ah, is anyone surprised with this?? These homes were 100% finaanced,sometimes more, and it is way too easy to walk away from the home..Also, from the article, it isn't a "middle class" area, but one where the owners are hard-working people, who likley couldn't qualify for a "conventional" mortgage..Sad, absolutley, but surprisingly not unexpected

Actually Stockton has always been a middle-class area. The developments were bought by commuters who work in Sacramento and the Bay Area but were priced out of those markets. Rather than buying a small fixer-upper close in, they chose to buy big 4 bdrm developer houses waaaayyyy out there. It isn't at all unusual for people to commute 1-1/2 hrs each way around here; it's one of the reasons why the San Francisco Bay Area has 4 of top 10 worst commutes in the state.

In the Bay Area proper home prices have declined a bit but not that much, for the simple reason of supply and demand. Stockton and Tracy have thousands of acres of buildable land. Close in to the coast - forget it. Rare large parcels like Mission Bay in SF are still sitting mostly unbuilt 35 years after Southern Pacific Railway created a land development company specifically to market it, due to lawsuits, hazardous waste cleanups, and permit/planning issues.

Realistically, although it's a shame the economy in those commuter towns is tanking, it has very little to do with the major cities which drive the state's economic engine. It's more the perception of uncertainty and fear that makes people hesitant to spend money or move to a bigger home, rather than any overall economic catastrophe.

An interesting statistic from the Mortgage Bankers Assoc., in a recent article in the WSJournal, showed that the default rate on non-owner occupied properties in CA - in other words, "flippers" - was higher for Prime-rated debtors than Subprime debtors: 21% for Prime, 15% for Subprime. Now remember, this is not 21% and 15% of all loans, this is a subclassification category. In 2005 (the most recent year compiled) non-owner occupied loans were only 14% of the total CA mortgage market for Prime and 7% of the total CA market for Subprime.

Anybody have the default rates for owner-occupied mortgages in 2006? The last stats I can find is Dataquick's 7/24/2007 stats showing 53,943 homes/condos in CA in default, with 54.6% of them expected to go into foreclosure. Like I said, painful as it for individual families, that's not much compared to the traditional average (the low default rates of 2001-4 are acknowledged even by the RE industry as unusual).

Also, for those who were wondering, the subprime crisis won't affect the calculations for the US GDP because it considers renting and owning to be the same: they're both housing, just of different types. What is affected is consumer confidence; scared people spend less, and renters spend less on supporting their housing than homeowners do.

"Adjustable rate mortgages offered to sub-prime borrowers, hopeful homeowners with shaky credit, lured families into houses with inflated prices, said Taylor."

Lured? Inflated prices? The market sets the price. People bought what they couldn't afford, signed notes they couldn't pay.

"People bought what they couldn't afford, signed notes they couldn't pay."

It's not always so simple. I work with a woman who is very responsible. She purchased a condo and at one point had about 20% equity. She refinanced and did a 2 or 3 year ARM. You may think "stupid", but I can tell you the banks around here were really pushing IO and short ARMS a few years ago. They really had their sales talk down pat, I can see people getting talked into it (they tried to push me into an IO even though I didn't need it, I said no). At no point was she "sub prime". She has a good credit rating, always paid her bills, wasn't over-extended, etc. Well, the condo market in her town tanked. Five in her complex have been foreclosed on. She is now upside-down on her mortgage (ows more than the place is worth) and now has a $2700+ mortgage on a condo that cost about $250k (this is actually how I learned about this, my mortgage is about the same as hers but I have a $435k mortgage). She can pay $2700 per month, but is is really, really tight for her. And she can't refinance because the mortgage is upside down. She is selling the place at a loss and plans to rent. What mistake did she make? She trusted the mortgage company for one. She was naive, that's all. But most people are not experts on mortgages and markets. Most people do not read the WSJ every day. They are just regular people in regular jobs who trust "experts" just doctors, lawyers and mortgage brokers.

Not everyone who ends up in foreclosure bought something bigger than they could afford. Some got caught up in the wave of IOs and short ARMS that the banks were pushing. When we built our house Wells Fargo really put the pressure on me to go IO. I wouldn't do it, it didn't make sense for me (I got a jumbo 10 year ARM at 5.375). But they were really spinning tales of what I could do with the extra money every month, etc. Yes, people are ultimately responsible for their own decisions. But they do not bear that responsibilty alone.

People are ultimately responsible for their choices. We could qualify for a much larger mortgage and a much bigger house, but frankly we used common sense and only bought what we needed, knowing that we didn't want to be "house poor". Many people over extend themselves because the bank says they can afford it. The same ploys are played out at car dealerships when a salesman tries to sell you a tricked out car with all the extras when all you really need is basic transportation to get you back and forth to work. Know what you can afford and don't give into pressure.

Bad things happen to people, they lose jobs, they get sick, etc. Some foreclosures are due to unforseen circumstances. Unfortunately the large number we're seeing can't be attributed to just bad luck, a lot are attributed to bad decisions. (in 2006 18,000 homes were foreclosed on in the greater Memphis area and 19,000 homes were sold in the greater Memphis area)

"Unfortunately the large number we're seeing can't be attributed to just bad luck, a lot are attributed to bad decisions."

OK, but why did so many borrowers all of a sudden start making such bad decisions? Do you really think people suddenly got stupider or more naive or more careless or more unlucky or whatever in the mid 2000s?

Have you considered that the sudden and steep rise in home prices during that period made home buying much more expensive, and particularly for first-time buyers? Many of them would have been priced right out of the market if they stuck to conventional loans. So they signed on for the ARMs and interest-only loans so that they could get themsleves into a house.

Now in retrospect, we know these were bad decisions because the market has tanked. But if you go back just a year or two, people didn't think that was going to happen. On this very forum, anyone who expressed the slightest doubt that the housing market would continue to roar was virtually hounded off the board.

What I don't understand is why those sectors of the mortgage market -- namely the underwriters and the mortgage bond raters -- who are supposed to be the people who keep everything grounded in realty, went along with all this. Why did they sign off on all these questionable loans? After all, they are supposed to be the experts who really know what they're doing, yet they failed miserably at protecting their clients and investors from getting so badly burned.

I guess I don't understand why people are so hard on the home buyers, who are the least likely to understand the intracacies of one loan vs another and the various risks they pose, yet seem willing to let the mortgage industry off the hook?

I dont see all this so much as a moral issue but more as a practical problem. In order to make sure this situation -- which threatens to bring the whole economy down with it -- doesn't happen again, don't we need a deeper understanding of what went wrong? People did make bad decisions and certainly more consumer education would help, but what about the rampant greed and stupidity in the mortgage industry that allowed the crisis to happen?

After all, stupd borrowers can't borrow unless there are stupid, greedy and/or unscrupulous lenders willing to make the loan. Who is stupider, the party who takes a loan he's not qualified to pay back or the lender who gives it to him?

Who is stupider, the party who takes a loan he's not qualified to pay back or the lender who gives it to him?

Or Fannie Mae and Freddie Mac who buy the loan that the lender made to the buyer who can't pay it back?

Or those who invest in Fannie Mae and Freddie Mac who buy the loan that the lender made to the buyer who can't pay it back?

So I somewhat agree. Ultimately I believe in personal responsibility, but it sure seems like people have been deliberately misled or just plain lied to, to keep the bubble going.

come on now, if a buyer doesn't ask the simple question, "What will/can my payments be in 1 year, 2 years, etc" when they take a mortgage out(ARM,etc), they can only blame themselves..You don't need to have an MBA to figure this out..

Smarter people didn't know the impact of those loans.

Here is a link that might be useful: Greenspan

>>Or Fannie Mae and Freddie Mac who buy the loan that the lender made to the buyer who can't pay it back?

Or those who invest in Fannie Mae and Freddie Mac who buy the loan that the lender made to the buyer who can't pay it back? Actually, Fannie and Freddie aren't involved in the subprime mess, and in fact Bush's suggestion that they buy up some of the subprime loans horrified them. They just got over Congressional scrutiny over having to restate their financial results going back three years, and don't want to touch this mess with the proverbial ten-foot pole.

I also thought that Bush's suggestions was horrible. We don't need looser standards right now - that is how we got into this mess.

And, of course, what isn't being talked about is the 800-lb gorilla in the mess...uncontrolled, unsustainable, & unaffordable rising home prices. When I first started reading this Forum, the consensus was that prices would continue rising forever & post after post encouraged people to buy now before they could not. People spoke about rising prices neutralizing any possible negatives from interest only loans, negative amortization loans, short-term ARMs, and on and on and on it went. People were told to refinance when their loans jumped or sell & reap the profits. I was soundly boo'ed for suggesting we had a bubble.

Everybody who has touched the real estate market in the past five years has a bit of the responsibility whether it was the public's resale greed, sellers, buyers, those packaging CDOs to investors, servicing fees, origination fees, realtor fees, appraisal fees, builders both large & small, title insurance fees, home inspector' fees, flipers, & Wall Street. A huge pyramid scheme. And now, those who made out like bandits because they were fortunate enough to sell before the bubble burst criticize those who didn't.

Kicking those lowest in the food chain & the least able to defend themselves are getting the lion's share of the blame here. IMO, sub-prime borrowers are the least responsible. The greater one's education & life experience the greater one's accountability. The more one is Blessed with success the greater one's responsibility to others, IMO. Those in a position of either strict or implied fidicuary duty have an obligtion to those who come to them for knowledge.

/t

Actually, Fannie and Freddie aren't involved in the subprime mess

I wasn't sure, and I'm still not 100% sure, but I did a little research before my comment, finding sources like this: Fannie Mae and Freddie Mac hold billions in subprime-backed securities
If there is some subtlety I missed, or other misunderstanding, please let me know.

come on now, if a buyer doesn't ask the simple question, "What will/can my payments be in 1 year, 2 years, etc" when they take a mortgage out(ARM,etc), they can only blame themselves..You don't need to have an MBA to figure this out..

Odd to find myself in a position defending people who got themselves into a mess, but my point was, many people were deliberately misled to get these loans. Maybe their payments in 1-2 years weren't clearly explained. Others knew the payments would go way up, but were promised that they could refinance later because the housing market would never go down. Considering that, and that many buyers in this position are young people who recently graduated from schools that most likely didn't teach them diddly-squat about personal finance, I start to have a little sympathy for some people in trouble now. Some.

Fantastic post triciae! Another thing to note, many people bought in to subdivisions where prices were comped waaaay up via fraudulent purchases (see the Crisp & Cole debacle in Bakersfield for a good example of this). People who played by the rules were (and still are) being thrown underwater because of the rampant fraud. See http://www.mortgagefraudblog.com/ for a litany of abuses across the country...

"Maybe their payments in 1-2 years weren't clearly explained. Others knew the payments would go way up, but were promised that they could refinance later because the housing market would never go down."

Bingo! Let's say you take out a 2 year ARM. You figure even if the rate rises you can refinance. After all, you have 20% equity. Can you really anticipate a large number of people in your neighborhood going into foreclosure, causing the value of your place to decline so much that you can't refinance even though you've never been late with a payment and have the same good job you had 2 years ago?

Yes, there are people who used IOs to buy bigger houses than they could really afford (they couldn't afford the house if they did a conventional loan). But there are other people who COULD HAVE qualified for a conventional loan but were sold on how great an IO was (all that cash in your pocket every month! And when rates rise you just refinance!). But they can't get a conventional loan now because of the market, especially if they need a jumbo.

I easily qualified for a conventional jumbo, but Wells Fargo did their mightiest to talk me into an IO, telling me I could buy a new car with the difference in what the monthly payment would be. But as someone who got badly burned on a condo in 1990, I'm cautious (once burned, twice shy). I didn't go with the IO for a number of reasons (didn't want to have to deal with a re-fi in a few years, I work in a volatile industry and worried I'd have trouble refinancing if I changed jobs), but I could have just as easily been one of those people burned by an IO.

I have to put ownership of the problem on the consumer and brainwashing by advice givers. I recall no more than 3 yrs ago even on this board the majority of recommendations was "Why get a fixed rate if you only plan to stay at the house for 3 yrs - get a 3 or 5 yr ARM?"

As a society we lost logic and the banks/lenders simply took advantage that our greed would justify getting an ARM at 1% lower than a 30yr FRM at 5.3%?

I reference the example by Sue earlier - why didn't her example go with a fixed rate mortgage? I don't understand what payments had to be explained - you get a FRM with a payment of x and after 10 yrs your payment is x and after 20 yrs your payment is x. If you sell before that time you no longer need to pay.

I simply don't comprehend how/why someone would gamble with their house making a HUGE # of assumption (values would stay high, I will move in y years, I will increase my pay by #% annually, interest rates will stay low).

Sadly, interest rates are still VERY VERY low and if we see the high number of foreclosures today based on only 2-3% points increase it is highlighting how many people stretch their income.

." I work with a woman who is very responsible. She purchased a condo and at one point had about 20% equity. She refinanced and did a 2 or 3 year ARM. You may think "stupid", but I can tell you the banks around here were really pushing IO and short ARMS a few years ago."

No one made her go to the bank, apply for a refi, and then sign it.
Either she had a mortgage she could not afford (20% equity or not) or she was attracted by the idea of reducing her payments so she had more money now, and to h*ll with the consequences (like an ARM).

Greed often has terrible consequences.

Sometimes you don't go to the bank...
Some people were just sitting at home minding their own business when they were offered a 'too good to be true' opportunity over the phone and it was never adequately explained to them in these terms:
This is an Option ARM loan, you get to choose the payment you make each month, with a minimum payment of 1 1/2% of your original loan balance, If you make that minimum payment your principal balance will grow each month, So you will owe more on your loan each month, and the interest will be computed on that new ever growing balance, eventually when your principal balance gets to 110% of your original balance- which could happen pretty fast considering you will probably want to make that minimum payment and your initial interest rate is very low and only good for 30 days- at that point we are going to reamortize your loan and you will pay the fully indexed rate-in this case up to 12 1/2% amortized on the full balance over 30 years. Your payment could go from what you can barely manage now to twice that amount in one month, would you like to sign up?

We were offered one of these loans about 18 months ago, we passed because it made no sense after I understood what it actually was. Based on the initial sales pitch it sounded like a dream come true. I spent alot of time getting to the bottom of how the loan actually worked, the 'loan officer' was only interested in showing me a power point presentation which was geared towards everything I could do with that 'extra' $ each month. His numbers never jibed with mine, and he maintained to the end that his loan was the best thing since sliced bread and that we were fools for passing it up. We decided to skip the refi on our investment property and felt like we had really wasted alot of time looking at such a crazy loan. Education is never wasted though, one friend and one family member came to us for advice regarding their mortgage choices. One a first time home buyer who's mortgage broker was recommending this same type of loan-"You can buy so much more house for your monthly payment", and one a person needing to refi to a lower payment due to a spouse's disability and medical payments - the loan was marketed to her differently - "You will be so much more SECURE with the ability to choose your payment each month". Neither one had the whole story, thankfully we were able to help them understand what they could have been getting into, they did not do it.

Some people are greedy for certain, it is not *always* the person signing up for the mortgage. I wonder about all the mortgage brokers and lenders who signed people up for these disasters in the making, do they feel any guilt or responsibility? I wonder if they bought what they were selling and are in the same boat?

"Everybody who has touched the real estate market in the past five years has a bit of the responsibility whether it was the public's resale greed, sellers, buyers, those packaging CDOs to investors, servicing fees, origination fees, realtor fees, appraisal fees, builders both large & small, title insurance fees, home inspector' fees, flipers, & Wall Street. A huge pyramid scheme. Those in a position of either strict or implied fidicuary duty have an obligtion to those who come to them for knowledge."

Strict or implied fidicuary duty? Yeah, right! Is this why we never hear anything about derivatives?

"Based on data compiled but no longer published à by the OCC, less than 9% of the derivatives held by U.S. banks are traded on regulated exchanges.

The remaining 91% are strictly one-on-one contracts, handled over the counter, outside the domain of regulated exchanges.

This mean that each party is ultimately responsible for monitoring the credit and trustworthiness of each counterparty."

Sounds like the fox watching the henhouse. I guess we should thank the regulators for allowing the banks to play "casino" with consumers pocketbooks.

" Ironically, the WSJ editorial staffÃ-which normally defends deregulation and laissez faire economics---is now calling for regulators to make sure they are Ãon top of the banks they are supposed to be regulating, so we don't get any surprise bank failures that spook the markets and confirm the worst fears being whispered about.Ã

September 7, 2007

SEC to review role of MoodyÃs, S&P, Fitch credit rating agencies in subprime mortgage mess
By ALAN ZIBEL, AP Business Writer

WASHINGTON (AP) Ã Federal regulators said Friday they are reviewing the role credit-rating agencies played in the mortgage market debacle for borrowers with weak credit.

The Securities and Exchange Commission "has begun a review of credit-rating agency policies and procedures," SEC spokesman John Nester said.

The review, he said, will include what ratings mean and whether conflicts of interest were created if rating agencies gave advice to issuers of mortgage debt and originators.

The agencies, whose ratings are used by investors to gauge the riskiness or safety of mortgage-backed bonds and other forms of debt, are subject to SEC oversight enacted last year.

Critics say the three biggest ratings agencies à Standard & Poor's, Moody's Investors Service and Fitch Ratings à failed to give investors adequate warning of the risk of mortgage securities containing subprime loans.

The agencies also are vulnerable to conflicts of interest because they are paid by the companies whose bonds they rate, critics charge.

A Moody's spokesman said the company will "fully assist" regulators in their examinations. A Fitch spokesman said in an e-mail that the company is cooperating with inquiries from regulators, including a subpoena from New York Attorney General Andrew Cuomo.

S&P, which also received a Cuomo subpoena, is "looking forward to discussing the role of ratings agencies and how we contribute to a healthy capital market," spokesman Chris Atkins said.

In written testimony submitted Wednesday to a House committee for a hearing on mortgage market turmoil, Erik Sirri, the SEC's director of market regulation, said the commission is studying whether to require disclosure of other types of performance statistics for bonds rated by the agencies à apart from historical data on default rates and downgrades.

In recent weeks, House and Senate lawmakers have said they plan to examine what role the three main credit-rating agencies played in the housing market downturn.

The agencies are also under scrutiny in Europe, where investors who got slammed by unexpected defaults in securities backed by U.S. home loans, are particularly upset. European securities regulators say they plan their own examination of the credit-rating agencies.

In Congressional testimony, newspaper op-ed columns and elsewhere, the agencies defend their track record of analyzing the mortgage market in recent years and say they have adequate protections against conflicts of interest.

It seems that those who feel righteous in blaming the lowest fruit on the mortgage pyramid scheme tree seem to be ignoring berniak's link to an article that quotes Alan Greenspan as stating:

" September 13, 2007
FORMER FEDERAL RESERVE CHAIRMAN ALAN GREENSPAN SAYS HE KNEW ABOUT ABUSES IN SUBPRIME LENDING BUT FAILED TO FORSEE THEIR PARALYZING MARKET EFFECTS UNTIL LATE 2005 "60 MINUTES" SUNDAY

He Defends His Lower Interest Rates that Critics Say Caused the Subprime Meltdown and Praises Chairman Ben Bernanke for His Handling of the Current Market Turmoil.."

Here you have the supposed all time guru of finance admitting that even he did not see through this complex game of dominos and its ultimate implications.

Whether one believes his statement or not, blaming those (the homebuyers) who fell for the scheme...as opposed to those who perpetrated it....and, who have since received BILLIONS in bailouts .... is like blaming the crime victim for riding the subway late at night, or the carjacking victim for neglecting to lock the car door or thinking that a woman deserved to be attacked by a predator because who wore a short skirt.

The architects of this scheme are those who bear most if not all of the blame...as they are guilty of willful intent to defraud and deceive.

Those who fell for their very intricate, well planned and faultlessly executed line of BS are guilty of nothing more than a lack of knowledge and/or sophistication needed to see through the smoke and mirrors....and, they are apparently in "good" company since Greenspan has admitted to being equally bamboozled.

That said...it is odd how in our society, being trusting and gullible is often viewed as a far bigger sin than willfully planning to defraud and to deceive.

If you read the article Monzamess linked to, it also points out that the delinquency rates, even the "serious" delinquency rates, aren't actually that high. We should remember that not all delinquent loans go into foreclosure. And in fact FMac and FMae have invested billions of dollars at Congress' urging to directly buy subprime loans so the terms can be renegotiated - there's a sizable percentage of delinquent borrowers who are having trouble getting their loans renegotiated because it isn't clear who owns them, according to a recent NYTimes article.

I agree with logic's post that >>...it is odd how in our society, being trusting and gullible is often viewed as a far bigger sin than willfully planning to defraud and to deceive. Yes, we glorify Michael Milken, who has probably done more to cripple American business under a leveraged load of takeover debt (the Fed is a lot more concerned about the overabundance of cheap equity deals than it is about home mortgage interest, and rightly so), but let's kick those stupid ignorant borrowers while they're down because hey, they should have known better even though our educational system doesn't bother making sure a high school graduate can even balance a checkbook before getting a diploma. What's the point of education if it doesn't teach people the basics of how to manage today's complex lifestyles? Expecting people to "pick it up" on the fly just leaves us with what we have - vast numbers of people who are confused and uncertain, easy prey for slick marketing campaigns.

Speaking of Michael Milken...

A few years ago, I was considering investing in Leapfrog when it went public in '02. Ya know, they are the educational toy company. Well, in doing my research I discovered that Michael Milken was an 86% owner of the company. So, immediately scratched that one off my "buy" list & thank goodness I did. If memory serves me correct it jumped on its first day making Milken millions & then plummeted to $8-$9/share & has never recovered. A lot of people lost big on Leapfrog but Milken, of course, got richer! How did he get from junk bonds to kid's toys? Oh well...it's America.

/t

Victims need to take responsibility for their actions.

Credit companies are known for giving thousands of $$ in credit to unemployed undecided college students with gifts/incentive. Oddly, not every person graduating college is in credit card debt or so under they are depressed.
The mortgage/loan industry is the same in my opinion and if it sounds too easy/too good to obtain a 1/2 million dollar home and you can barely afford to buy a new Ford - the warning sign should go up. A little logic can go a long way when signing a paper regardless of what someone else is telling you.

Additionally, I think many people fell into keeping up with the Jones and felt they MUSt own a home even if they weren't financially or mentally equipped. However, their coworker or former neighbor bought up so they should be able to buy a home. This applies to 1st time homebuyers (we have all read post on this board of people who were stretch but felt it critical they must buy a home - and they were the smart ones to get online advice), real estate investors (easy money theory), and refinancing (ie. I should also have a new boat and Jaguar because I'm better than Frank down the road - I dont care of consequences to thsi refinance deal I need to show up Frank).

We live in a capitalist society and a few will profit off the dumbness/mistakes of the majority. I do not put full responsibility on the banks/lenders because supply matches demand. If a sucker/consumer wants to buy 1/4 million home with a 500 FICO score - why not give them a high profit product? And if a sucker/consumer with a 800 FICO wants to take the risk on a product when they should go FRM - heck I'll take that money also.

I guess I don't walk into a car dealership without a concrete idea of what I want and maximum of what I will pay which avoids a salesman from brainwashing me. Another difference, I do NOT need the car as many folks didn't need to refinance, or buy a home which removes the gullible decisions made due to emotion.

"Victims need to take responsibility for their actions."

Victims normally have their day in court to watch the punishment of the criminal. Looks like another bash to blame the victim.

If the word "Victim" was changed for "Gullible", I might have been more forgiving in the choice of words."

If a sucker/consumer wants to buy 1/4 million home with a 500 FICO score - why not give them a high profit product?"

Who contributed and is responsible, if this buyer is not able to make an adjusted payment? The buyer will obviously lose, but the larger responsibility for this type of business lies with the company that was willing to take the risk by fronting the money and should pay the major penalty.

"As a society we lost logic and the banks/lenders simply took advantage that our greed would justify getting an ARM at 1% lower than a 30yr FRM at 5.3%?"

While I'm sure the banks stand fully ready and able to take advantage of anyone's greed, there's an irony here that many seem to be missing.

The greedy mortgage companies that pushed these exotic loans now see themselves going out of business. Countrywide now owns over 11,000 homes that it will have to dump at firesale prices, and that number rises every day. Tens of thousands in the lender industry have lost their jobs. Mortgage derivative-based investments have plunged in value. Builders are going bankrupt. Real estate agents are fleeing the field in droves. And so on.

Now, all of these parties are assumed to be so much more knowledgable and sophisticated than the Joe six-pack schmoos who got sucked into (or eagerly grabbed) these rotten mortgages. So my questiona are:

why did the morgage industry make this happen? After all, the borrowers couldn't have gotten these deals if someone hadn't offered them. Why didn't and couldn't the industry see that this was nothing but a house of cards waiting to collape?

It seems that the underwriters and bond raters who were supposed to protect their employers and investers from funding bad mortgages or buying what appeared to be good bonds but were actually rotten at the core had conflicts of interest and/or had somehow been co-opted by the rest of an industry so caught up in making hay while the sun shone that it totally lost its bearings.

If the economic fallout were confined to the various greedy parties who are responsible for the housing crash, that would be one thing. We could all roll our eyes and leave the mortgage industry to figure out what happened and how to prevent it happening again.

But now the whole economy is threatened. Does it really make sense just to stand back and let happen what will happen? That approach probably would punish some of the parties most responsable, whoever you think they may be, but it's certain that a lot of the totally innocent will suffer, and increasingly likely that all of us will, to one degree or another.

We can't come up with any workable solutions to the problem until we figure out what caused it.

"And if a sucker/consumer with a 800 FICO wants to take the risk on a product when they should go FRM - heck I'll take that money also."

Sure, but then you also have to accept responsibility if you end up "owning" a lot of foreclosed homes and if your lending business collapses, like we see today.
Because for every sucker/consumer is a sucker/lender.

feedingfrenzy: "Now, all of these parties are assumed to be so much more knowledgable and sophisticated than the Joe six-pack schmoos who got sucked into (or eagerly grabbed) these rotten mortgages. So my questiona are:

why did the morgage industry make this happen? After all, the borrowers couldn't have gotten these deals if someone hadn't offered them. Why didn't and couldn't the industry see that this was nothing but a house of cards waiting to collape?"

IMO...the real answers to this question and the others that you have posed are very very complex...so much so that chances are many of the big players did not even fully understand the cause and effect of the collective actions.

There are so many different entities involved in this game, that in many respects, my belief is that the span of control became so degraded that the minimal checks and balances that do exist where totally overwhelmed. A good analogy is that the mortgage scam is to world finance what Hurricane Katrina was to the levies in New Orleans....in both cases, there simply was not enough knowledge about the reality of the situations to adequately prevent such a catastrophe from occurring.

IMO...the failed "levies" in this case are the hedge funds....as are they held only to minimal if any regulation, standards or scrutiny. Most of those who invest in such are extremely wealthy...they are risky to the max...and instead of using real information, traders, analysts, investors etc. ostensibly relied upon "computer models"....and are using those as the excuse for their inability to see that the emperor had no clothes.

Bottom line is that HUGE money talksand despite the failure of more than a few hedge funds prior to this collapse, the regulatory authorities still chose to maintain a hands-off policy

and now we are ALL left holding the bag. The only difference is those who are at the core of fault in this case may have lost millionsbut it is for many a mere drop in the bucket. The real losers are those who are lower on the food chainwith the biggest losers of all not just the homebuyers who bought homes they could not affordbut ALL of usas we are all suffering the consequences in one way or another of Wall Streets greed and the regulatory authorities enabling and abetting their fraudulent and deceptive schemes under the guise of "hedge funds".

I agree with failure of checks and balances but let us simplify this 'complex' situation.

Mortgage companies/banks - All banks/financial companies made HUGE profits during this irresponsible time period. Why would CitiBank, Wamu, BoA not get involved if CountryWide was unable to keep up with the profit account?

Mortgage companies CEO - Those at the top knew this couldn't last and it was temporary but they would have millions upon millions of profit without criminal charge because it was all legal. We live in a society whereas if you ask someone to take home bonus of $250k for good long term of our economy vs. take home bonus of $53million but major consequences? Hello? They have 53 million they could care less. As the prior post indicates bank CEO made millions during this period and don't care about the lay-offs or foreclosures as they are retired to their own islands.

Federal level - Our WashDC elected official didn't see a problem with the banks writing off certain bad accounts against assets/profits - so banks didn't have REAL incentive not to provide some bad loan. I forget the term but a VERY bad accounting practice was legal amongst all of the banks.

finally, let us not forget after the .com bust > 09/11 the housing industry was fueling our economy (refinances, building, low rates) and it would defy Wash DC to do something about it because there was nothing to fall back on to make us feel confident we weren't in a recession.

Sadly, we have two examples in recent history in housing flopping causing major hiccup in the long term economy. 80s during Regan policy to make certain debt deductible and Japan in the early 90s.

This isn't new just disappointing people place blame on business instead of themselves for being gullible or trying to keep up with their peers.

Excellent post, logic. Can't disagree with a single sentence.

I wonder how long it will be until we know exactly the extent of the size of the problem? The investment banks/brokers start reporting 3Q earnings this week. There will be some marking but I'm sure it's not the end of it. Plus, these questionable 'assets' are continuing to deteriorate so each quarter will bring more write-downs/charge-offs until it's all flushed out of the system.

IMO, 2008 is optimistic for a price bottom to form. The mortgage industry, as a whole, will adjust quickly swinging too far in the other direction before reaching equilibrium in profit/risk analysis. For the next couple years, I fully expect to see restrictive enough credit standards to slow cleaning out existing inventory of unsold houses. DH is already bringing home stories of crazy refi requests they're receiving at the bank. Lots of people trying to get out of loans that are 'So 2005'. Normally, their turn-down rate is about 40% which is high compared to industry norms but they're a conservative shop. In August, it jumped to over 50%.

On Tuesday, we'll find out the FOMC's & Bernanke's decisions. Count me in the minority that doesn't believe easing the Fed funds rate is a 'cure all' for the problem. First, the majority of the troubled mortgages are based on LIBOR and second, mortgage pricing has become more competitive in nature. Remember back when mortgage rates were little different from one lender to another? Those days are gone. If lenders continue to have trouble selling into the secondary market at the FOMC's preferred rate...they'll keep mortgage rates up high enough they can sell the darn things. So, I'm little convinced the FOMC has as much control as they have in the past. This is largely due to those hedge funds logic spoke so well about. Combined, they control so much money that they've almost become a "central bank", so to speak in there ability to move markets. If hedge fund managers, with their decreased risk tolerance, demand a 7.5% return on prime jumbos we'll not see 6.75%, 30-year fixed rates anytime soon. And, that's assuming the secondary market even returns for mortgage-backed securities. I'm pretty certain it won't return to 2003-2006 levels no matter what the rates of return or assurances of credit quality fund managers are given. Loans over $417K are going to be much more difficult to obtain no matter what Bernanke does on Tuesday which is going to dramatically affect those in the trenches trying to sell or purchase a house.

I think Lehman leads the way with 3Q earnings....anybody care to place a bet on how bad the damage will be?

/t

Just a quick note that I think is important...

Not ALL banks are like WF, WaMu, etc. Most financial institutions consider they've done very well to end the year with a 1% return on assets. They work with very tight margins with little room for error.

Anyway, I just wanted to get out here that MOST banks across the country have not made zillions of sub-prime, IO, pay-option ARM mortgages. Most have been chugging along during the past five years conducting business just like they always do. So, it's not right to lump ALL banks into this pile with Countrywide, MaMu, WF, Citi, Indymac, etc.

And the CEOs of these 'steady-as-she-goes' banks have not licked the coffers clean come bonus time either. Unfortunately, a few very rotten apples have spoiled the entire bushel in the public's eye.

/t

Tricia, do you *have* to be such a realist? LOL

The selling of my condo could be hinging on what the FEDS decide. The one offer I had didn't want to counter 'at the moment', which makes me think he's waiting in the wings on their decision.

Alan Greenspan on 60 minutes tonight before the release of his book tells us what he knew or ignored while he was in the role of maestro to our economy.

Actually, I don't think Greenspan is the villain in this. I repeat - the Fed has very little control over the securitization of bundled mortgage loans. They are repackaged into equity deals and are collateralized by the RE. Yes, in some areas of the US that RE has fallen in value. But in most areas of the US it has not dropped drastically, and even a 25% decline eventually works itself out through the system. The US simply has too large and global an economy for it to be more than a big burp in the overall history.

I do fault Greenspan for keeping rates low too long, but hindsight is always so much better than foresight. Why should he be any different than us folks at the forum - where are all those posters here who declared one could never lose money in RE?

And the hysteria over banks is amusing. There is NO CASH CRUNCH. Banks are flush with money, as are most companies. There is a liquidity crunch, which is a thing entirely different. Wells Fargo had very little exposure to subprime loans; they securitize and sell most of their loans to other servicers. WaMu recently added to their loan loss reserve but their core business, checking and savings, is booming like gangbusters and they will have no trouble opening all the new branches they plan to start in 2007-2008.

Actually, if I were investing in individual stocks, which I don't, I'd buy Goldman Sachs in a heartbeat. The liquidity messiness has really depressed its stock price and they are the premier deal-broker in the world. Now, when they start jumping out of their windows, then I'll worry!

As for RE agents fleeing the field, most of those were part-time and newcomers anyway. It's always been a boom-and-bust business, and probably always will be. We saw the same thing happen in the 1990's. People have such short memories!

The vast majority of Americans have pretty much the same amount in their checking and savings accounts as they had two months ago. The vast majority of American, Asian and European corporations can say the same. The only thing changed are people's perceptions, as fed by the media.

"Actually, Fannie and Freddie aren't involved in the subprime mess"
I wasn't sure, and I'm still not 100% sure, but I did a little research before my comment, finding sources like this: Fannie Mae and Freddie Mac hold billions in subprime-backed securities
If there is some subtlety I missed, or other misunderstanding, please let me know."

I'll take a crack at it: It seems to me that people are getting bogged down in definitions: fannie mae and freddie mac do not directly write subprime loans, but they do act as reinsurers of those loans. Reinsurance is like insurance for an insurance company. The people claiming there is no direct link between fannie/freddie and the subprimes are technically correct, but they are dead wrong if they try to claim there's no indirect link.

Also, freddie/fannie have another indirect impact on the markets that is so strong it could practially be called a direct impact: by law, they write loans only up to $417K. This $417k sort of becomes a magical number - if a buyer needs to borrow that much or more to buy a property, the interest rates banks charge will magically be higher than if the buyer were to borrow only $416k and pay the rest out of pocket. The banks get away with it because the market (of borrowers, i.e., all of us) lets them.

jkom--

"And the hysteria over banks is amusing."

I'm glad you find it amusing, but most of the rest of us don't. Especially the British depositers at Northern Rock who've created a bank run that's now in its third day, despite emergency cash transfusions from the Bank England. NR is one of those banks that relies on the capital markets, rather than depositors for capital financing. Its sources have dried up do to the US subprime collapse.

So now the depositors are willing to face a three-hour wait in line to get their money. Observers say the situation calls up scenes from the Weimar Republic.

So even if it were really true (which it emphatically is not) that "the only thing changed are people's perceptions," that, alone, is enogh to set the alarm bells ringing.

Also thanks to tricea for her consistanly incsightfull posts and also to logic. I compelety agree with you about the crucial role in this mess of the hedge funds and their total lack of either oversight or regulatin.

The panic over Northern Rock UK is strictly hysterical. Northern Rock has not yet drawn down the BoE credit line. And in fact, if its reserve ratio is deemed by regulators to be going to low, it will simply be sold. Another bank will take it over, and the idiotic run on deposit accounts will stop because the name has changed. NOBODY has lost any money with that bank, and nobody will. Deposits taken out of that bank are simply deposited with some different bank, or stuck under the proverbial mattress. There have been no losses, although some folks will be out jobs if branches are closed, IF NRB is taken over by another bank.

Per the NYTimes today:
"If Northern Rock can't reach a deal, people familiar with the matter say, its equity and certain other obligations could be valued at a token price in a sale approved by the central bank and the FSA. A decade ago, the prestigious investment bank Barings Bank was similarly sold for a token £10 after a rogue trader caused billions in losses.

Barring a sale of Northern Rock in its entirety or in parts, regulators could allow the bank to go out of business, shifting its deposits to other banks. Northern Rock hasn't tapped the emergency funding from the Bank of England, people familiar with the matter say."

It's pretty strange, isn't it, that the BoE so kindly offered NR the emergency funding, considering that it, unlike the Fed or the other European central banks, had maintained a strictly hands-off approach until the NR crisis? Why would the BoE take what it must have considered a drastic step if it wasn't needed?

The real irony is that this intervention ("the biggest rescue by the central bank [BoE] in 30 years," according to the NYT) hasn't had the intended effect -- the bank run, hysterical or not, continues.

I still fail to find any amusement in the NR story.

jkom51,

I believe what you're missing is that the liquidity crisis has potential to deepen into an insolvency crisis; hence, the concern for financial institutions such as Northern Rock. We are not finished with the high cost of wholesale financing. There's a reason Countrywide is offering a 5.65% 12-month CD rate for $10K+. They are having trouble raising capital due to the public's wary nature of troubled insititutions. When it comes to their money, most people would rather be safe than sorry. The lines of people outside NR's offices we're seeing are people who've decided to "shoot first & ask questions later". That's understandable and not amusing, IMO either.

FDIC is unable to bail out any of the major US banks. Sure, it works great for a smaller local or regional bank that gets itself in trouble. But, if a major money-center bank were to be in a solvency crisis...FDIC would be little able to help other than offering forth soothing public words. It is still possible, even in America, to have a banking crisis. It's not likely...but, it's possible and that's enough for some people to play it safe.

You have also ignored the asset/liability ratios of institutions such as WaMu, WF, etc. They are leveraged to the hilt. The institutions I noted have made mortgage loans far in excess of their deposits to support. Their cost of funds has ballooned in the past couple months. So, you're correct in that they sell originated loans through mortgage-backed securities...but that's not the whole story & it paints an incomplete picture to not discuss the rest of the problem.

/t

I am sure there are some true 'victims' in this mess, but let's face it- we all know or have heard of people who have used their home equity like an ATM card for the past 4 years, shame on them- I cannot believe that a reasonable person could believe that the market could keep going up, all you had to do is look at the fundamentals, houses are renting for half of what the payment would be if they were not financed with 'voodoo loans' that is unsustainable, wages have not risen much, if at all, so how could anyone be so dilusional as to think that this bubble was not going to pop?

My guess, based on everything I see is that prices in many areas will drop to 2003, maybe 2002 levels before they stabilize. What concerns me even more is the impact on other parts of the economy, 100k kitchen renos, and new cars paid for with heloc's have largely sustained this economy, what happens now that the well has run dry? I think it's going to be an ugly ride hang on tight and good luck if you have to sell during the next 3 or 4 years.

"so how could anyone be so dilusional as to think that this bubble was not going to pop?"

Apparently most people, if the posts I saw on here a year or two ago mean anything. Posters on this forum are more knowledgable than average about housing matters, yet most of them insisted that house prices would continue to rise indefinitely into the future. The more cautious among them predicted at worst maybe a slight slowdown in activity.

Those who rang the alarm bells were pretty much ridiculed (remember "Chicken Little"?), ostracised and bullied off the forum. What has happened to that vast crowd of optimists? They don't seem to post here anymore.

Hindsight is 20/20, as they say.