Yet Another Should-Have-Been-Obvious Effect Of The Subprime Lending Fiasco

Credit counselors are bracing for the continuing fallout from the expected 1-3 million foreclosures during 2007.

“Oh Lord, there is no way we can keep up with these calls,” said Kaye Britton, a foreclosure counselor at the downtown nonprofit group that promotes home ownership to minority Americans, among others.

Really, the heart of the problem, as some have pointed out in the comments, is that banks should have known better. But the market was hot, they got carried away, and borrowers just followed the advice of their mortgage brokers. Things steamrolled, and here we are. The subprime lending fiasco is costing everyone money except the mortgage brokers who originally wrote the loans so they could walk away with a quick broker fee. What isn’t quite clear is why the banks haven’t sued the brokerage firms who knew exactly what they were doing when they engineered this mess by “helping” borrowers into loans they couldn’t afford by misstating incomes and fudging numbers. SAM GLOVER

(Photo: klannert)

Comments

Edit Your Comment

  1. ColdNorth says:

    Methinks it’s going to be the next hot cottage / boiler room industry: For-fee credit “counseling” services. With all these people who walked the primrose path to untenable VRM’s, what is to stop them from the “quick fix” of a “credit counseler” who will make all their problems go away… at least for a year or so.

    We ain’t seen nothin’ yet.

  2. grkgus says:

    Makes it easier to buy houses for profit in 6 years.

    Its just how it works. The economy cannot grow without falling.

  3. HawkWolf says:

    Man, this whole thing makes me just want to skip buying a house ever. Sure, it builds ‘equity’, unless I buy a house for 500k and then it drops to 100k and I need to move to another state, then I just lost 400k in equity… (well, it’s more complicated than that)…. nevermind that if my furnace blows up, there goes 11k for a new furnace or however much they cost..nevermind I’d have to pay someone to mow the yard, fix the roof, blah blah blah.

  4. Pelagius says:

    The subprime lending fiasco is costing everyone money except the mortgage brokers who originally wrote the loans so they could walk away with a quick broker fee.

    And the people who ignored the hype, put their money into other investments, and waited. It’s about time – I was about to punch the next over-leveraged idiot who told me I was “flushing my money down the toilet” by renting.

  5. zentec says:

    Already some in the government, Christopher Dodd being one of them, are calling for a bail-out.

    One one hand, I feel sorry for the people who were duped by fast-talking mortgage “experts” who only were after the commission on writing the loan and then spun it onto the market. Many of these borrowers had no idea what they were getting into and the only loan qualifications were the ability to hold a pen long enough to make a mark.

    Conversely, I’m going to be seriously annoyed if the government bails out people who took on all this risk for starter-castles only to be able to keep their homes. I’m all for it if there’s some sort of relief to help them avoid foreclosure or refinance to something more sane than these adjustable rate reverse amortizing mortgages, but if you can’t afford your home that means you can’t afford it. Get some boxes, pack up your stuff and find something affordable.

    I guess the question on assistance is whether or not the borrower was duped or just gamed the system in order to finance a lifestyle that they could not afford. In either case, a bailout just perpetuates a continuing problem in this country of people simply living beyond their means and the consequences are dumped on people who save for a nice down-payment, have clean credit and live within their means.

  6. kimdog says:

    I knew things were crazy when houses in my parent’s rural TN town were going for $300-400k. Seriously, there’s very little industry there, most of the big employers have left over the last two decades. And clearly many people were buying houses they couldn’t afford. I’m personally looking forward to picking up something cheap now that the bubble has burst.

  7. Lewis says:

    “What isn’t quite clear is why the banks haven’t sued the brokerage firms … fudging numbers.”

    If indeed number fudging happened, then yes you have a point.

    If, on the other hand, folks on both sides of the table just went with emotion instead of common sense, then caveat emptor (to the borrow) and caveat vendor (to the bank…)

    We bought our place in mid 2005, at what now appears to be the height of the bubble (at least in DC). But we were intelligent enough to avoid a ARM and chose a 30 year fixed from *our bank* – no brokers, no shopping, etc.

    We had to subsequently move and rent the place out (for a loss), and as much as that sucks, I can’t even imagine the nightmare of opening one’s mortgage bill every month and have it be a surprise.

  8. mikesfree says:

    @HawkWolf:

    The funny thing is you are already paying for all that when you rent.

    I think now or soon might be a good time to buy some rental property. I sold my rentals at top of the market and cant wait to get back in at a low cost. The thing is a lot of these people who bought are more naturally geared to renting. The dont tend to save, but can deal with a steady payment that doesnt change much. Owners can usually deal with the fluctuations of costs (New applicances, furnaces) because its built into the rent and a little of it is (should be) getting squirreled away for when it is needed.

  9. kimdog says:

    @zentec: They’ve refused to bail out all the Katrina folks who were left with uninhabitable houses not covered by flood insurance, but still owe mortage. I’ll be pissed if they jump into this situation.

  10. pinkbunnyslippers says:

    Can I ask why nobody bothers to take into consideration the lendEEs here? I’m hearing all this talk about “predatory lending” which is all fine and good but what about the people who were just plain stupid and bought a house they couldn’t afford?

    It doesn’t take much math to realize that if you make $2000 a month of net income, than buying a home with a $1700/month mortgage isn’t smart?

    I agree – banks and mortgage brokers got carried away, but really…at the end of the day, nobody was twisting your arm to get into a loan that was clearly too much for you to handle. So now someone like me who just bought a house and doesn’t have her rates locked in just yet is going to be stuck paying for the idiots that wanted to move fast on something that deep down they KNEW they couldn’t afford.

    I’m done ranting.

  11. I may be crazy, but in Detroit houses are going for less than cars. Something tells me that while Detroit is a hellhole now, a major metropolitan city, with infrastructure and access to a large quantity of fresh water isn’t going away any time soon. It’s just about time to buy as far as I’m concerned.

    I wonder how many wannabe “flippers” have lost their shirts in the last few months? I too get hell from homebuying friends. Who don’t understand that a fixed rate mortgage for less than 75% of the value of the house is a much better deal than their no money down, PMIed to death, adjustable rate mortgage, even if it means I rent for a year or two.

  12. Falconfire says:

    @Electoral College Dropout: No its just Detroit. Around the rest of the country I still would wait a half year or so.

    originally my fiancee and I where going to get a apartment, but with the crashing house market (and our combined 70k salaries) I think we can actually afford buying a house now.

  13. Falconfire says:

    Also the big issue is the adjustable rate mortgage. You can get a no money down fixed rate thats fine, thats what we are doing and the payments are looking to be around 1100-1500 easily manageable for our salary.

    Adjustable rates are evil simply because they are designed to be cheaper up from and insane on the back end, its just like the whole balloon payment shit with cars which is why good car dealers tell their customers to steer clear of them.

  14. humphrmi says:

    subprime lending fiasco is costing everyone money except the mortgage brokers …

    Um, not everyone. I was a subprime borrower when I bought my first house in ’01. Two refi’s later, I’m at >40% equity (I started with 10%) and 2 years into my 5.25% fixed, 20 year mortgage (I started at 7.75% fixed 30 year). Each refi, I’ve thrown more equity into the loan (e.g. payed it down more each time). Today, I face almost no financial impact from this. My house value has dropped far less in the last six months than it gained over the last six years. Even if it fell below my loan amount (which is highly unlikely) it doesn’t matter because I, oddly enough, bought a house that I want to live in until I retire (20+ years from now). My monthly payments are lower today than when I bought the house. The P&I portion of my paymentwill never go up.


    The only financial fallout I’ve seen is that my Legg Mason Value Trust investment has dropped because of their investment in New Century. But even that has not cost me anything, and I’m sure by the time I retire that fund will have recovered from this, as will my home value. And the loan will long since have been paid off by then.

  15. mad_oak says:

    Ladies and Gentlemen. The banks… the lenders don’t care. They had no incentive to lend responsibly. They had gutted the bankruptcy code and investors were willing to buy the loans they wrote. Greed across the moneyed elite drove this. The insatiable appetite to buy endless mortgage backed securities at rediculously low rates (go thank the Fed). So… who to blame? Well, we have this government agencies (boo, big government) who are actually supposed to regulate the banks and lenders. But naw, why bother? Those nice banks and lenders are contributing millions to our reelection campaigns.

  16. Prince of Zemunda says:

    I agree with most of you that nobody twisted anyone’s arm. I am from Charleston, SC where there is little major businesses yet most houses are around the 200k range which is very high for the southeast (especially SC which is rated near the bottom in business development, education, etc.) Yet my parents 20 year old house that they bought for 83k is now valued at 230k. My wife worked as a florist in college and other floral designers who’s husband’s did not have great jobs were buying 250k houses. Instead of realizing they couldn’t afford it they got interest only and ARM loans and now they are stuck in a mess. People knew exactly what they were getting into, they just wanted more then they could afford. I mean the name of the loans are self explanatory and tell you exactly what you are getting into.

  17. formergr says:

    I went for a 5-ARM because I knew I’d be moving out of the city within 5 years or less, so I didn’t need to worry about what would happen once the fixed rate went adjustable. I put down the full 20% so I wouldn’t have to pay the outrageous PMI, and am most likely going to move in the next year (which will make 3 years in the place).

    Yeah, I probably won’t make much of a profit from the sale, but I lived in a really nice place that I enjoyed and wasn’t throwing away money at rent during that time. Realizing this isn’t possible or ideal scenario for plenty of other people, but in this case it’s worked out for me.

  18. paco says:

    The ARM idea seems great if you’re in a position like me–single dad, rebuilding life and credit, decent job, want to get into owning rather than renting, not much spare cash for a downpayment. Seems great, that is, until you look at what the frenzy has done to the market, driving up prices until the houses in my neighborhood are impossibly overpriced. Now, the owners who want to sell are maxed out on the assessed value rather than the real value of their properties, so they’re asking more than a buyer like me can reasonably afford. In retrospect, I’d rather bide my time for six months or so until I see what’s happening with the market, and hope that I can get into a decent place with a fixed rate to start.

  19. Starfury says:

    I bought my house in 1994 for 195k. Now it’s worth about 650k. When I bought my wife and I saved every penny we could plus I cashed in part of my 401k to put 20% down. We got a 30 yr fixed loan and didn’t even look at any of the adustable loans. Re-financed once to take money out for a kitchen remodel and got 1.5% lower fixed rate. With prices the way they are here (SF Bay Area) I can’t afford to move and don’t plan to. I don’t feel bad for the people that got in over their heads, they should have been able to do simple math and compare their income to what they need to pay each month.

    I wonder if my kids will be able to afford a house when they’re grown here or if they’ll end up moving away.

  20. Samby says:

    Not everyone who got caught in this mess was just being irresponsible. I have a friend who lives in LA, and houses there cost a fortune. They were renting for many years, but it had gotten to the point that they couldn’t keep living in the type of area where the rentals were with small children. They bought a *tiny* house for a lot of money because they felt they didn’t have any other options, and the lenders convinced them that one of these pay less than the interest 30 year loans would be okay for them. They weren’t entirely convinced, and were very worried about such a step, but they didn’t know what else to do.

    (moving to another area was not possible because of their jobs.)

    point being- they weren’t trying to be irresponsible, they felt stuck and were led to believe that this would be okay, don’t worry, this is LA, housing prices only rise, it’ll be fine, etc.

  21. skittlbrau says:

    I hate how most people overlook the legal disclosures on mortgage applications with stated income subprime loans. Those legal riders say that the undersigned (ie, the borrower) is representing that the information is true and factual.

    People who “fudged” their income on these documents committed a felony by lying. People should read contracts thoroughly before signing them. If a broker says its ok, and the document you are signing clearly says it is not, don’t do it!

  22. I am neither an economist, nor an entrepreneur, but it seems to me that there’s a niche here that could be filled at a profit: buy up “distressed” mortgages that haven’t yet gone into foreclosure, and restructure them to lower the monthly payments, extending the length of the mortgage, among other things.

    The bank avoids the legal hassle of foreclosure proceedings, and probably gets more money than they would from an auction, the owners get to keep their house, somebody gets a monthly income from the payments.

    Am I missing something here?

  23. Sam Glover says:

    @Eric J with Club Sauce: There are a few different ways that investors do such things. However, not all of them are legal. Buying the house, fixing it up, and selling it is fine. However, when you try to “keep the homeowner in their house,” or similar things, you run into a host of legal problems because so many use this to take further advantage of homeowners in trouble.

    Something that often gets overlooked is that, at least up front, an ARM looks like something that the borrower can afford. The broker just downplays the potential for getting screwed on high payments once the adjustable rate kicks in.

    So the “dumb borrowers” are often just unsophisticated and don’t understand what will happen to them in 1, 3, or 5 years. Many (certainly not all) who end up misstating income should be at least partially forgiven for following their mortgage broker’s advice in doing so.

  24. brattpowered says:

    @zentec: This is America– the government will bail out the banks, not the homeowners!

  25. Chris says:

    Sue, sue, sue. I’m a laywer (not lending or real estate), but also a homeowner. Has anybody ever weighed the disclosures, acknowledgements, and whatnot that you sign when you take out a loan or buy a home? This stuff is all regulated up the yazoo – if people don’t want to read (or really, don’t want to believe) the “fine print,” what can you do?

    This “predatory” meme is nonsense. It’s not like lenders are going into people’s apartments, twisting their arms, and forcing them to take out high-risk loans. Unless there’s fraud on one side or the other, everybody should live with the deals they’ve made.

  26. This is the same crap they pulled in the 80′s. They gave loans to just about everybody, knowing full well that many of the apps were full of crap. They just crossed their fingers and approved the loans, then cried foul when the defaults started rolling in.

  27. IC18 says:

    @ starfury, you bought your wife? For how much, where are they selling wives! …..just kidding.

  28. thrillhouse says:

    Yep, this behavior is not new. This is just another example of how out of control the lending industry is in America. The reason why we have a story here is because this misbehavior by lenders is being exacerbated by a deflating housing bubble.

    Unfortunately, the side effect is record numbers of foreclosures by people who either thought they were ‘savvy’, or took all of their advice from their lender. Just another part of the sad state our financial affairs in this country.

  29. Trai_Dep says:

    The first (and second, and third, and…) person of authority that suggests we bail out any of the banks that gleefully chased their fees, knowing full well they were nuking the US housing market longer term, should have his right arm cut off.

    He mentions it again, then he loses his penis.

    For once, make these jerks pay for their own mistakes.

  30. mac-phisto says:

    @Exasperatrix: the big difference is they gutted the bankruptcy laws this time, so when they sell your home at auction for less than value + the $20,000 in foreclosure fees they add, you still get to pay the difference!

  31. mac-phisto says:

    @trai_dep: let me go sharpen my knife……

  32. BartClan says:

    I can’t see the banks suing the brokers. Banks take your loan application and send it to underwriters who are supposed to be able to crunch the numbers and say “yea or nay” to the loan. Sounds to me like the underwriters screwed up and their employers are taking the fall.

    It makes sense to find a reliable broker/lender combination. And definitely go for the fixed rate loan–ARMS are just scary!

  33. lusis says:

    While I’m unable to find any older articles (thanks to this news story), I seem to remember that the lenders were being criticized for NOT lending to enough people a few years ago.

    Here’s the thing. These people were subprime to begin with. I would argue that the risk the companies took in lending to these people was enough to justify the rates they were charging.

    Nothing forced these people to buy homes. Renting is a perfectly valid alternative.

    I know this opinion won’t be popular but it’s still a valid argument.

  34. lusis says:

    @Chris: I’m with you on this. My wife and I just bought our home 3 years ago.

    Before we even started we picked up two Elise Glink books on homebuying. We were informed.

    These types of transactions are a two way street. The consumer has the obiligation to be informed just as much as the lender has legal obligations on disclosure.

  35. Anonymously says:

    Since I never even considered an adjustable-rate mortgage, I’m shocked to see that so many people did. The entire benefit of the “interest rates are at historic lows!” thing is a fixed-rate loan!

    Btw, don’t forget the Title Insurance companies. They’ve made a fortune off of the refi. boom

  36. scodav says:

    I passed up ARM’s as well — it seemed too insecure and scary a road for the short-term benefits involved. If the brokers lied, then rack ‘em up, but if buyers went for a deal that seemed too good to be true…

  37. Sudonum says:

    @kimdog:
    They haven’t “refused to bail them out”. Au contrair, the federal government has allocated about $8 billion, with a “B”, for Louisiana homeowners with damage who DID NOT have insurance, whether it be flood or wind. Up to $150,000 per homeowner. It’s administered by the state and is called “The Road Home”. It is sucking wind big time. The Gov hired an outside contractor to administer it so that there would be no “improprieties”. Well the grants as they are called are taking forever to get. It’s one of the reasons that Blanco decided not to run for re-election.

  38. Jason-Ryan-Isaksen says:

    The problem is that the mortgage industry isn’t run with the same comission structure as the merchant account business. When you sign someone up for a merchant account for example, the place gets basis points (percentage points of the credit card swipe rate) and these are paid as long as they keep the merhcant account so it’s ongoing.

    With a mortgage, they get comission upfront, not a percentage over time as long as the mortgage is active, which is the way it should be. This would encourage responsible lending, not just financing anyone who can pay the first couple of months but can’t really afford that much.

    This would really close the door on predatory lending, or overlending to increase that hit and run comission. Don’t you think a lender or broker would really only want you in a mortgage that you could afford, rather than the fattest loan they can get you because their comission is up front?

    This would really work for the lending companies so that the brokers have an interest in long term payments, and I’m sure would eliminate a lot of these defaults if they knew if someone couldn’t last at their income level, they would bail or be foreclosed on in 3 years. Even if a broker left a company, they would still get the residual payments, so over time they would make more, which would reduce turnover as well.

    Jason Ryan Isaksen