The Wave of Mortgage Defaults is Not such a Bad Thing

[lawrocket 3]

So the Bush Administration is leading an effort to get mortgage companies to freeze the teaser rates they gave to subprime borrowers because the borrowers are defaultign and foreclosing too much. And it turns out that Hillary Clinton and John Edwards don't think the admin is going far enough, and want a moratorium on foreclosures.

Okay. Those suffering here consist of two groups: 1) mortgage companies; and 2) subprime borrowers.

I can rephrase these categories as follows: 1) lenders who were fucking idiots for lending money to people who had no business getting the loans they got; and 2) borrowers who had no business getting the loans they go but for fucking idiots who would loan them the money.

There are plenty of people who are doing just fine, by the way. These include: 1) lenders who kept a high enough margin of providing loans to prime borrowers; and 2) prime borrowers, who by their nature are low risk.

So we find a situation where the irresponsible are paying for their irresponsibility while the responsible are maintaining their responsibility. WHo is it that the government wants to help? That's right. The irresponsible.

The banks aren't happy because they loaned far more money than had reasonable security. That $350k loan the bank made on a house that was only worth $300k, but they hoped would appreciate within the next six months? Ooops. It didn't happen. The house is only worth $280 now. And that subprime borrower who should not have qualified for a more than $210k loan received $350k because of clever accounting, clever loan processes, and in many cases outright perjury.

And now THESE are the people who should be helped? Why? THey agreed that the rates would increase from a low introductory rate to a higher rate, which would add hundreds per month to the payment. There were Truth in Lending Disclosures.

The logic is, "We can't have people without homes." Understood. But what is happening is that the VASTLY inflated housing market has reset. That house isn't worth $350k. It's worth $280k. Those people getting a start, who were priced out of the market - and exercised sufficient restraint to avoid a bad loan - are now being put in the market to buy these houses.

So what we have is a bubble that was bursting, but is now being transformed into a slow deflation. The housing prices are being kept artificially high. People are being kept out of the market in favor of people who should have never been there in the first place remaining.

The mortgage lenders stand to lose a fortune. Let them. They gambled by loaning sums of money to people who should have never received it. Their loss. Fuck em. They played fast and loose and let it ride. They lost.

And for the borrowers. They thought, "I'll buy the house. I can't afford it now but I've got a teaser rate. The house will increase in value. I'll refinance it in two or three years, take the equity out and get a low fixed rate loan."

They gambled. They let it ride and they lost.

The government should aloow this market to correct itself. There should not be anything standing in the way of a recovery. The government should INSTEAD be looking to encourage people to purchase property instead of spreading fear and locking in these loans that, by all accounts, have failed.

My wife is hotter than your wife.

[kallend 2,106]

What he said.

This wasn't a natural disaster like floods or a hurricane. This was people being greedy and/or stupid.

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The only sure way to survive a canopy collision is not to have one.

[pop 0]

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The government should aloow this market to correct itself. There should not be anything standing in the way of a recovery. The government should INSTEAD be looking to encourage people to purchase property instead of spreading fear and locking in these loans that, by all accounts, have failed.

Abso fricken' lutely! Government needs to generally stay out of business....this is how we built this country to be succesful in the first place.

7 ounce wonders, music and dogs that are not into beer

[rehmwa 2]

Wow - general consensus on a topic.

A Speaker's Corner first?

(certainly there is some hothead out there, somewhere, that wants to cliche the whole "the banks took advantage of the little guy" statement. Or even the "we need to TAKE CARE of the these poor investors or their children won't have a roof over their heads" thing.

no one?

ok)

...
Driving is a one dimensional activity - a monkey can do it - being proud of your driving abilities is like being proud of being able to put on pants

[Gawain 0]

I don't know why the government needs to be involved in any way other than to ensure the regulations won't prevent banks from restructuring the loans. It's that simple.

So I try and I scream and I beg and I sigh
Just to prove I'm alive, and it's alright
'Cause tonight there's a way I'll make light of my treacherous life
Make light!

[kallend 2,106]

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Wow - general consensus on a topic.

A Speaker's Corner first?

(certainly there is some hothead out there, somewhere, that wants to cliche the whole "the banks took advantage of the little guy" statement. Or even the "we need to TAKE CARE of the these poor investors or their children won't have a roof over their heads" thing.

no one?

ok)

I guess it will be a short thread.

...

The only sure way to survive a canopy collision is not to have one.

[kelpdiver 2]

yes, the sooner we take our medicine, the sooner we can move on. (and as a renter, the sooner I can consider committing more than half of my net income) Japan based its economy on a falsely valued real estate market and they still haven't recovered 17 years later.

It's a bit funny to see the GOP tossing aside their free market precepts for an election year. We know it is in support of the financial companies, but they'll talk about the poor people getting thrown out of houses (ones they probably won't pay anything to live in for the last year).

[ryoder 1,590]

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Wow - general consensus on a topic.

A Speaker's Corner first?

If we aren't going to squabble over it, then we may as well get a Greenie to move it over to the Bonfire.

"There are only three things of value: younger women, faster airplanes, and bigger crocodiles" - Arthur Jones.

[Casurf1978 0]

It's not as simple as you make it sound. From what I've read it would be an ARM freeze on homeowner who are current and meet certain criteria.

Also what many fail to see is that the financial system is so interconnected. Mortgages are sometimes sold to investment firms, who then cut them up and sell them to as instruments based on risk. Then you have hedge and pension funds come in and buy these up. It doesnt stop there either. Sometimes these loans are bundled up and sold to investors all over the world. Now our subprime crisis has turned into a global problem that will impact markets from Asia to Europe.

In the past, gov has bailed out other industries. There was the S&L of the late 80's, and the airlines a few years ago. Sometimes a bailout is necessary to ensure the overall health of the economy. Such is the case right now. You have to look at the overall picture not just focus on the micro level.

[Gravitymaster 0]

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Wow - general consensus on a topic.

A Speaker's Corner first?

(certainly there is some hothead out there, somewhere, that wants to cliche the whole "the banks took advantage of the little guy" statement. Or even the "we need to TAKE CARE of the these poor investors or their children won't have a roof over their heads" thing.

no one?

ok)

Oh yea, of so little faith. Give it some time. There are many who disagree.

Oh, and I agree with Lawrocket.

.

[Zipp0 1]

Although I think some 'innocent' (but maybe dumb) people will be hurt, and that the overall economy may be SERIOUSLY hurt, I agree with you in principle.

My wife and I bought LESS house, maybe much less, than we could have, so that we would not be house poor, or risk overextending ourselves. Now it is starting to look like we should have bought a huge mansion, and let the bank eat the loss when Bush & Co. get the banks to let us out of the contract!!!

But the real reason Bush is doing this is not for the poor, subprime people - he knows that a further crumbling of the mortgage/credit markets will almost certainly result in a rather nasty recession.

--------------------------
Chuck Norris doesn't do push-ups, he pushes the Earth down.

[Trent 0]

I'll join the love-fest. I whole-heartedly agree. What did the mortgage companies think the definition of "sub-prime" meant? Risk vs. Return? They deserve all the loss they get. As for the borrowers... if they can borrow $150,000, they'd damn sure be able to read the contract they sign! Ignorance and/or greed can really get you in a bad spot.

Oh, hello again!

[nathaniel 0]

I think you're misreading the purpose and the scale of the freeze. Although it involves a temporary stay on interest rates, which translates into a windfall for the borrowers, the purpose of the action is to address a feedback loop.

Foreclosure, although desirable in isolation as a contractual element when a borrower defaults, is not desirable in large amounts. Foreclosed properties lose a lot of value due to banks not caring about the property and wanting liquidity and former homeowners having hard feelings and typically not caring for the property either.

Too many foreclosures also increases the strain on financial instruments based on the loans that were (perhaps negligently or even fraudulently, we will see in time) packaged and sold off in large quantities on the market. There's a decent chance you hold some indirectly if you have retirement accounts based on pensions or mutual funds. The strain on these financial instruments contributes to higher interest rates, which could lead to higher foreclosures, etc.

So, while I'd hesitate to say that I'm in favor of this action, I don't think it's entirely without merit.

My advice is to do what your parents did; get a job, sir. The bums will always lose. Do you hear me, Lebowski?

[lawrocket 3]

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what many fail to see is that the financial system is so interconnected

Oh, I fully recognize it. It's not just mortgages, but pools of leases, or just about anything else.

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Mortgages are sometimes sold to investment firms, who then cut them up and sell them to as instruments based on risk.

Yep. "Sub-prime loans" = "high risk." Thus, people knew it and bought them anyway.

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you have hedge and pension funds come in and buy these up.

Indeed. And thus my pension fund is directed towards lower risk investments. What was it? My wife is "aggressive" and mine is "conservative." Or, as my investment guy told my wife, "wimp." Which is fine. I balanced hers out.

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these loans are bundled up and sold to investors all over the world.

Yep. There is no guaranteed return on investment. And thus there will be losers. And the market will correct itself and a new pool of investors will come in.

Guaranteeing the investments, however, is a different story. The government should not be a surety for these investments.

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In the past, gov has bailed out other industries.

Yes. The S&L's were bailed out to the tune of 125 billion. They made risky investments that compounded by loan holders defaulting on loans and going into bankruptcy. Sound familiar?

And deficits grew from it. And the govt. bailed them out, which resulted in increased budget deficits, and probably caused the recession of 1990-1991 - roughly 5 years after the real beginning of the crisis and just a year or so after the Congress passed FIRREA.

So a bailout happened and we see it happening again, 20 years later.

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Sometimes a bailout is necessary to ensure the overall health of the economy

I compare it more to the government choosing to have a month-long cold over a week-long flu. The health is already gone. Do you want something that is mroe severe, but short or something that is pretty bad, but lasts longer?

My wife is hotter than your wife.

[Andrewwhyte 1]

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I compare it more to the government choosing to have a month-long cold over a week-long flu. The health is already gone. Do you want something that is mroe severe, but short or something that is pretty bad, but lasts longer?

That depends. Is it the flu, or Ebola?

[nathaniel 0]

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Yep. "Sub-prime loans" = "high risk." Thus, people knew it and bought them anyway.

It's not just subprime loans that are at issue -- SIVs based off of ostensibly prime or average credit histories are being downgraded (read, jeopardized) as well. Foreclosure rates for all categories of borrowers are going up under the adverse market conditions, including prime.

My advice is to do what your parents did; get a job, sir. The bums will always lose. Do you hear me, Lebowski?

[kelpdiver 2]

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I think you're misreading the purpose and the scale of the freeze.

The scale is a political hot potato and will undoubtably move when the people just outside the eligibility line start crying. It's also a bit offensive that only the most financially reckless are the ones that will be rewarded. If it had to be done, I'd restrict it to those involuntarily fired or who had undergone major medical expenses or disability.

So far the losses have been tens of billions. So what? My company controls 2T in assets. The losses are small, not remotely like the losses people suffered at the end of the dotcom bubble. It's only the decrease in liquidity that is a concern.

We didn't bail people out in 2002, why do it now?

[nathaniel 0]

lawrocket:

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...the govt. bailed them out, which resulted in increased budget deficits

kelpdiver:

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We didn't bail people out in 2002, why do it now?

Correct me if I'm wrong but it doesn't appear that gov't or taxpayer dollars are (yet) involved to any significant degree. Afaik all that's been announced is that the gov't is acting as a regulator and an intermediary to facilitate a detente between borrowers and lenders (purportedly) for the market's own best interest. From what I can tell the lenders are getting a bit of a raw deal but aren't freaking out because they fear the effects of uncontrolled forclosures & interest rates more than the downside to pinning these mortgages where they are.

My advice is to do what your parents did; get a job, sir. The bums will always lose. Do you hear me, Lebowski?

[lawrocket 3]

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It's not just subprime loans that are at issue -- SIVs based off of ostensibly prime or average credit histories are being downgraded (read, jeopardized) as well.

SIV's are based mainly off of liquidity. The risk is inherent in SIV's that the value of the investments it holds falls below the equity it holds - much like the $350k mortgage on a $280k house. There's no liquidity in that case because the assets cannot be liquidated for the amount owed.

Now the mortgage crisis is different, but related. The lack of liquidity is but a part of it, which is why Countrywide has put forth, what, 16 billion? It helps with the liquidity problem. Other banks are moving int oshore it up, too. WaMu did something similar in April.

W have a perfect storm of: 1) issuing to poor credit risks; 2) betting on assets increasing in value; and 3) low liquidity (SIV), based in part on Nos. 1 and 2.

Now, these "strategic investments" sometimes have a failed strategy. Unlike a CDO, the SIV runs the risk of insolvency because it is designed to keep on buying. Thus, SIVs need cash onhand. Liquidity crises seriously fuck them up.

Consider, though, that property is an asset just like stocks. Buy right, and you'll do well. Buy wrong, and you'll lose money. Property is nothing more than an investment that should be bought and sold to make money.

I have concluded that there is never a bad time to buy property, only a bad time to sell. But when your business is predicated upon always sellign for a higher price than you bought, and buying more from that profit, a wrench in that work can cause problems downstream.

I have empathy for these businesses. I'm a businessman who has made some good choices and some bad choices. But I don't feel sorry for them. It's business, and they should suck it up.

My wife is hotter than your wife.

[lawrocket 3]

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Afaik all that's been announced is that the gov't is acting as a regulator and an intermediary to facilitate a detente between borrowers and lenders (purportedly) for the market's own best interest.

Why is it in the market's best interest? Is it EVER in the market's best interest to merely continue inefficiency for five years?

The worst is the proposition to put a moratorium on foreclosures. Question: What happens to a homeowner when he finds out he will not be foreclosed upon? Answer: free living!

THIS is why the government is SO freaking messed up. There's a problem of irresponsibility. Government moves in to say, "We'll help you."

Let the liquidity problems play themselves out and rebound.

My wife is hotter than your wife.

[kelpdiver 2]

good summary - I'd add in that leverage is the problem for the hedgies. Their investment schemas fail miserably with even small losses.

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As soon as the Feds tell banks they have to accept lower interest rates on millions of loans, there has to be $$ coming as well. Or they have to be allowed to do negative amortization, which certainly will just delay the end result.

If they voluntarily want to stick with the teaser rate they only intended to use for 1 to 2 years, good for them. But I doubt the owner of the loan (the investors who bought it) are so inclined.

[Para_Frog 1]

Re:OP

Spot on.

- Harvey, BASE 1232
TAN-I, IAD-I, S&TA

BLiNC Magazine Team Member

[joedirt 0]

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I have concluded that there is never a bad time to buy property, only a bad time to sell.

I have concluded that BUYING is where you make your money. If its rental property, this will determine your future cash flow which is the whole point, usually.

[azdiver 0]

its not just the reckless people that are currently being hurt with the sub prime mess, anyone involved in residential real estate is getting hit hard right now. with the market flooding with forclosed property and decreasing property values you end up with a overstock of homes with no buyers. constructions in the tank, no ones building anything, home builders are going under because they have all thier money tied up in homes already built and cant sell, contractors are laying employees off by the the thousands. realtors are screwed,homeowners wanting to sell cant, and those trying to sell cant sell because there are no buyers. so for those of you thinking its just the reckless getting hurt wake up. the reckless ones are getting hurt but others that didnt have control over what the reckless were doing are getting fucked as well.

light travels faster than sound, that's why some people appear to be bright until you hear them speak

[lawrocket 3]

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so for those of you thinking its just the reckless getting hurt wake up. the reckless ones are getting hurt but others that didnt have control over what the reckless were doing are getting fucked as well.

No they aren't. Construction is being completed right now because under the construction loans, they HAVE to finish up. But it's also an industry that has ups and downs - like any other business.

Realtors? Yeah, they are facing a hit, but those who are looking into moving REO's are doing all right.

The main source that is off kilter is the "property value" loss. Yeah, which means a person wanting to sell their home and buy another realizes no net loss. Those who would sell a large home and buy a smaller one are at a disadvantage. But those seeking similar value, or wanting to buy a larger home, will realize no loss or a long-term gain.

The only loss is in refinancing, which ALSO just results in no net money. After all, you gotta pay it back, right?

In terms of finance, no, people are NOT getting hurt. They just aren't benefitting as much.

My wife is hotter than your wife.