not many people can..flat tax @ 18% for everybody..below a certain income, no income tax.

  • enhabit

    “unregulated” should read “deregulated”

  • plnelson

    It takes five to eight years for people to forget the lessons of the past, so if you have a good memory, you have an advantage over the average person.

    Depends on how you define “advantage”. One of the problems with having a good memory is that when you see the same stupid stuff happening all around you that you saw 20 years ago you know how it’s going to turn out for many people but no one believes you!

    Texas wasn’t the only place hard hit by the Mortgage and S&L mess from back then. House prices in Massachusetts also fell, and the value of a house we bought in 1986 had fallen so far by the early 90′s that we applied for a property tax rebate. (BTW – our mortgage was bought by Silverado shortly before their famous scandal)

    By the early-ought’s everyone, including us (with a different, more expensive house), was refinancing like crazy, but as I mentioned above, we were putting cash IN at the closing to lower our principle, but almost everyone else was taking money OUT to pay for cars, vacations, and other self-indulgences. When people asked us why we weren’t doing the same they didn’t believe me when I said that I though this was going to come to a sticky end.

  • plnelson

    enhabit says – btw simplify the tax code too while you’re at it..if two people with professional masters degrees can’t understand their taxes..

    Yes!

    I think there’s a show idea for ROS in this . . .

    Recently I was scheduled to have surgery for a condition with several different surgical options. A prominent proposed to do mine a certain way and after scheduling it I started reading up in the peer-reviewed journals, where I saw articles in at least 4 different major journals indicating that it would have been very dangerous to do it that way for people with a pre-existing medical condition I have. I had discussed that condition with the surgeon but he never indicated any risks. I consulted with a specialist who told me adamantly not to have that kind of surgery, and for added emphasis told me some horror stories about cases like mine he had to treat. So I cancelled it.

    But the average person doesn’t read the peer-reviewed medical and scientific journals and would have been at great risk in my case. We live in a world where ordinary non-technical people have to make decisions about all kinds of things – taxes, health, mortgage and financial planning, saving and investing for retirement, even buying cell phones and computers – where to really make the decisions well you need detailed technical knowledge and some degree of enthusiasm for really geeking-out doing the research.

    And it’s getting worse as pensions and social-security are replaced by defined-contribution plans, technology gets more complicated, ordinary middle-class people are getting hit with the ATM, etc. Bought a TV or selected a calling-plan lately? Are you up-to-date on your food pyramids and trans-fats? How many of the ingredients on the back of the average can or food carton can you REALLY describe? Quick: Anti-oxidants: good or bad? How about your portable music-playing devices or Web 2.0 sites? Do you have your own website, blog, MySpace profile or real estate on Second Life? What’s the difference between a virus, a trojan, a worm, and spyware, and how sure are you that your cmputer is protected? How about your cellphone? Congress routinely debates bills on topics such as climate-change, stem-cell-research, Medicare solvency, etc, on which the average voter would be hard-pressed to state 3 concrete facts.

    I’m a geek so I do OK in this new world. But plenty of people, even with advanced degrees and high IQ’s are struggling to avoid feeling overwhelmed. Is this the ultimate revenge of the nerds? Are we creating a society where only wonks can survive?

    Or perhaps we’ve come full-circle: primitive hunter-gatherers lived in a world where danger could arrive without warning and they had no real science to explain most of nature’s mysteries, so they had to rely on habit or superstition to survive. In the 19th century we developed our science and technology to create a feeling of mastery and understanding of our world. But now our systems and creations are so complex and arcane that more and more people are falling back on habit and superstition to deal with it. ROS should do a program on coping with the complexities of modern life.

  • plnelson

    Above, I wrote ordinary middle-class people are getting hit with the ATM

    . . . make that the AMT (Alternative Minimum Tax). If you get hit with an ATM taxes will be the least of your worries!

  • smtcapecod

    I haven’t had direct experience with sub-prime, thankfully, but I have been on a tear about what I percieved to be disingenuous lending in the mainstream market. It may not have been fraudulent, but as interest rates dropped and there was a rush to refinance, buy or pull equity loans, I saw what I percieved to be a conspiracy of sorts– albeit possibly an unspoken one. When I bought and when I refinanced, I felt I was paying well above what the cctual value of the property was, but the availability of funding and the promise of future appreciation led me to take the plunge. I was lucky, I was in a superheated coastal market and I was sufficiently in advance of the current ‘softening’ that the property did appreciate.

    But- what was clear to me, was that the appraisers — particularly those to whom I was referred by the lender– seemed happy to appraise a property at sufficient price to allow a purchase or refinance package to go forward. These high appraisals, and the lenders that write credit on them, allow buyers to get into bad circumstances even in the prime market. ITs a subtle collusion of lenders and appraisers, to each’s benefit and the debtors detriment.

  • tbrucia

    Ah, appraisals… another interesting area that harkens back to the Houston Boom of the 70s and early 80s! The name of the game then was to slip the appraisers a piece of the action so he would ‘fix’ the appraisal — allowing folks to buy a property for $200,000 in the morning and sell it the same day for $400,000 (aka, a ‘flip’). In many cases, the afternoon sale provided the cash for the morning purchase. What struck me as strange back then (I was in my 30s) was that nobody seemed to be sure if these flips were illegal or legal, but since so many folks were doing them, nobody seemed to much care…. It would be fascinating to know what kinds of strange games are going on in the appraisal game in our current world…

  • enhabit

    and then there’s assesment…the anti-tax people in my town, and indeed the state have capped property taxes…the town is running at a deficit…so they re-assesed the properties..much higher, what a surprise!

    up go property taxes anyway..as do “house values”.

  • momos

    Robin,

    The “explainer guest” you want for this show is Irv Ackelsberg, who as the Managing Attorney of Community Legal Services in Philadelphia is known far and wide as THE city’s expert on subprime loans. In his testimony to the US Senate Ackeslberg identified the deregulation of home lending as the principle cause of the predatory lending crisis: “The problem is that too many home loans are being made for purposes that have nothing to do with the home.”

    Ackelsberg is extremely engaging, thoroughly knowledgeable, very funny, and excellent at breaking down complicated financial and legal deals into straightforward points anyone can understand. He has first hand experience because he has worked directly with the victims of predatory lenders in the ghettos of North Philly for 25+ years. I know this because I was an intern in his office, which is on the threadbare 2nd floor of a cramped building next to an abandoned lot on Broad Street, several blocks north of Temple University.

    Ackelsberg also has a very interesting race/class analysis of the predatory lending epidemic. While these loans bleed equity from low-income households, the debt is sold to mutual funds and the lucrative proceeds are accumulated by middle and upper-middle class stock market investors. He has a very sharp analysis of this wealth transfer. He is also steeped in the facts about how these loans disproportionately affect minority communities (when compared to white households in similar income brackets) and can relate compelling anecdotes from his long professional experience.

    In short, THIS SHOW IS MADE for Ackelsberg. You would have an expert who has years of experience with this as an idealistic lawyer in the trenches, not as an ivory tower academic. It’s short notice, but he would be thrilled to talk about this issue on an intelligent, national public radio program. You must contact him: 215-227-2400. That is the switchboard of the north central CLS office where Acklsberg worked until very recently (he retired in order to run for City Council). They will know how to put you in touch with him.

    Another resource you should be aware of is the National Consumer Law Center, which is based in Boston and is the organization with the greatest expertise on predatory lending in the United States. They do primary research and have documentation of the national picture, which is very difficult to determine because much of the relevant information about loan rates and defaults is proprietary.

  • momos

    Here is a second plea to contact Irv Ackelsberg and the National Consumer Law Center: if you’ve already booked your guests and it’s too late to include them, it would be still be extremely revealing to talk to them for background. Irv in particular can offer some very useful frameworks for considering subprime lending. For a glimpse of how he thinks about the problem, check his bio at the Philadelphia Predatory Lending Task Force.

  • momos

    Lastly, don’t neglect the political dimension of this story. Here’s how it played out in Philadelphia: the City of Brotherly Love, despite entrenched poverty and high unemployment, has an unusually high rate of minority home ownership for a major American city. This is one of the reasons it became one of the hardest hit cities by the predatory lending onslaught.

    The Philadelphia City Council, which by and large is weak and corrupt, finally moved to take action when the epidemic of predatory loans really began pushing neighborhoods, already on the brink, into a debilitating spiral of foreclosure, abandonment and blight. Churches and community groups demanded something be done.

    The city government doesn’t have the best track record of tending to the needs of its African-American residents. John Street, the current mayor and an African-American, has made a show of changing that. He made a famous remark in one of his speeches to the effect that “the brothers and the sisters have taken back City Hall.”

    So it was interesting to see what happened when the City Council began considering what could be done to stop the predatory lending outbreak.

    Sharif Street, John Street’s son and the shining protege of the Philadelphia Democratic party machine, went straight to work. He was hired by Wachovia and other major Pennsyvlania-based banks as a lobbyist in Harrisburg.

    The state legislature, which is dominated by Republican-leaning suburban and rural representatives, was very receptive to the idea that if certain “important municipalities” took their own steps to deal with the subprime market, the state would experience major job losses in the financial sector.

    And so Pennsylvania passed a state law, with the quiet behind-the-scenes lobbying of Sharif Street and his banker patrons, that prohibits any municipal government (ie, Philadelphia and Pittsburg) from taking measures to address the crisis.

    The political story here is not new, but very important. The predatory lending crisis reflects the imbalance of political power between the banking and financial industries on the one hand and ordinary working class people on the other. Where government can step in to play a role in regulating this high-stakes market, in which people’s homes are at stake, it has instead turned its back on a vulnerable constituency that by and large doesn’t vote in favor of garbage bags full of campaign donations. And the ones who benefit financially? Politicians up for re-election and white, upper-middle class families naively buying mutual funds that accumulate the collapsing equity of inner-city neighborhoods. It’s another day in the American marketplace.

  • egauvin

    don’t know if someone already mentioned this sometime, but SF Chronicle had a good series on real estate call “Surreal estate”. you should check it out…

  • egauvin

    The Chronicle series is not in the past tense, and the writer is Carol Lloyd. Maybe she’d be good for an interview.

    Also, one of my favorite sources for bubble info is:

    http://housingbubble.blogspot.com/

    It’s a bit of a crazy place, but they were talking about all this stuff probably 2 years ago, already asking questions like, “who will they point the finger at when the bubble bursts?” That was the time when there were still plenty of people saying, “There’s no bubble.”

    Also another strange phenomenon to come out of the mortgage meltdown is a guy who became famous from his forclosure problems. His site:

    http://iamfacingforeclosure.com/

    (he’s quite the web celebrity and of course has his own wikipedia page)

  • RealEstateCafe

    There has been lots of talk about ‘scam mortgages” but not much has been said yet about “scam buyer brokers.” For more detail, read these blog posts:

    Ides of March: Beware mortgage meltdown & counterfeit buyer agents

    http://realestatecafe.blogs.com/real_estate_cafe/2007/03/counterfeit_buy.html

    Double Bubble: How counterfeit buyer agents inflated the housing bubble

    http://realestatecafe.blogs.com/real_estate_cafe/2007/03/my_socalled_buy.html

    PULL QUOTE:

    [Consumer advocates] are calling for the media and regulators to investigate the role dual agents (a.k.a. designated agents) played in creating the real estate bubble and the growing foreclosure problem. During the housing boom, little attention was paid to the conflicts of interest which occur when large real estate agencies try to represent both home buyers and sellers in the same transaction. But one leading consumer advocate predicts homebuyers will take legal action when they realize they have been betrayed by counterfeit buyer agents:

    “As some home owners get “upside down” on their equity, or lose their homes by foreclosure, you may start to see a rash of litigation against the real estate “agents” who sold them their homes. Probably the vast majority of real estate agents acted as “buyer’s agents” in the transactions, so there is likely the possibility some of these “buyer’s agents” didn’t really perform up to their expectation of “protecting” the interests of their “buyer clients.”

  • egauvin

    Sorry. I meant to recommend

    http://housingpanic.blogspot.com/

  • mulp

    Ownership????

    Who owns their land and the fixed assets on it? I have paid off my mortgage, but if I don’t pay rent for a couple of years, the town takes my land and sells it off to pay the rent. Some call it property tax, but it would be more realistic to look at the deeds we have to land and property as what they are, the right to transfer our right to use the property without the prior approval of the soveriegn.

  • enhabit

    i think that we can trace the home ownership push to the crack epidemic of the eighties. the notion that homeowners were more actively involved in policing their neighborhodds was frequently sited at the time.

  • erisa

    Regarding subprime loan home buyers being responsible, being responsible frequently includes taking “expert” advice from a real estate agent who gets a 6% commission only if the sale happens, andthe agent is sales trained to be an optimist. Real estate agents have a hard time giving cautionary, independent advice to excited buyers when thousands of commission dollars hang in the balance, and in many cases agents contributed to these tragedies.

  • enhabit

    this is tragic..

    so many people have been persuaded that home ownership is NECESSARY…in spite of how impractical it is in terms of their cash flow. renting is the most practical method of providing a home for many many people.

  • enhabit

    but we must add deregulation to the mix. 20% used to be usurious under the law. there are actualy people who are paying 30% on their credit cards, at one time an interest rate found only in organised crime.

    clearly the leash has been removed on this market….the consequences were predictable.

  • sirius

    Yes, the smiling salesman, the tame appraisers, deregulation, dreams of flipping glory each and all have its/their place. Still, anyone grasping 5th grade math should understand you cannot buy a $750k house with a $16K gross annual income.

    Yes, this is an actual case. Extreme, but exemplifying precisely what happened here. Or you could add the woman who had a $196k mortgage in 2001, re-fi’d 9 times, and now owes $610K, which is more than her house is worth………and much more than her income could conceivably pay. (might be off a very small touch on the $ – Don’t have the newspaper articles in front of me)

    Frankly, I don’t care what story of American dreams, evil lenders, “real estate always goes up” idiocy I hear. You sign the contract, you live with it. Bail out?

    Not a possibility without, say, lopping the odd few hundred thousand off the loan, or increasing the buyer’s wages, like maybe 1000%.

    Simply stated, the s*#$ is just starting to leak under the door. Stand by for the flood, then tell me how “contained” this debacle of greed is.

  • dsires

    I am in the mortgage business and take exception to much that was said by your experts about the Mortgage Meltdown. First of all, predatory lending and subprime lending are quite different animals. If, as they suggest, many or most subprime lenders are predatory lenders, then the subprime lenders would be sitting fat from “eating” off the poor borrowers. The fact is that subprime lenders are in a world of hurt, many are out of business. Why? Wall Street firm cut many subprime lenders off. That is, they quit buying their loans. Why? For two reasons: one, borrower delinquency and; two, too many borrowers refinancing too early. These reasons cause the lender to re-purchase the loans, which lenders find difficult to do. Difficult because lenders normally sell their closed loans to investors, mostly Wall Street firms, in the case of subprime loans.

    Also, these subprime loans are not designed to extend beyond the first two or three years, which is the period that the rate if typiclaly fixed for. Someone on your programs said they are fixed for six months or two years. The first six months is not correct. It is two or three years, and then the rate changes every six months after that.

    If a borrower pays his mortgage other other debt on time for two to three years, they should then qualify for a prime loan. So, borrowers should plan on getting into a low rate loan after the two or three years is up.

    In addition, I find it interesting to note comments about African American borrowers and their high delinquency rates. There is often a twingle of guilt directed to lenders for this, as though lenders were discriminating against the group. You might ask youself why the same does not occur in Asian American communities. The reason is the difference in cultures, not that lenders deal with blacks, yellows and whites differenty.

    Lenders offer different loan programs to different people based on the credit, debt and income profiles. The higher your credit score, the lower the rate. The lower the credit score, the higher the rate. Color has nothing to do with it.

    David Sires

    206-444-4910

  • http://yieldspreadcredit.com Deron

    I’m in the mortgage business as well, and thought it was pretty balanced.

    A couple of key points were made. First, the products aren’t bad, they are mis-sold. The classic example is the “Option ARM,” which is a terrible product for a lot of people, but works well for someone like a law partner who gets annual bonuses (law partner doesn’t suggest sophistication in financial matters).

    Sales are king, and the bait-and-switch tactics are pervasive. It’s a battle to win business in this environment. The Denver Post has daily advertisements that are all tease with extremely small fine print, some are endorsed by a consumer advocate.

    Ira’s a little behind on the markets. They are feeling the pain. Bonds are being down-graded dropping the value of the bond to the current holder, and companies are being forced to close as a result of forced buy backs. “Wall street isn’t shocked,” there’s too much credit given here. Wall Street (financial markets in general) follows a model: If a product works, they package it up and sell it, they sell it while it makes sense, then they sell it when it doesn’t – see LBO’s, IPO’s and watch private equity. The mortgage market is similar, once all the good loans are made, the drive is to make all the bad ones. This happens because people in these markets don’t know what else to do.

    On accountability… All the money is made up front for production of loans. Punishment for bad loans is buy-backs, but it is such a severe punishment that it leads to attempting to get blood from a turnip. Unless, criminal action can follow, all that happens is that companies declare bankruptcy, plead poverty, and the top guys simply move on.

    Two more realistic adjustments could help: Contracts with investors should be re-written not for buy-backs, but require insurance for loss mitigation purposes. Or… a portion of loan revenues to producers should be withheld and paid out over two-three years based on performance. This could occcur all the way up the chain. This would address two problems. 1st – churning in the refinance market; 2nd – the majority of foreclosures happen in the first couple of years (even with the sub-primes where most of the foreclosures are occurring before the famous adjustment explosion). Neither suggestion will be popular.

    As for minority markets, I’m generally not in one, south suburban Denver is pretty pasty. I have noticed that here in Denver there are hispanic companies who sell to the hispanic markets, it’s very difficult to crack this market without the language skills. There may be a lot more going on than what I see on the surface, but it would be very beneficial if the companies from these commuties would commit to stop ripping off their neighbors and brethren.

    Finally, consumers need to learn that rates and products are commodities. Nobody has a corner on products or rates – the markets see to that. The income generated is what separates loan offers far more than the products and rates both of which can be smoke screened. As with stocks, mutual funds, and other financial tools, people need to focus mortgage shopping based on the revenue they’re creating to the producers. There are companies who will provide this information.

  • rtman8025

    I live in Washington state, where supposedly there is still a strong housing market (if you read the local paper, the Seattle Times.) The local paper mentions that prices have continued to increase despite a slowdown in sales compared to the boom years. What they don’t mention is that this is true in primarily the wealthy areas. The suburbs south of Seattle have seen prices either stagnate or increase much more slowly.

    My wife and I purchased a house in the spring of 2005 in one of those southern suburbs, and have regretted it in more ways than one. Things were so crazy in 2005 that we felt like we had to get something now or we would miss the boat and pay even more in 2006. By my estimation, we overpaid by at least 30K for our house. As mentioned in the program, there are many problems in the real estate industry. But I really have to put most of the blame on myself. No one forced us to buy the house. Yes, the real estate agents, lenders, inspectors, etc. are looking out only for themselves. But as with anything else in life, it seems like you have to rely on yourself for information, or risk getting screwed big time. But there is one person involved with our purchase that I do still have a grudge against: the appraiser. Even though it was an inflated market in 2005, the original appraiser said the house was worth 25K less than what we were paying. Because of this, the deal almost fell through, since the lender would obviously not lend us more money than what the house was worth. However, within 24 hours, the original appraiser recused himself, and another appraiser came by and gave a nice inflated appraisal for (surprise!) exactly the amount we were bidding for the house. My wife and I were first time home buyers, and so we had to rely a lot on the real estate agent for advice. Naturally, at this late stage in the game he was of no help to us. He even told us that we would lose all of our earnest money (over 2K) if we didn’t go forward with the sale. Looking back, I should have walked away from the deal and tried to get the earnest money back in small claims court (especially since I have documentation proving what the original appraiser valued the house at.) It’s now been over two years, and we would like to upgrade to a better house, but are still far away from breaking even. I understand that you normally have to stay in a house for two or three years before breaking even. But we are not even getting offers that are close to what we paid in 2005!

    My take on all of this: Learn as much as you can on your own. Don’t count on the real estate agents or anyone else to level with you on anything.

  • plnelson

    These high appraisals, and the lenders that write credit on them, allow buyers to get into bad circumstances even in the prime market. ITs a subtle collusion of lenders and appraisers, to each’s benefit and the debtors detriment.

    I don’t get your thesis How does the value the house is appraised at affect your decision to take out a mortgage?

    Your ability to afford a mortgage is based on how much you can afford to pay each month. That’s not affected by whether the house is appraised at $300K or $900K. Are you saying that if a mortgage customer determines they can afford to pay $700/month but thanks to an overenthusastic appraisal the bank is offering them a mortgage that comes to $900/month that they would take out such a mortgage just because it was possible?

    I’m sorry, but in these politically correct times is it EVER permissable to assume people should use a little common sense when they make decisions about their lives?

  • plnelson

    so many people have been persuaded that home ownership is NECESSARY in spite of how impractical it is in terms of their cash flow

    Well, home ownership sure is nice. If you own your own home you can remodel it, rip out walls, change the landscaping, etc. You have privacy and a degree of control over your environment. Also, since you mentioned cash flow I should note that we live in a very nice 4 BR house and our P&I is a little over $700/month. And we’ll have this whole place paid off soon (we could pay it off now but our mortgage rate is lower than our ROI on competing investments).

    So the irony is that affluent people with fixed-rate mortgages actually end up with a better cash flow than poor renters. We wouldn’t be able to come CLOSE to this as renters! So I don’t think there’s any big mystery about why people prefer to own instead of renting.

    BTW, I’ve been kind of hogging the ROS discussions for awhile, so I figure that if I like to yak so much I should get my own blog. So a few days ago I launched http://blog.peterography.com/ . You’ll be seeing less of me here because there will be more of me there.

  • enhabit

    that may be so plnelson..

    but many many people simply do not have the financial resources or knowledge for that matter to set up a reasonable mortgage. do you seriously think that mumbai is filled with people that can afford their own home? what about new orleans now that property values and incomes are in such flux? or how does the working class fare in san francisco?

    the fact is that for many people renting is the best option 34%, 19% of humanity dwells informally or “squats”, 34% rents, 42% owns and the rest “others.” (UNHABITAT 1998)

    pushing home ownership on those that aren’t ready for it is unethical imo.

  • plnelson

    the fact is that for many people renting is the best option 34%, 19% of humanity dwells informally or “squats”, 34% rents, 42% owns and the rest “others.” (UNHABITAT 1998)

    That may be true but I’m interested in the bigger picture. One of the most fascinating perversions of our modern economy is that you can live more CHEAPLY if you’re rich! This is bizarre but true.

    In the example I gave above, my monthly housing expense, for a big expensive house in a nice suburban community is maybe half what a poor person would pay for an apartment in the city (and I get to deduct some of it on my taxes).

    Recently I had some expensive medical tests. The nominal fee – what you pay if you have no insurance – was around $3000. But my insurance company had negotiated a much lower price – around $1200. So I’m actually getting a far better price than a working-class uninsured person.

    The other day NPR did a report of the the cost of food. One point they made was that in poor neighborhoods there are no big food stores with basic, cheap foodstuffs. Instead they just sell expensive, unhealthy processed food. So the result is that my wife and I, who cook only with fresh fruits, vegetables, meat and fish amd dried grais and legumes, not only eat healthier, but far more cheaply than poor people.

    What you’re saying (and I’m not denying that it’s true) is that if you’re poor you have to rent, and thus live more expensively.

  • enhabit

    i hear you pln

    so let’s give EVERYBODY access. although it is likely that you haven’t accounted for every hidden cost in your equation.

    look at the teachers union..they get to dictate what they are paid ..within limits of course…and some get summers off…well why shouldn’t we all get paid what we are worth, while enjoying such a schedule. my kids are in school for five hours a day..

    my years as an architecture intern were like servitude in terms of time and pay..no union would allow it and it barely covered my student loans never mind the cost of living.

    let’s all have access to fair housing practices and medical care..why not if it’s out there.

    btw before you all hang me..BOTH my parents were teachers.

    and my rents have all been less than my mortgage..esp. when you include insurance and depreciation etc.

    some of my relatives in phila lived in “woodward houses” …they rented while sending their kids to private schools and saving for retirement..they did quite well for themselves. one of them was a financial analyst. times have changed to be sure but those families made it work.

  • Will Stevens

    Just a note on “personal responsibility.” After listening to the podcast today, I was so angry to hear the desperate pleas about people “losing” thier homes. I agree that it is a tragedy, and that predatory lending (which is not the same thing as sub-prime mortgages) is awful, BUT people need to be responsible for thier actions. When people take cash out of their homes, they will need to repay it. I remember the story of the poor 72 yr old who “lost” her home that she had lived in for 60 years. HOW is it possible that she hadn’t paid off the home by then? By refinancing, over and over and over again. Just because the asset that people are using to get credit is as emotional as a home doesn’t mean that they don’t bear responsibility for thier actions and should expect to pay off their debts.

  • terpzgroove

    The speakers of the program mentioned in the beginning that only 10% of the mortgage market is sub-prime lending, but, I assume, that this number is a dollar based figure. I would like to know what percentage of actually mortgages, or percentage of housed in the county are sub-prime loans. I would expect this number to be much higher than 10%.

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