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There's been an interesting series on NPR, and I've read quite a few other articles, about how this whole mortgage mess came to be.
I've learned about the global pool of investment monies doubling from mid-90's to early 2000's, and how that global pool had already invested in stocks, bonds, real estate, etc. etc. and how investment bankers had to find additional investment vehiles for that global pool. Voila, mortgage backed securities!
Initially, these were pretty decent packages of "good" mortgages, i.e., borrower was thoroughly vetted, had money down, most likely the mortgage was a fixed rate 30 year loan. BUT, that global pool of money grew and grew and loved mortgage backed securities and just about everyone who could have a good, more or less traditional mortgage had one, so how could more mortgages be sold so they could be packaged into more mortgage backed securities???
The answer: lower standards for securing mortgages, and create different types of mortgages. Standards went from you had to have a verified income, some assets, a down payment, etc. to stated income stated assets, to no income no assets (NINA) but a good credit score, to maybe you had to have a pulse and a credit score. And in a case I read about in Columbus, Ohio, about a dozen mortgages were made to folks who had no pulse!
The pressure for this came from the top down. So freaking much money has been made by the investment bankers, the securities packagers, the big mortgage brokers, the guys who bundled the mortgages into packages, the smaller mortgage brokers, and so on. Some ethical lenders stepped away from the craziness. Some lenders/brokers did not, they had to compete or fear drying up and laying off.
At the same time, people who wanted homes who had an ice cube's chance in hell of affording one were told they could qualify. And this was especially prevalent in over-bought markets, or distressed urban markets (think Polish tiwn in Cleveland), and crappy starter home markets. Yes, anyone who housekeeps at Days Inn for a living should know they cannot afford a $250k home, or maybe any home. OTOH, yes, people were lied to, and information on applications was fabricated, changed, and outright falsified.
So who do I think is at fault? Everyone who was driven by greed. Anyone who says "I knew my customer couldn't ever afford the $400k home he just bought, but hey, I was going to earn $15,000 on the mortgage and if I didn't write it and push it through the next guy would." The buyer who said "I can't really afford the home now, but I just know I'll be getting raises and bonuses in the future and I'll squeak by." The investment bankers who pushed the lenders into pushing the edge of the lending envelope a little more, more, how about a little further ...
My heart goes out to the buyers who bought homes they could afford, only to find the homes were incredibly over-appraised, and are now upside down on their loans. And they can't sell 'cause no ones buying, and even if they could sell they couldn't even pay off the mortgage. The collusion amongst lenders, brokers, appraisers thing is just another riff to this whole mess.
Currently there are investigations into lending practices, investment banks and bankers, appraisers, builders, real estate brokers, mortgage brokers, etc etc. It's interesting to note that we really don't have much in the way of rules or regulations for how mortgages can be fashioned. I bet you could have written a mortgage requiring the first born child of the buyer, and if it was disclosed in the fine print, it would've flown.
Anyway, greed greed greed, from the top (that global pool of money that wants ever bigger yields at any cost) to the bottom (the guy/gal who delusionally thought they could have that dream home and forgot about having to pay for it!), is, IMO, what drove this mess.
A side note:
I bought my 1st home in Cincinnati, Ohio in an urban neighborhood for 0% down, even got a check back at closing. It was through a revitalization program for urban areas, and 5/3 Bank was my lender. I made every single payment on time, and sold the home 4 years later a decent profit. My APR was around 8% - high - but no big deal on a $70k home.
I bought a small home on an acre in rural western North Carolina, about 2 years ago, using a NINA loan. I was self-employed for less than a year, but had (and still have) a near perfect credit score. I financed 95% of the purchase - my interest rate was about 7% - high - but no big deal on a $60k home. I did pay closing costs that were quite reasonable. I still own the home and have recently refinanced it as it has increased nicely in value. Now I no longer pay PMI, and my monthly payment has decreased since I have a much better rate. Still a 30 year fixed rate vehicle.
I bought my current home in Gastonia for $500.00 down, seller paid closing costs, because I had put down a huge earnest money check I got most of that back at closing. My rate is about 6.2% - I do pay PMI but I am hoping I can deduct it next year (we'll see what the IRS does) - it is a 30 year fixed rate mortgage.
I'm mentioning all of this as a reminder that there are many folks who have excellent credit, who know how to budget and not over-buy, who have paid every bill on time, their entire life. We just don't have a bunch of money! So I hope that the result of this mortgage-real estate mess isn't such a pendulum swing in the opposite direction that people like me get shut out of home ownership.
Geeze, who knew a huge cup of coffee would fuel this much typing in the a.m.! Carry on!
There's been an interesting series on NPR, and I've read quite a few other articles, about how this whole mortgage mess came to be.
I've learned about the global pool of investment monies doubling from mid-90's to early 2000's, and how that global pool had already invested in stocks, bonds, real estate, etc. etc. and how investment bankers had to find additional investment vehiles for that global pool. Voila, mortgage backed securities!
Initially, these were pretty decent packages of "good" mortgages, i.e., borrower was thoroughly vetted, had money down, most likely the mortgage was a fixed rate 30 year loan. BUT, that global pool of money grew and grew and loved mortgage backed securities and just about everyone who could have a good, more or less traditional mortgage had one, so how could more mortgages be sold so they could be packaged into more mortgage backed securities???
The answer: lower standards for securing mortgages, and create different types of mortgages. Standards went from you had to have a verified income, some assets, a down payment, etc. to stated income stated assets, to no income no assets (NINA) but a good credit score, to maybe you had to have a pulse and a credit score. And in a case I read about in Columbus, Ohio, about a dozen mortgages were made to folks who had no pulse!
The pressure for this came from the top down. So freaking much money has been made by the investment bankers, the securities packagers, the big mortgage brokers, the guys who bundled the mortgages into packages, the smaller mortgage brokers, and so on. Some ethical lenders stepped away from the craziness. Some lenders/brokers did not, they had to compete or fear drying up and laying off.
At the same time, people who wanted homes who had an ice cube's chance in hell of affording one were told they could qualify. And this was especially prevalent in over-bought markets, or distressed urban markets (think Polish tiwn in Cleveland), and crappy starter home markets. Yes, anyone who housekeeps at Days Inn for a living should know they cannot afford a $250k home, or maybe any home. OTOH, yes, people were lied to, and information on applications was fabricated, changed, and outright falsified.
So who do I think is at fault? Everyone who was driven by greed. Anyone who says "I knew my customer couldn't ever afford the $400k home he just bought, but hey, I was going to earn $15,000 on the mortgage and if I didn't write it and push it through the next guy would." The buyer who said "I can't really afford the home now, but I just know I'll be getting raises and bonuses in the future and I'll squeak by." The investment bankers who pushed the lenders into pushing the edge of the lending envelope a little more, more, how about a little further ...
My heart goes out to the buyers who bought homes they could afford, only to find the homes were incredibly over-appraised, and are now upside down on their loans. And they can't sell 'cause no ones buying, and even if they could sell they couldn't even pay off the mortgage. The collusion amongst lenders, brokers, appraisers thing is just another riff to this whole mess.
Currently there are investigations into lending practices, investment banks and bankers, appraisers, builders, real estate brokers, mortgage brokers, etc etc. It's interesting to note that we really don't have much in the way of rules or regulations for how mortgages can be fashioned. I bet you could have written a mortgage requiring the first born child of the buyer, and if it was disclosed in the fine print, it would've flown.
Anyway, greed greed greed, from the top (that global pool of money that wants ever bigger yields at any cost) to the bottom (the guy/gal who delusionally thought they could have that dream home and forgot about having to pay for it!), is, IMO, what drove this mess.
A side note:
I bought my 1st home in Cincinnati, Ohio in an urban neighborhood for 0% down, even got a check back at closing. It was through a revitalization program for urban areas, and 5/3 Bank was my lender. I made every single payment on time, and sold the home 4 years later a decent profit. My APR was around 8% - high - but no big deal on a $70k home.
I bought a small home on an acre in rural western North Carolina, about 2 years ago, using a NINA loan. I was self-employed for less than a year, but had (and still have) a near perfect credit score. I financed 95% of the purchase - my interest rate was about 7% - high - but no big deal on a $60k home. I did pay closing costs that were quite reasonable. I still own the home and have recently refinanced it as it has increased nicely in value. Now I no longer pay PMI, and my monthly payment has decreased since I have a much better rate. Still a 30 year fixed rate vehicle.
I bought my current home in Gastonia for $500.00 down, seller paid closing costs, because I had put down a huge earnest money check I got most of that back at closing. My rate is about 6.2% - I do pay PMI but I am hoping I can deduct it next year (we'll see what the IRS does) - it is a 30 year fixed rate mortgage.
I'm mentioning all of this as a reminder that there are many folks who have excellent credit, who know how to budget and not over-buy, who have paid every bill on time, their entire life. We just don't have a bunch of money! So I hope that the result of this mortgage-real estate mess isn't such a pendulum swing in the opposite direction that people like me get shut out of home ownership.
Geeze, who knew a huge cup of coffee would fuel this much typing in the a.m.! Carry on!
I thouroughly enjoyed your "coffee" post while drinking mine. Thank You. You seemed to have summed it up beautifully and acurately.
I agree that both lenders and buyers are at fault, but the buyers more so. However, there are plenty of people out their that also ran into trouble with issues like losing their jobs. Then, it is no one's fault, really.
I think FHA loans are important to have, but maybe the qualifications should be more strict. Take myself for example. I am 25 years old, have $10,000 in the bank, excellent credit (780 credit score) and want to buy a house. The catch is that I am a teacher and only make 32K a year. Between student loans, my car payment and rent ($800 monthly by itself), I can survive easily (no credit card debt), but can not actually SAVE money for the down payment. The 10K was inherited. I would never be able to afford a home (one I'd live in anyway) without getting an FHA loan.
I'm not 100% sure but I think there are special programs for police and teachers for loans that you might want to investigate and take advantage of.
I might have this information mixed up with a program here in NY State but I would check it out.
je
Everyone that says the buyers are at fault because they bought what they could not afford is just WRONG.
If you are in the market to purchase a home, and you go to a "PROFESSIONAL" to get the best deal on a mortgage and the mortgage professional advises one that they best way to do it would be to get a 3/1 ARM and refinance in a few years and you take their advice.... how is it that you coulcn't afford the home???
The reason that there are sooo many foreclosure happening now is that a great number of people were SOLD ARM between 3 and 5 years ago. These loans are expiring now, and people are unable to refinance. If they don't refinance, their rates are increasng EVEN THOUGH interest rates are lower now.
Personal anecdote. I bought a condo in Calif in 2002 for 250k. This is not a luxury condo, but a starter one. I put 20% down so I was looking for a loan around 199k. My mortgage professional really encouraged me to get a 3/1 or 7/1 ARM because the rate was slightly better and I could refinance later if rates dropped again. I didn't because my dad discouraged it. 18 months ago, condo's in my complex were selling for 368k. Now, I see them listed for about 265k. I wonder if they are going to drop lower than my purchase price.
I could afford the condo, but if I had taken the mortgage brokers advice and gotten an ARM, I wonder if I would be in the same position as some of these people. I was really sold on the arm and was told that that was how the home buying process worked now.
I know several people in that bought homes on an ARM with a minimal down payment. When their loans were ready to expire, the value of the homes had gone down buy 50-100k!! Now they are unable to refinance because the house will not appraise for as much. So they stick with the ARM, right?? Well, even though rates have not gone up, each of the 4 people I am referring to had their rates increase!!! So they could refi for the same rate as their original loan if their house would appraise, but since it can't appraise now, their payments are incresing. One couple had their rate increase 3 times in the last 18 months for a total of 780.00 in additional payments (1800 + 770 = 2570 and the rate may go up again!!). They are getting ready to walk away because they don't see how they can get out of it anytime soon. BTW... to my knowledge all these folks are still making their payments. So they can afford it now. But if the increases continue as they have, they won't. Remember.... they could refi and get back to their original payment if the house would just appraise. ;-)
My point is that the situation is complex. There were a lot of shady business deals going on. Buyer beware of course, but mortgage people were making a ton of money and ofen they were less than up front with buyers. THIS IS REALLY AN AWEFULL SITUATION FOR ALL INVOLVED.
Last edited by baybook; 06-01-2008 at 09:31 AM..
Reason: grammer
I really do not know whose fault it is. I walk through many foreclosures each week and you can tell that either someone lost a job or they could not afford the place to begin with. I have family members that have been through this from not being able to pay the mortgage after a member of the working party became seriously ill with cancer. They went through there life savings and retirement trying to cling on with hope of staying in the home.
Others as already stated have just walked into a house and signed and drive like it was a car dealership. These people should have been counseled or even told no but with the corporate America types trying to save the bottom line were able to get in.
It is a shame. I think the FHA program is a good one and also glad the government (for once) were able to make changes.
So from 10 years from now will we have learned or will we be back in the same crunch and conversation?
OTOH, yes, people were lied to, and information on applications was fabricated, changed, and outright falsified.
So who do I think is at fault? Everyone who was driven by greed. Anyone who says "I knew my customer couldn't ever afford the $400k home he just bought, but hey, I was going to earn $15,000 on the mortgage and if I didn't write it and push it through the next guy would." The buyer who said "I can't really afford the home now, but I just know I'll be getting raises and bonuses in the future and I'll squeak by." The investment bankers who pushed the lenders into pushing the edge of the lending envelope a little more, more, how about a little further ...
My heart goes out to the buyers who bought homes they could afford, only to find the homes were incredibly over-appraised, and are now upside down on their loans. And they can't sell 'cause no ones buying, and even if they could sell they couldn't even pay off the mortgage. The collusion amongst lenders, brokers, appraisers thing is just another riff to this whole mess.
The ultimate responsibility for a foreclosure is with the homeowner. Although there are some exceptions such as illness or death in the family. Everyone always wants to blame someone else when their poor decisions come back to kick them in the butt! IT WAS THE BANKS FAULT....MY REAL ESTATE AGENTS FAULT......MY MORTGAGE PROFESSIONALS FAULT. All of these people are SALESMAN trying to make a profit. It is up to the consumer to make a fiscally responsible decision.
15 years ago, people were complaining that banks and mortgage companies were not loaning out money to minorities and others with less than perfect credit. Now....they loaned out this money and people have defaulted (DUH!!!) and it's the banks fault because they were predatory. It's ridiculous.
People need to be accountable for their own decisions. There are a lot of things I want and when I go to stores. I am tempted by salespeople all the time ie...We have 0% financing on this nice new 65" plasma TV for the first year. Tempting but you know what....I make the decision that at this time it is not fiscally responsible to get that TV...I'll buy the one I know I can afford. It's the same with a car. I go to purchase a car and the SALESMAN always tries to sell you something on the high end of your budget. It is up to the consumer to say NO!! THIS IS NOT A FISCALLY RESPONSIBLE MOVE!!
When I decided to purchase my first home 1.5 years ago, the mortgage companies were pushing ARMS on me and trying to convince me that I could afford to make payments on a 300K house with an ARM. But after crunching the numbers I chose to buy a much smaller townhouse at approx 160K with a fixed rate that I knew I could afford. A fixed mortgage worked for my parents...my grandparents etc...It's the good old keeping up with the Jones's and people not being able to control their own desires and work within their budget that gets them in trouble.
Everyone can blame everyone else however..the consumer is the one who signs the papers at closing...no one else!!
15 years ago, people were complaining that banks and mortgage companies were not loaning out money to minorities and others with less than perfect credit. Now....they loaned out this money and people have defaulted (DUH!!!) and it's the banks fault because they were predatory.
When I decided to purchase my first home 1.5 years ago....
A question and a comment
1) Are you trying to say that minorities and people with less than perfect credit are the ones having problems now?
2) 1.5 years ago in Charlotte you had the benefit of seeing what was on the horizon. Glad that worked for you.
So from 10 years from now will we have learned or will we be back in the same crunch and conversation?
Not so sure it's going to take 10 years. One of the reasons I have some confusing views on this subject is: After having a house on the market in CLT for one month I get and accept an offer to purchase. (about 6 weeks ago).
Broker says that we can close in 10 days. I'm in shock, but hey, good for me.
We close. Basically no money down. seller's concession. Now when I started in real estate dealing these type of things were done under the table. Checks were exchange before you entered the closing room. But not now. Everything was disclosed (including the fact that this buyer didn't have a potty to wee in)
My point is-I'm not convienced that what we had in the past 5 years or so is completely over. Don't know and want to get educated.
je
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