Making sense of the mortgage system collapse

[Filliam H. Muffman]

I knew the housing market was starting to have problems in July 2005. I bought a homebuilders stock in May and went on vacation in July. When I got home, the stock had dropped 15% and all the financial networks were talking about the housing bubble. About six months later I started hearing about 100% loans with balloon payments on over-appraised houses and I knew things were really going to hit the fan.

[will2000]

"Sir, I have to tell you honestly that after reviewing your file, I know that you should not get a mortgage over $250,000"

"Ma'am, I'm very sorry, I would love to sell you this car but you cannot afford it. I do have a nice used car that will fit your budget..."

[hal]

this is the 'S&L Crisis' all over again... and we all remember how THAT came out - right? Do we remember?

[Gutenberg]

Basically the banks and brokers stopped caring much about who wanted a mortgage because they could package the loans and fob 'em off on investors. Shame on the investment houses that bought the packages though. They were professionals and should have known better. There is plenty of shame to go around here. Nobody comes out of this looking good.

[JoeH]

[quote will2000]"Sir, I have to tell you honestly that after reviewing your file, I know that you should not get a mortgage over $250,000"

"Ma'am, I'm very sorry, I would love to sell you this car but you cannot afford it. I do have a nice used car that will fit your budget..."
Don't even need the /sarcasm tags to recognize it here. Yes, some of the borrowers deserve blame for taking on too much in loans, but there were few voices out there urging restraint. Lots of advice to the contrary to drown them out; "Get in now", "Prices are just going to keep going up", and "Of course you will be making more in a few years" among other statements by would be lenders and real estate agents. And any loan disclosure I saw, while listing what an adjustable rate might go up to, was not required to list the correspondingly higher payment explicitly. Often with a "wink and nod" from the agent that of course that is only the "worst case". Now I would not be fooled, since with my math background I could work out the changes roughly in my head, but I know I am the exception.

[Paul F.]

Yes, some of the borrowers deserve blame for taking on too much in loans, ...

Some?

[JoeH]

Some, as in "not all". Hard to know if you are taking on too much if everyone is telling you "Sure, you can afford that..." Whether it reaches the point of "most", "many" or "just a few" is where the debate starts to get interesting. In any case, the ones I see pushing for "all" or "most" for the borrowers side often have not had to deal with some of the more rapacious loan brokers and real estate agents lately. Some I have dealt with personally or heard of dealings with friends and acquaintances make car salesmen and politicians look good.

[Paul F.]

So you're on the side of the illiterate who couldn't read their contract, or the stupid who chose not to..

Gotcha..

I have SOME sympathy for the former. None for the latter.

[JoeH]

Since better than half the population, and I have seen estimates as high as 80-90% do not have the financial literacy to understand all of the terms in a standard real estate contract, it is not a case of just being illiterate vs. stupid. Also given the trend in some states and markets to not have a lawyer represent you in a real estate transaction, just the lender and seller's agent, many contracts hide clauses that are not favorable to the buyer. Even then a lawyer may not be of much help in interpreting the financial terms. Some have even given my sister, a CPA, trouble. Add deception, an uneven playing field between lender/real estate agent and borrower, to outright falsehoods by those lenders and agents. Given all that, I have sympathy for many in this boat, but that might not extend to giving all of them a bail-out. And none for any who actively participated in fraud to get a loan.

[Sam3]

I would like to say that I don't feel too much sympathy for the people who took out $500K mortgages with such limited income.

I think that what is necessary is some COMMON SENSE, and that seems to be lacking in this day and age.

When we purchased out home in 2000, we were approved for a similar amount, I think it was $300k-$400k. We looked at each other and said "your kidding", because we knew from, umm, common sense that it was impossible for us to pay for a $400k house. Did we jump at the chance to buy nice, expensive house? No! Would we like such a house? Of course! But, we bought a house that was within our means (OK, may a smidgeon more than we should have) Are we suffering now and asking for a bailout? No.

Same with the ARM. Maybe I'm weird, but I would think it doesn't take a rocket scientist to figure out that if something is at 5% (as the rates were then), there isn't much room for them to go lower. If something doesn't go lower, it will go up. And anybody who grew up int the 70's would know what interest rates were like then - 16-19%. ARM's weren't offered in such a public fashion back then, now were they?