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These are my questions about subprime mortgages — 28 Comments

  1. I know one thing: it wasn’t caused by people that bought what they could afford. Yet it is us that will foot the bill. It’s no wonder we’re angry.

    Even if the ‘taxpayer’ does recoup the ‘investment’ or even make a profit, where does that money go? Back to the suckers that pay taxes, in portions commensurate to what they pay? Uh, how about ‘no.’ Not a chance of that, ever.

    I’m screwed no matter how this turns out, while the dumbasses that got us into this mess, including the Barney Franks and Chris Dodds, walk away scott free.

    Again, is it any surprise that we’re completely fed up with being America’s mules?

  2. I recall in the Wall St. Journal about six months ago, an article stated about 20% of the subprime loans were for second homes. (I wish I could be more specific about the reference.) Clearly, a good number of people were speculating and/or buying more than they could afford.

  3. Neo, these are all questions that I’ve been asking and do not know where to get definitive answers.

    Here are some guesses from what I’ve been reading. There are 170 million homes in the U.S. 43% of them are owned outright, so 57% have mortgages. That is 90 million morrtgages. Those who qualify for sub prime loans (low income, minorities, etc.) represent about 60 million people. If 20% (probably a high figure) actually received mortgages, that would be 12 million sub prime mortgages. I saw some figures for California that stated 17% of sub primes were in default. That means 2.1 million sub prime mortgages are in default. There are probably another 1 million Alt-A mortgages in default. This gives us a total of 3.1 million of the sub prime/Alt-A mortgages that are in default. Prime mortgage default rates in California were running at 2.8% of mortgages outstanding giving us 1.96 mortgages in default. This gives us roughly 5 million mortgages or 5.5% of all mortgages that are in default. Since WWII the max default rate in real estate downturns was something on the order of 3.8%. These are, of course, guesses, because I have not seen any up to date figures for the entire nation. There may be a place where they are available, but I haven’t found it.

    Assuming my guesses are somewhat correct, we see that the default rate is larger than in the past, but is it unmanageable? My guess is that it would be quite manageable if the economy does not get significantly worse. However, and this is what has people scared – if we have a severe recession or, God forbid, a depression, the default rate can go much higher. Then it becomes as a snowball rolling downhill gaining size and speed with each passing day.

    If all these mortgages were not rolled up into these MBSs each lender could deal with the workouts of the defaults in a rational and measured way. Even then some injections of liquidity by the Fed might be needed, but the problem would be known and contained. But since themortgages are bundled into MBSs, it injects uncertainty into the process, which in turn creates fear and loss of confidence. More than anything else this situation is a crisis of confidence.

    Hogarth,
    Tell me how you personally are going to pay for the so called “bailout.” The effects you may feel: Higher taxes – maybe. Lower taxes – maybe. Easier to borrow money – definitely. Lower interest rates – definitely. More jobs – definitely. Continued growth of the economy – definitely. As opposed to the alternative – deep recession/depression – I think it is a winner and the long term effects will be good for “mainstreet.”

  4. If I find the info I’ll pass it on but I’m not sure that defaults are the ‘actual’ cause of this problem.

    It is my understanding that these mortgages are rolled together and traded in markets. Because of the perception that people are not paying, their value has plunged. So, they are currently trading for less than they are really worth.

    So a lot of this crisis is not really a real crisis. It is an accounting rule / valuation problem. Which is why the government may make money on buying up this debt…

  5. Higher taxes – a certainty. I’m in the group that already foots 40+% of the total

    Lower taxes – You make me laugh.

    Easier to borrow money – Couldn’t care less. I live within my means. No credit card debt whatsoever, paid cash for my last car.

    Lower interest rates – That’s just swell. My parents and in-laws live on interest rates; I never pay them.

    More jobs – Got one already, thanks.

    Continued growth of the economy – Remains to be seen.

    As opposed to the alternative – deep recession/depression. Or so they would have you believe. It’s not like “threats” have ever been inflated by a gov’t that wants more control over our lives or anything, now is it?

  6. Which is why the government may make money on buying up this debt…

    Which would be just swell if they later remitted back to those paying the money into the system in the first place, proportionate to how much they paid in. But just as with the economic stimulus package, the dollars went as tax rebates to people that paid little or no tax.

    It’s easy to gamble with someone else’s money, isn’t it.

  7. Neo

    My questions exactly! Why is no one providing these data?

    Even in default, the bank is not out the entire mortgage, because it gets the house. So the loss is only the difference between the amount the bank loaned and the adjusted price of the home once the bank gets it back.

    According to the report linked below CRA loans were LESS likely to be foreclosed upon that other loans, and more likely to be retained by the lending bank (as opposed to being sold into securities).

    http://www.traigerlaw.com/publications/traiger_hinckley_llp_cra_foreclosure_study_1-7-08.pdf

  8. Hogarth says:

    “But just as with the economic stimulus package, the dollars went as tax rebates to people that paid little or no tax.”

    This is the income redistributing welfare state that Democrats and socialists (but I repeat myself) want to construct. And yes, I know the stimulus rebates came from a Republican (RINO)administration.

    Regarding the $700B “bailout,” I saw a statistic noting that it represented about 5% of all outstanding mortgages; I haven’t been able to confirm that, however.

    In terms of the govt making a profit on this; that would be great. However, it profited from the Chrysler rescue and also, I understand, from the S & L rescue. Don’t recall the taxpayer or the nat’l debt EVER benefiting from either of those.

  9. Hogarth Says:

    “Which would be just swell if they later remitted back to those paying the money into the system in the first place, proportionate to how much they paid in.”

    Well, the half full side is that the 700 billion for the action may not really cost 700b. Could be a fraction or it could be nothing (re: profit).

  10. I read a commentary a few weeks ago that indicated the bad loans were 2-3% of all mortgages. So it’s not that many. Unfortunately, the raw number still ends up being large. 3% of x million is still a lot.

    I believe than a LOT of the bad loans were from people by big expensive homes far beyond their means, counting on appreciation to make it come out even. THOSE people and banks should NOT be bailed out.

  11. You are leaving out the flippers. Take a look at some of the houses at:

    http://www.burbed.com/
    http://www.socalbubble.com/
    http://thehousingbubbleblog.com/index.html
    (and of course the now departed http://iamfacingforeclosure.com/ )

    We are not dealing with people who bought homes with the idea of living in them. We are dealing with a very large group of people who thought they could buy a place with no money down, live in it a couple of years and then sell out for big bucks. On the other side, we have the whole mortgage industry using compounding interest to make it impossible to ever really pay off the mortgage. In the 50s, they used to have mortgage burning parties when they paid the house off. It’s just impossible now. I am opposed to bailing out the banks and the speculators. We did not get any of the upside, so let them deal with the downside.

  12. This all started in 1977 with Jimmy Carter’s Community Reinvestment Act. The purpose of the CRA was to provide credit, including home ownership opportunities to underserved populations and commercial loans to small businesses; the flood gates were opened for less secure loans.

  13. I don’t have any big-picture information, but my law job gives me a microcosmic view of the sub-prime crisis from within. Part of my job involves examining the paperwork in mortgage foreclosure actions, and I’ve noticed a few things.

    First, many of the mortgages being foreclosed upon are for amounts greater than the average house prices in the area. (That leaves out any down payment, of course — the paperwork I see does not indicate what was actually paid for the house, just what was borrowed on it.) But if the loans, alone, are for more than most houses cost around here, then I don’t think that the houses being foreclosed on are at the bottom of the market. Also, many of the loans are reaching foreclosure in the first year or two of the mortgage, suggesting that the buyers never had the ability to make those monthly payments in the first place, even before the interest rate hikes kicked in. Finally, when the foreclosures are filed, most of the buyers are just walking away. Where I work, it’s quite rare to see a contested foreclosure action –almost all of them are defaults. All of that suggests to me that many of the loans are for high-end houses that the buyers couldn’t afford and never should have tried to acquire in the first place.

    Finally, a quick reply to kamper — even though the banks get the houses after foreclosure, that’s not necessarily much of a comfort, because they can’t sell them all again. There are too many for the market to bear. You can drive around this area and spot the foreclosed houses by their unmowed lawns and empty windows. Many aren’t even for sale — the banks aren’t trying because they know they won’t sell for what the bank has into them. Some of the houses will end up in government hands. I read the tax foreclosure list for a nearby county recently. Probably a third of the houses on the list were owned by mortgage banks — in other words, the bank foreclosed on the house, didn’t pay the taxes, and now the county’s foreclosing on the bank!

  14. I don’t think anyone in the media or government answers Neo’s questions because they are too busy pointing fingers or covering their rears. They are not interested in facts. They are interested for the most part in blame. A few want to solve the problem, but they are swimming against the tide.

    As someone said, the big problem is the bundling of mortgages. No one knows what any bundle is worth at the moment.

    Conversely, I doubt that anyone knows who actually owns many of the houses in foreclosure. The current owner of the mortgage has little or no idea of what particular properties are involved.

    My current mortgage was obtained from a very reputable company with whom I have done business for over 50 years. We have developed very strong mutual trust. The mortgage was sold. I do business now with a mortgage “service” company. I have no idea who they are. They don’t know a thing about me other than what is contained in a credit report. That is where we are today.

  15. These questions are too important to go unanswered before action is taken. Trying to force a “solution” before the election – let alone the weekend – is very suspicious.

    If those of us who went without by not consuming on credit get shafted into paying to preserve the profligacy of others, then a great injustice and crime will have been committed.

    Can anyone suggest a line of work that gets paid in cash? I’ll be happy to declare that portion of my income that will yield a tax payment I think is reasonable.

  16. Michelle Malkin has an article on her website right now that points to many illegal aliens getting home loans. Gringo papers not required! Here in my town I have seen advertized in the local paper twice this year loans for startup businesses that were advertized as being available to Hispanics only. Makes me want to scream!

  17. PS to my comment and some others regarding resale of houses. The situation today is not all that unique.

    Many years ago I worked with many pilots who had come to the lower 48 from Alaska when their airline went broke. At the time the market in Alaska was so bad that people would go into a lending institution and throw the keys to their house/condo on the desk, then go down the street and buy another forecloseure at a very attractive price. The market was saturated.

    What goes around. . .

  18. Hogarth says,
    “Higher taxes – a certainty. I’m in the group that already foots 40+% of the total (I’m in that group too, but I know that if the credit markets freeze up, many people will lose jobs and tax receipts will fall. No one will be better off under those circumstances.)

    Lower taxes – You make me laugh. (If this reliquification plan works, there could be room to reduce some tax rates.)

    Easier to borrow money – Couldn’t care less. I live within my means. No credit card debt whatsoever, paid cash for my last car. (You represent about 10% of the population and are to be commended for your finacial responsibility. However, most businesses need to borrow money on a continuing basis to keep operating. They provide the jobs that keep this country going. Marathon Oil is building a 3.2 billion addition to its refinery in Louisiana. They could not build that with cash on hand. Do you believe it is a good thing to borrow money to fill a need? If the credit markets seize up, even companies like Marathon Oil will find it hard to borrow money.)

    Lower interest rates – That’s just swell. My parents and in-laws live on interest rates; I never pay them.
    (Congratulations! Again you represent a very small part of the population. There is nothing wrong wiith using credit responsibly and most people are responsible or the financial industry would not be able to stay in business.)

    More jobs – Got one already, thanks. (If the credit markets seize up and businesses can’t borrow money to keep operating, many jobs will be lost. Maybe you work for a company that needs to borrow money. If it doesn’t it is a very unusual company.)

    Continued growth of the economy – Remains to be seen. (Without credit new businesses cannot get up and running. Old businesses cannot expand. This is all about injecting liquidity into the credit markets so business can continue to operate normally.)

    As opposed to the alternative – deep recession/depression. Or so they would have you believe. It’s not like “threats” have ever been inflated by a gov’t that wants more control over our lives or anything, now is it?” (Do you know anything about the financial system? You may think Paulson, Bernancke , etc are feeding you a line, but I have money in blue chip debt instruments that have declined by as much as 50%. This is not “normal.” Why are people selling investment grade bonds and preferred stocks? Because of the fear engendered by the MBSs’ uncertainty. People are running irrationally from all debt. That means they are afraid to loan money to the most creditworthy businesses in the world. I say world because this is a global situation. There is something like 1.85 trillion dollars in the U.S. sitting in money market funds, which are relatively safe, but pay very little. The Treasury just had to extend deposit insurance to the money markets to stop a run on them. Why would people take their money out of money market funds? Irrational fear! In 1929 the depression could have been avoided if the Fed had loosened up on money and lowered interest rates. They didn’t do it because of ideology. Even today there are ideologues arguing against doing something to avert this crisis. There are many ways to solve the problem, none very elegant or without objection. But something has to be done. I grew up during the depression. I would prefer not to go through that experience again in the twilight of my life.)

  19. The very idea behind derivatives was to make impossible robust risk estimation, so no one of these question can be answered.

  20. This Humpty Dumpty sitting on the Wall Street is broken, and all the King’s men can not put it together.

  21. I’ve always felt that the last of the 7 letters to the 7 churches in the beginning of Revelation depicted the condition of Christian countries right before the rest of the events in Revelation.

    Rev 3:14 “To the angel of the church in Laodicea write the following:

    “This is the solemn pronouncement of the Amen, the faithful and true witness, the originator of God’s creation: ‘I know your deeds, that you are neither cold nor hot. I wish you were either cold or hot!

    So because you are lukewarm, and neither hot nor cold, I am going to vomit you out of my mouth!

    Because you say, “I am rich and have acquired great wealth, and need nothing,” but do not realize that you are wretched, pitiful, poor, blind, and naked, take my advice and buy gold from me refined by fire so you can become rich! Buy from me white clothing so you can be clothed and your shameful nakedness will not be exposed, and buy eye salve to put on your eyes so you can see!

    All those I love, I rebuke and discipline. So be earnest and repent! Listen! I am standing at the door and knocking! If anyone hears my voice and opens the door I will come into his home and share a meal with him, and he with me. I will grant the one who conquers permission to sit with me on my throne, just as I too conquered and sat down with my Father on his throne. The one who has an ear had better hear what the Spirit says to the churches.’”

  22. Conversely, I doubt that anyone knows who actually owns many of the houses in foreclosure. The current owner of the mortgage has little or no idea of what particular properties are involved.

    Oldflyer, that’s a very good point. We see mortgage actions with “lost note” affidavits, which say, essentially, I can’t find that note and mortgage, in fact I’m not sure I ever had it, but I think it belongs to me, so please take my word for it and let me foreclose it. And recently we saw a bank tell its lawyers to foreclose on a place but then assign it in a bundle to somebody else, mid-action, without ever telling the lawyers — it wasn’t discovered until the attorneys tried to do the foreclosure sale and discovered that the place already belonged to somebody else. It’s all wildly irresponsible and depressing.

  23. You represent about 10% of the population

    Oh, I recognize that. I’m taking a purely personal view of this, but in my defense I am part of the demographic that routinely foots the bill for gov’t screw-ups and providing financial support for an ever-growing rancorous and unappreciative entitlement class.

    The whole “we’re all in it together” story is warm beer to me. Why is it that if we’re all in it together, only a few of us pay? And I don’t want to hear that “fair share” crap. I pay the cost of a brand new Corvette every year in Federal taxes alone. What’s fair about that? Everyone should be contributing in some way, even if it is going out and picking up trash on the side of the highway in exchange for your gov’t handout.

    Don’t get me wrong, though. I am fully in favor of some for of progressive taxation, and I am fully in favor of a societal economic safety net provided for through taxation. But we have crossed a line from safety net to income redistribution with no requirement for something, anything in exchange. We are clearly not all in it together when only one side is rowing.

    My judgment of whether or not we are truly in a crisis that requires a poorly thought out rush to a huge financial risk will be based on how much extraneous crap gets thrown in my opportunistic lawmakers. Harry Reid has already tried, but I expected nothing more from him. And rumors of 20% going to the radical, election-fraud hothouse of ACORN? Please. This doesn’t look like crisis management to me, this looks like a corrupt government’s opportunity of a lifetime to screw us yet again. And ask us to smile and be thankful while they’re doing it.

  24. The market value of the individual mortgage, or the bundle of mortgages, depends on the presumption that x percentage will perform as specified.
    Once that presumption is damaged, the price drops.
    If an institution is holding a bunch of this stuff and calling it assets, valued at current prices, and then the current market price drops by, say, half, the actual value which they can use as collateral, show-off money to prove they’re strong, or to sell to raise cash just dropped in half.
    IOW, the value of stuff like this depends on the future being like the past.
    Part of the S&L fiasco was a change in the way junk bonds could be valued. S&Ls, which did not intend to sell them on the market but hold until maturity, had valued them at current value of a future payment. Once the junk bond market sank–partly out of panic–and the regs changed to insist that the S&L value the bonds at market prices, the S&Ls got instantly and artificiallypoor. You could argue that the previous method of valuing bonds made them artificially rich. In either case, value was in the eye of the beholder, and some beholders had the right to arbitrarily change the value. Leaving the institutions in a deep pile.
    I know some folks who put substantial down payments on houses four or five years ago and now have zero equity. But, as long as they want to live there instead of move, or use it as an ATM, and as long as they have their jobs, they’re okay.

  25. Pingback:MzEllen & Co. » Blog Archive » lunes linkage - 9/29/2008

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