Monday, September 22, 2008

someone explain this to me

For two years, Amanda and I have been trying to buy a house. We saved our money. We hung up the phone on the predatory lender who asked Amanda if someone at work could fraudulently sign something claiming that she made twice her actual salary. We did budgets. We worked with a financial advisor. We worked with a mortgage broker and three real estate agents.

We were careful. Slow. Deliberate.

Where did that get us? Nowhere. No house.

Now the financial markets are tanking and taxpayers are going to be made to pick up the tab.

Rather than living in our own cautiously bought home, Amanda and I are going to be made to help foot the bill for all of the a-holes who were stupid, careless, greedy, etc. And we still don't have a house of our own.

What is the impact on taxpayers going to be? How is it going to affect me and my wife? Why do the careful and intelligent have to fix things for the stupid and reckless?


EmoRiot said...

Personally as I've been watching this all unfold I've oscillated between resentment of the people who ruined the system and the system that ruined them and itself.

But by an large, as much as I want to fault every borrower out there... it's not even close to mostly their fault. It's the fault of the guy who called you to conspire in fraud. It's the fault of every scheister who downplayed or talked circles around teaser rates. It's the fault of the companies that sliced and diced sub-prime mortgages and repackaged them as micro-particles of larger financial instruments and derivatives. It's the fault of Senator Phil Gram, et al, who past the deregulation acts of the late 90s that allowed investment banks to dabble in mortgages and mortgage brokers to masquerade as investment banks.

It's a completely toxic stew of unfettered greed and at the very bottom of the pyramid are millions of Americans who were sold the American dream, sold the idea that they qualified for a mortgage, sold the ludicrous notion that housing is an investment that won't ever go down, and hurried through the most legally sensitive process of their lives with as much care as you put into signing up for your gym membership.

In difficult times I myself have to resist the temptation to turn on the other pawns in the game.

Because as much as I sometimes have the instinct to fault them as unintelligent a-holes, you and I both considered buying houses in the past 2 years. Sometimes we came closer than just considering. And were it not for other factors that stopped us unrelated to being approved for certain levels of financing, we'd both be upside in mortgages right now. Pair that with a sudden change to the financial picture - unemployment or illness for example - we'd be doing what millions of American's are doing right now... dropping the keys in the mailbox and abandoning their house and their credit rating.

I'm going to keep my anger focused on the corporate swines who are riding safely to the bottom in their golden parachutes. And on the treasury secretary who honestly suggested another blank check piece of legislation this weekend which specifically asked for, or rather demanded, no oversight and no review by any government or legal body for his ensuing giveaway.

Bug said...

I agree with you, and yet ...

The predatory lender who called us and asked us to fraudulently state our income did so not on a whim, but because it was a tactic which had worked time and time before.

Hanging up the phone on those kinds of scams should have been unanimous, should have been the norm, and should have been unquestionable. But it wasn't.

Blame is shared. There's no escaping that.

Russ said...

Yeah, I work doing collections calling for Sears credit cards, and I get a lot of the same stories regarding this issue. It is partly companies enabling consumers to take out bad loans, but I often feel like asking the people I talk to why, if they can't make monthly payments, they decided to drive up an $8000 line of credit. My venerable employers love throwing the phrase "shared responsibility" around.

rooni said...

Blame is definitely shared. Sure, we would morally say that the lender shouldn't have offered me that type of financing. He shouldn't have treated me like I was an idiot when I told him that his idea sounded ridiculous. Some people might say that it should've been illegal for him to do so.

However, I chose to say "No thank you, that's ridiculous," at least a month or two before all hell broke loose with the mortgage market. I had never even heard of a "Stated Income" loan, and yet I thought, "Gee, this whole thing doesn't sound right." And when that sleaze bucket treated me like I didn't have a brain in my head, I thought, "This guy doesn't seem to understand that I have a brain in my head."

I think People have a general lack of confidence in their own ability to figure out how to manage their money, assets, identity, etc. That's our responsibility. This is a Capitalist society, and it's our job to do some homework. If we don't, and we choose to ask our government to take better and better care of us, we're asking for Socialism. When we get to that point, it'll be hard to turn back and re-introduce Capitalism. We should think hard about what we blame on the lack of regulation.

Do I think something needs to be done to save our financial system? Yes, because although I'm not the one who made the mistakes, I stand to suffer consequences related to many mistakes that other folks have made, at all levels of society. The so-called "bail-out" should be designed as a relatively cheap fix for what could be an all-consuming global financial catastrophy. Our government should ultimately protect us from catastrophy, using public funds. And do I think that a publicly-funded bail-out should be subject to oversight? Yes.

Also, when you say "And were it not for other factors that stopped us unrelated to being approved for certain levels of financing, we'd both be upside in mortgages right now," I don't necessarily agree. I don't think that ALL home purchases, aided by mortgage programs, have gone bad. Not everyone is losing money. Not all people are upside-down in their mortgages. You have to be smart about what you buy. You have to think about why you buy, and you have to consider your own personal situation. No one should buy just to buy, and that is what a lot of people did. A home is your investment in shelter and security for your family. That's not a decision to make lightly.

Last but not least, regarding "a sudden change to the financial picture - unemployment or illness for example" -- these are issues that have plagued homeowners for ages and ages. There are other non-governmental Capitalist answers for these issues, including family and community support, and let's not forget Insurance. When you make a large investment, your thoughts should focus on how you will plan to protect that investment. There are homeowners' insurance policies in the case of natural disaster, life insurance policies to take care of the other half of your expenses if a spouse should pass, long-term disability insurance, and health insurance. Though the last one is linked to many home ownership losses, it should be discussed as a separate issue.

phobucket said...

I agree that there were poor decisions and shared reponsibility on bothe the supply and demand side. I'll shed some light on why you keep hearing that banks don't trust each other.

First: Bad loans / Stated income etx.
Stated income loans are a valuable tool for people who own their own business and may not have pay stubs to show their income, and of course have a lot of tax write-offs so you can't use the tax return income either. This is a small (and shrinking?) portion of the population. These loans are supposed to pass a plausibility test by the underwriter. e.g, I'm a software consultant making $80K per year = plausible, vs I'm a janitor making $125K per year = not plausible. The point behind underwriting is to make sure that the bank does not give loans that are going to default. That's all well and good when the bank is holding or "portfolioing" the loan. But if the Bank A, who provides the loan, sells their loans to Bank B, then Bank A is no longer as concerned about loan default. On top of that, Public Bank A only reason for existence is to maximize shareholder value, which is done by increasing the stock price, which is done by showing that you are funding loans by the billions. So in this situation, top line revenue is very important, loan default rate is not as important. If the underwriter is holding up the works by underwriting "too conservatively", then have the underwriters report to the sales team. Approve that loan or I'll make your life a living hell. Did I mentioned that until the very last days, sales reps were bonused based on "loans funded", not "loans funded that did not default with x months"?

Second: 100% financing

As home prices increased at a much greater rate than per capita income, it became harder and harder for people to afford home payments and down payments. After the burst of the dotcome bubble, low-interest rates made it easier to afford payments on higher value homes. So now the buyer can afford a payment on a higher value home, but 20% of $400K (home price in 2005) is a whole lot more than 20% of $200K (same home price in 2000). This presented a problem for an economy built on home sales.

80/20 to the rescue! Tell you what, since your credit score is good, and your stated income is high enough, we'll give you a second loan for 20% to cover the cost of your downpayment. Just come up with closing costs and fees and you're in. Now now bank want's to have a loan out for 100% of the value of the home, but that's why there are 2 loans. The banks would then sell the 20% loan to another bank to distribute the risk.

Now here's is where the banks got really dirty: Although the bank had sold the partial loan your loan as an investment, if that investment fell through, it was the homeowner who was on the hook to the 2nd lien holder, not the 1st lien holder. So Bank A would take your home for 80% of value, and resell for 85-90% of value and make a tidy little profit. Remember, they already collected cold hard cash on the 20% they sold to Bank B, now they are making extra profit on top of that.

So why are banks in trouble if they were making all that profit? Well, as bad as bank A sounds, Bank B was doing the same thing to Bank C. Once Bank B figured out what was going on they stopped buying 2nd liens and bundled loans from Bank A, and Bank C stopped buying from Bank B etc. etc. etc. All of a sudden, the banks had to portfolio bad loans that they though they could sell off to other investors, and no one else would lend them money to stay afloat becuase, well, they were crooks, and it was obvous that they had a bunch of crappy loans.

Now everything the banks did here was legal, even if it was dastardly. I didn't even begin to touch on the fraud being committed by borrowers and brokers, and the willigness to overlook that fraud as long as the money kept rolling in.

My home foreclosed in part because I made poor choices, and in part because the company servicing the loan was a crook. I bought a house that I could afford, but when I moved at the wrong time. (e.g. Just as the market started to tank in TX). I held the rent and my mortgage for 6 months as I tried to negotiate with my kender so that they would accept the offer that was 95% of the loan value. The lender told me 2 things: 1) They would not consider reviewing my loan until I was at least 60 days late. 2) Why would they take this deal from me and have to pay the 2nd lien holder when they could take the home from me in a foreclosure for 80% of the value, and then resell the home at 95% and make a handsome profit. In fact, they sold my home to the buyer I had a signed sales contract from. Still, I made the poor choice of moving before my home sold in that home until it either did or did not sell. But don't worry, you're not paying for my loan. That company went bankrupt shortly after they sold my home and I paid the 2nd lien holder off earlier this year.