Sub-Prime Lending/Foreclosure etc

[Richard Cole]

Saw this on the BBC website - not sure if it belongs on here or on the Global section.

http://news.bbc.co.uk/2/hi/business/7070935.stm

An interesting article.

[ryan costa]

This is a direct threat to all surrounding cities. the article said 10 percent of homes are vacant. Parents move out to try giving their kids a better environment, without pondering that they and their kids were the environment. The whole fashion and peer pressure thing kicks in, and it just escalates.

But there is hope for the future! It costs a lot of money to supply and gear up a single soldier, sailor, marine, etc for a stay a year in Iraq. A few hundred grand a year in total.

http://www.chron.com/disp/story.mpl/spe ... 28480.html

Tens of thousands of dollars for individual Gear.


http://www.msnbc.msn.com/id/21105586/

That's ok. Ten percent of homes in Cleveland are vacant.

The feds may as well pay to put soldiers up in them. They won't need expensive gear. They can walk on patrols 2 hours a day and otherwise teach the kids and young adults to not be violent hyperactive cretins.

Its better than being in Iraq. and more beneficial to America. It is ok. There are plenty of corner bars for the end of the day.

[Justine Cooper]

The politicians we had for 16 years in OH before the new administration catered to predatory lenders and their lobbyists. Had they not, and passed stiffer laws and required more licensure and schooling for people who were handling people's BIG money investments-their homes, (like they do for stockbrokers and accountants, etc.) this would have never happened to Ohio so badly. You didn't even need a high school diploma to get hired as a loan officer and you hardly needed anything to hang a shingle and open an office. People cheated, charged hidden fees, extra charges, variable rates that people didn't understand, anything they could do to make a buck and while it was nice for people to get into homes with no money down, they soon had no equity, rising interest rates, second mortgages that surpassed the value of their home. Inner city people were targeted first, with deception and theft from all those hidden fees which helped killed Cleveland and then it all trickeled down to every neighborhood. Laws after the fact are little consolation. We are fortunate to have a new administration that does not cater to the greedy big companies and lobbyists, but to real people.

It is now bad everywhere in this country but Ohio is one of the worst for a reason. Although people in CA are being hit with losses of much more money on homes they bought at the height of sales. At least we can live here in Lakewood in an affordable home and still a decent city.

[Bill Call]

The politicians we had for 16 years in OH before the new administration catered to predatory lenders and their lobbyists. Had they not, and passed stiffer laws and required more licensure and schooling for people who were handling people's BIG money investments-their homes, (like they do for stockbrokers and accountants, etc.) this would have never happened to Ohio so badly.

So called predatory lending is more an urban legand than a reality.

http://online.wsj.com/article/SB118643226865289581.html

While there are examples of lenders forging documents or deliberately overstating income most of the foreclosures are the result of:

1. The bursting of the housing bubble. People expected their houses to increase 10 or 20% a year forever.

2. Government policies that were based on the spurious assumption that everyone should own a house.

When I was buying my first house I was told by several banks that they wouldn't lend me the any money. I found a mortgage company that would lend me money and was able to buy the house and make the payments. If I failed to make the payments would that mortgage company be a predatory lender?

During recent congressional hearings a women was giving tearful testimony because she was losing her home to foreclosure. She said that when she was looking for a house that the banks wouldn't loan her the money. Why? They didn't think she could afford the payments. Looks like the banks were right.

What should the government do about the decline in housing values? Nothing. Some people will lose their homes, some people will get a great price on a new house and the market will right itself.

What is one reality that everyone wants to ignore? That some houses and neighborhoods are unmarketable. You can't lose 500,000 people in a city and expect housing values to increase.

[sharon kinsella]

Bill -

If it is an urban legend - why was I trained by a mortgage company to do whatever it took?

Believe me they exist. I stayed exactly one week, I thought they were despicable. I had just come from selling cars. My specialty had been qualifying people, honestly, with special financing. When you have no credit or when a calamity has ruined your credit, you deserve a second chance. I loved doing that.

That's what I was considering when I went to the mortgage industry. Turns out they wanted me because of my sales skills.

It is a horrible industry and a lot of these people who do this were originally snake oil sales people.

[Jeff Endress]

As I see it, there are two distinct issues. One gets a lot of press, but was, I believe fairly rare. That situation involved illegal flipping or non-disclosure of key financial issues. Those are the tragic cases, and at least borderline illegal. But they are more of a result of the larger sub-prime rush over the past decade, and not a measure of the problems that are of far greater impact from the collapse of the sub-prime real estate mortgage market. It is that collapse that is of greater concern as it is far more systemic.
It really is a complicated situation....
High risk buyers, wanting their piece of the American dream, unable to get a loan from FFL or Third Fed......
Mortgage brokers (and their financial backers) offering products to those borrowers, and getting a premium for doing so.......
Commissioned agents whose sole aim was to close the deal......
Purchasers willing to gamble on increasing real estate values.....
Second and third mortgages (renamed "home equity loans") that funded vacations.....
Buyers who neither read nor understood what a balloon payment, ARM or rate ceiling REALLY meant......
Lost jobs through downsizing, job exports and closings.....
Throw in a real estate downturn, the balloons coming due and rates being adjusted from loans made at the height and you have sort of a "financial perfect storm"

It's not too dissimilar to the events that caused the stock market to crash in 1929.

So who is at fault? The salesmen who pushed a product to earn a commission from a buyer who couldn't really afford the dream?
The buyer who was looking to own, rather than rent but didn't have the down payment?
The insurers and hedge funds that provided the money that greased the whole house of cards?
The home owner who pulled their equity to take a cruise?
The broker who soft peddled the small print ?
The government who failed to regulate the business and protect us from ourselves?

There's plenty of blame to pass around. But, just as in 1929, there's a huge amount of collateral damage. Families who have lost their homes, banks that now own significant numbers of houses (on which they'll inevitably take a loss) instead of portfolios of high return mortgages. All those impacted by the collapse, who find themselves upside down, and can find no buyers in a dismal market. But, this is the kind of thing that happens in an unregulated, free market economy. The rich get richer, some that were in the middle make their fortune and climb into the class of wealth, and the rest end up footing the bill. Taxes to fund bailouts, reduced real estate values, empty foreclosed properties. But, a few people made a lot of money and got out before the bubble burst and left the rest of the poor schmucks struggling to keep their heads above water.

Jeff

[Justine Cooper]

Bill,
You could not be more wrong, and if it were an urban legend, there would not be politicians scrambling to put laws into effect, strictly for predatory lenders. I worked as a social worker in Philadelphia and could barely make ends meet as a single parent and was offered a job by a friend's brother in a lender's office for "non traditional" loans. They were based out of NY and when I moved here I was sent as the sales rep for them so got to work with mortgage brokers here too for a short while until I could not stomach it and went back to social work. Trust me, if you saw what I saw, first in the Philadelphia/NY area, with young guys smoking cigars and driving BMW's living high of the hog with no formal education and ripping off primarily inner city people. They owned their homes and were doing fine and these vultures swooped in and talked them into refinancing with "this money back, etc" but didn't explain the ARMS and adjustable rates and how high their payments would be, etc. and these elderly and working poor people were losing their homes!!!! Of course this created a domino effect and kills cities!!!! Were they all greedy? No. Sure some wanted money back but I am telling you these guys knew which appraisers to work with to get JACKED up appraisals which contributed in the suburban areas to higher home prices but when they are jacked up so high, they can only fall!!

Were there people who wanted more of a home they could afford? Of course, but with snake oil salesman pushing them into bigger loans with no money down, etc. up to 100% financing and believe it or not I have seen over 100% financing!!! The biggest problem was that FEES were NOT regulated and mortgage brokers could jack up an interest fee for a homeowner and get MONEY back from the lender as well as charge as many points as they want!!! These guys were getting five thousand dollars in points on small homes without the homeowner even realizing it. It is not as simple as "reading documents" which people are now being much more educated to do. There were so many papers in the loans and many people weren't educated and got completely ripped off.

The company I worked for went out of business long ago, as many have, but not before neighborhoods and families and elderly couples were completely displaced, homeless some of them, before they knew what hit. Yes there are greedy people living in fancy homes they can't afford, but they are only a percentage of what is really going on. It took a long time to get laws into place and it is too little too late. And ever single one of us that owns a home has been deeply hurt by this in values of our home and of our beloved city.

Jeff,
Great post. This is a tangled web and you nailed the gist of it. Our country is being devastated and it is time for our government to focus on this country or there will be nothing left to protect.

[Richard Cole]

The interconnectedness of all the issues, and I would add in poverty, is going to take some major public policy initiatives. The magnitude of the repercussions are immense.

I'm not sure if we're in the midst of a market correction, or a market malfunctioning. Either way, a lot of people are going to be in bad shape, and Cleveland and its suburbs will bear the brunt.

[ryan costa]

I doubt many Cleveland area home buyers expected their purchase to appreciate 20 or 10 or 5 or even 3 percent a year. Unless they bought in Tremont.

Most of the homes in Cleveland sold for under 120 grand. Ten percent of them are empty. It prompts the question: If you can't afford a house in Cleveland, where can you afford a house or apartment?

Twenty years ago big business rolled up so many mortgages into Bonds and used those for leveraged buyouts of previously viable corporations. It ruined great companies like 7-11. It also bankrupted many Savings and Loans. Somehow George Bush's brother Neil avoided going to prison or ending up poor.

This time it is the big Hedge Funds that rolled up these mortgages into so much paper to trade back and forth. Now they're "losing" billions left and right. The top guys are usually terminated with multi-ten or hundred million dollar severance packages. Most of us will never have the opportunity to "fail" on that level.

However that ends up, the end result is 10 percent of Cleveland buildings are vacant. In America the consistent trend has been that Sprawl enables urban decay. It may even Generate it.

I don't know exactly what the War on Terror is, or how doing the things our elected Executives tell us to do will Win the War on Terror. I do know it won't substantially increase our supply of energy, our ability to pay for that energy, or the usefulness of things we build with that energy.

So, that is why we didn't need troops in Iraq. We needed them in Cleveland and other cities across America. Providing good examples and guidance. The Second Amendment calls for a well regulated Militia to secure the freedom of the state. State being the American states, not Iraq or Viet Nam. Like The Fonz or so many fictional James Cagney characters. Most of the beggars downtown claim to be veterans. The Troops can keep one or two of them around at each house they are stationed at. They can be put to use trimming hedges and keeping the yards and sidewalks clean.

[Justine Cooper]

Good ideas Ryan. The problem is, we have a Texan oilman with family member who cheated people, running our country. How did that happen? What we need running this country, is a person, who has worked their whole lives, who has dedicated their life to helping people and their country, who cares about the average man and woman, not lobbyists and big companies, someone who would never think of having their good friend trying to obtain oil rights in Iraq while our soldiers are dying every day.

[sharon kinsella]

What is even crazier in this whole debacle is that so many of these lenders, like countywide won't negotiate and set up payment plans, they'd rather foreclose and leave a vacant property. Are they writing it off as a loss? What do they have to gain by doing this?

Strickland tried to work with these lenders and not one of them would cooperate. Now this administration, that is already having to spend much of it's time to cleaning up the mess that taft and his crew left, have to go back to the drawing board and come up with another plan.

In the meantime, Bush is trying to pass legislation to protect the lenders? Anybody else smell something nasty from DC?

[Justine Cooper]

On his way out of office, Taft, at the ninth hour passed legislation to HELP predatory lenders. What is wrong with that picture. That is not a leader of people in any way, shape, or form. Did anyone notice how many appraisers, and title companies popped up in the last several years (many now going out of business). They were all schmoozing each other with dinners, parties, etc. to get the business of the mortgage companies. A lot of people made money off of one loan.

[Jeff Endress]

What is even crazier in this whole debacle is that so many of these lenders, like countywide won't negotiate and set up payment plans, they'd rather foreclose and leave a vacant property. Are they writing it off as a loss? What do they have to gain by doing this?

It is truly BIZARRE! In my divorce practice, I've had to deal with a number of foreclosures (sometimes the collateral damage of a divorce). The bureaucracy one has to work through to save a house out of foreclosure is beyond description. No one person has authority to do anything more than take scads of information and then discuss the matter with a loan committee who makes a recommendation that they take to the underwriter who then, after discussions with the underwriter's financial backer decides that since you'll end up in foreclosure anyway, they're better off doing now, then to start all over later. I most cases, they're looking for a significant amount of cash, maybe to the extent of bringing a mortgage that you couldn't pay, current. Many times they won't even waive late fees, or related foreclosure expenses. They display no ability to think out of the box. To get them to adjust a rate, you basically have to re-qualify for the loan, which is an impossibility given that you're in foreclosure.

The bank ends up buying the house at auction, for the amount that they are owed. It's as if they don't want to cu their losses. Perhaps there' a significant tax upside in all of the losses.

[Tim Liston]

I've had kind of a unique ringside seat at the subprime lending debacle. My company writes software almost exclusively for the mortgage industry. One of our two products PowerSeller helps larger lenders pool and securitize their recently closed loans. We had a LOT of the big subprime lenders as customers: New Century, Ameriquest, American Home, Mortgage Lenders Network, Accredited, Fremont Investment, Aegis and a bunch of others. These were all BIG subprime lenders, and now they are all gone. As a result of the implosion my company, which started out 2007 with 47 employees, is now down to 32. It's been a really rough year to say the least.

Lest you think that I have bad karma or something, securitization was around long before subprime lending. The subprime lending industry, with the help of software like PowerSeller, simply securitized crummy loans. And despite the many customers we lost, we still have many more very good lenders pooling and securitizing prime loans, and we add more every month. Just installed Banco Santander's mortgage operation in Puerto Rico....

The biggest cause for the subprime debacle is pretty simple – lack of responsibility, and very often outright fraud at the point of sale. Like prime loans, subprime loans have to be underwritten to certain standards before they can be sold. But so often the information on the loan application was false (particularly on stated income loans). And yes, many loan brokers were less than diligent in making sure the borrower was truthful and clearly understood the terms and conditions of the loan. Because the lender is typically sharper than the borrower, we hear a lot about “predatory lendersâ€Â￾ and very little about “predatory borrowers.â€Â￾ But both parties bear responsibility. And believe me there are/were plenty of predatory borrowers out there, people who knowingly took big liberties with the truth in order to acquire their dream home. Just as there are/were many unscrupulous lenders who took advantage of uninformed borrowers.

Regardless of culpability, I agree with Bill about one thing in particular. I'm not in favor of any bailouts, not for Wall Street and not for homeowners. Unfortunately, we're already in the process of bailing out Wall Street, in the form of fed funds rate cuts. Such cuts seem benign but they're not. Such cuts tend to be inflationary, and for example oil would not be $96 a barrel today had the Fed left well enough alone. So we're all paying for that. Similarly, homeowners should not be bailed out either. And frankly, bailing out the homeowner is just another bank / Wall Street bailout in disguise. If taxpayers are forced to ante up to help distressed homeowners make their mortgage payments, the bigger beneficiary is, once again, Wall Street, whose “assetsâ€Â￾ then won't be besotted with tens of thousands of REOs (foreclosed homes). Better I think that the homeowner move back into an apartment that he/she can afford to own, rather than a home which in addition to the mortgage also requires payment for taxes, insurance and maintenance, payments that will undoubtedly continue to distress the homeowner for years to come. Presumably these folks have jobs, at least they said so on their loan applications. So presumably they can find an apartment they can actually afford, and are not being thrown out onto the street. An apartment that they should have been living in all along.

I know I'll catch flak for that but I just don't see where a homeowner is better off in a home he/she could not afford in the first place. Yes there will be moving expenses, and there will also be a big hit to the credit rating, but that credit was substantially impaired in the first place, thus the subprime loan.

So I guess I feel that virtually any bailout initiative will come at the expense of taxpayers, either in higher taxes, or higher prices for goods and services. And I feel that the primary beneficiary of any bailout, whether targeted (seemingly) to Wall Street or to the homeowner, will benefit primarily Wall Street. And whether you're Wall Street or an average citizen, when are we going to start making it clear that large-scale improprieties should not always followed by large-scale bailouts?

(As a complete aside, on my ride to work this morning I started to think, maybe Fed funds rate cuts are a win/win/win. We get lower interest rates, higher priced commodities that will discourage consumption, and higher priced imports which will encourage domestic production. What's not to like?)

[Bill Call]