The other side of the mortgage story

It is high time there's some media coverage given to the folks, retirees mostly, who are losing their interest income to support the shiftless who don't/won't read the contract and figure out the math. I haven't seen one single story about the consequences of low interest rates on the thrifty, the folks who lived within their means, didn't flip houses, didn't refinance so they could have the luxuries of life so as to save. America's savers are carrying the freight for the Walkers and the banks. Why no sympathy for them?

IP, I've e-mailed my friend to ask him if he'd like to explain more here. I think what he's getting at, though, is something another friend, one far more familiar with the world of high finance, has been telling me: that banks are badly overstretched, having insufficient capital reserves to cover losses in case of bad loans. World capital is so complex and intricately involved that a serious crisis in one area necessarily affects so many other areas. It's hard to firewall anything off.

My wife and I have sterling credit, and not a lot of debt. Yet I worry about our situation, because of my job. You can't firewall my job off from the rest of the economy either. Few people's jobs can be. We'll be in better shape than most people in case of a severe economic downturn, but ultimately my job is not guaranteed. And if I were out of work, we'd be sunk. Moreover, we live in a part of town that's not too far from the metaphorical Other Side of the Tracks. You see gang tags in this neighborhood. If the economy crashes, crime will go up, and we're right on the border of that.

I think the entitlement criticism doesn't suit the Walkers as much as some other people. The Washington Post has run stories about grocery store cashiers getting $500,000 loans. The Housing Bubble Blog has been posted stories like that every day, several times a day for years. Your friend is right about everything else in his chain, but not necessarily about the Walkers in particular (a 2-to-1 home value to income level isn't too bad, compared to a lot of the country). Still, the zero-percent down thing is what *is* a fair criticism. If people didn't understand that their payments were going to go up significantly, they should never have gotten a loan unless they knew they could cover it. Greed played a role there. And the mortgage lenders shouldn't have lent to people with no savings, no investment, and insufficient income levels.

As someone who sat out the boom in DC ($450,000 thousand foot condos??), I'm looking forward to buying sometime later this year in Dallas (just moved to town this month), with 20% down, and looking well below our means. Still, I'm not too smug about everything. I work in commercial real estate, our deals have slowed way down. I may be a prudent borrower/consumer, but the whole MBS disaster could still affect me (and you, as you said, Rod).

A Doom and Gloom report from your friend! Not sure it'll be QUITE that bad. Look at all the banks that went down in the late 80's, early 90's for making bad loans and we're still here. The internet boom pulled the economy up. The same will probably happen with the new green energy economy. We've got to innovate.

Unfortunately, there's no way around the fact that the Sellers forced to sell quickly, the foreclosures, the higher costs of utilities and taxes will all adversely effect the housing market. That combined with stretched and wary lenders and it is NOT a seller's market. But houses are selling. It'll all work itself out. Don't let fear and worry get you. Evaluate, Pray and then Act. It'll work itself out.

There are layoff-proof jobs out there. But they may not be where your talents lie or what you'd like to do. Good jobs are worth the risk! :)

When I was first out of college we were all out of work or seriously underemployed. But fortunately none of us carried the debt we do now - except the student loans. It's tougher this time with the mortgage and the kids.

Last time around, A good number of us took sail on the entrepreneur-ship. Multiply the number of bosses you have. A few can say goodbye and you're still afloat.

Hey,You're doing that now with this blog,Rod and you're good at it. Expand it! Use your talents for God's glory. And remember who's really at the helm. :)

Pax

Doubled the mantra. Sorry.

It'll work itself out. It'll work itself out. . . .:)

In the interim, isn't there a way for banks to work with people a little bit? Instead of foreclosing, work out a way for people to make payments at their previous interest rate or some percentage of their mortgage payment? Isn't it better for the banks to continue to receive a stream of payments than to foreclose and get nothing? If it's all just smoke an mirrors anyway, maybe we can help some people out and keep them in their houses.

No. The subprime mess and the sexual revolution are just an extension of the triumph of nominalism over Scholasticism. Read yer Weaver. ;-)

Rod's friends comments seem to me to confirm the common axiom about how you know it's a recession or depression:

"If my neighbor is out of work it is a recession and if I'm out of work it's a depression"

Rod's friend is in the financial business so it's currently a recession (since he probably knows people losing their jobs) and he fears that he will lose his job so we are teetering on the edge of a depression.

Since a recession is commonly defined by economists as 2 consecutive quarters of negative GDP growth, we aren't yet in a recession and might not enter one now. I'm betting we're not. Since even 2 consecutive quarters of negative GDP growth (or 4 for that matter) don't define a depression, the fears are, at best, premature.

Industries go through tough times. We lost 40,000 jobs in Silicon Valley during the dot bomb and the economy as a whole faced the prospect of deflation (extra credit if you know how and when helicopter Ben got his nickname). It hurt and there weren't too many raises or bonuses for those (like me fortunately) who remained employed. It didn't however (thanks to good economic stewardship by the fed and Bush administration) produce even a recession although folks I know that had to sell-out and move out of Silicon valley probably feel differently about it.

There is another question raised by all this however. Much of the crunchy agenda entails slowing down economic activity and velocity. All well and good perhaps but in practice it would involve a largely recessionary economy brought on my government regulation. It wouldn't be pretty and it wouldn't be fun let me tell you as someone who came of age in the era of "lowered expectations" of the 1970's (as coined by the Jerry Brown of that era).

Mortgage Guy is right -- a 9% rate then and the inability to refi today does tell us that the couple had weak credit all along. That should have been obvious.

As for how to leave the risk with originators: License all mortgage loan officers, not just the brokers they work for, and police for violations. But more importantly, I think, is for buyers of mortgages to pay originators the way insurance companies pay agents: annual commissions over the life of the loan. For mortgages, I might argue for a 7 year life rather than 30, as 7 years is the average life. And clawbacks for defaults within a year of any step-up in rate.

But it would be better to outlaw, or at least restrict, the magnitude of rate increases. Thus if rate hikes were restricted, the starting rate would be higher (closer to market for that specific risk). And borrowers would be less likely to be unable to make the new payments.

Thanks, Rod, and especially mortgage guy, for your responses.

Oh, please. The whole global financial system is about to come down? Really?

To be sure, some folks are in for a rough ride by I'm not at all sanguine about the prospects for global financial cataclysm. In the first place, these are mortgages we are talking about which means behind each piece of paper is a piece of property somewhere. Now that piece of property may not be worth the remaining principal of the loan but it's also not zero. Also, seeing as how many of the borrowers in this fiasco weren't the most savvy folks ever, many of the loans probably had insurance paid for by the borrower: meaning the lender's loss is covered. Then there's this.

There seems to be a mania, among many of us that prefer the 'small and particular' to the 'large and abstract' to wallow gleefully in bad news so certain are we that it heralds a NEW DAWN of righteous living whether the masses like it or not. That should give us pause. More to the point, we need to develop a coherent philosophy of life that doesn't begin 'when the hammer comes down, you will be one of us.' In other words, how do you sell crunchy conservatism in an up market?

Cheers,

Basil Seal
The Cow and Acres

Sure M_, we could be in a marginal recession which is a normal function of the business cycle. But, given the readily observable state of things, it hardly appears that the world economy is teetering on the brink of collapse. There is simply no evidence to suggest that it is. Just fear and in some instances a desire for destruction.

SVS, I agree.

And disagree. I see three big problems with today's economy, no, four:

1) Human capital is not so bright; families are imploding in the West, and this is obvious to all but the most obtuse. Our sewers right now are running with the blood of millions of aborted children, something that was illegal just a generation or two ago. Feminism and all its ills is a brand new thing and could well have economic consequences once the family decay catches up. Justice does not limp.

2) Division of wealth between high/low IQ is at record levels due to the information age; I'm not sure this sort of thing is sustainable and something could give.

3) Aging populations are something we've never seen yet; there have always been more kids available to do more work each generation. We are entering uncharted territory as the world is slated to drop in population c. 2050. Also, the high IQ set (Europe/Asia) are imploding in population, absolute free-fall, and these people generate the wordwide economic growth.

4) The oil age is peaking; we have not been able to replace reserves since the 90s yet the cost of drilling is up fourfold. We have no low-cost replacement for oil. Lack of cheap energy will slow growth (already is), and energy will get much more expensive in the next decade barring some Black Swan fix like fusion (good luck).

Granted, this isn't the end of the world. Mankind has seen steady economic growth for well over a million years due to new technologies and a growing cranium, and it makes sense that economic growth will continue.

But the downside risk is huge; note our growth history is always written by the winners. Plenty of losers out there. Think about all those folk who lost everything in Germany or Japan in WWII. Keep in mind Russia still aborts more children than they birth, and in America we have expanding prisons and places you don't dare walk unarmed. I think some serious fear is logical simply looking at the data head on.

Please Rod, explain why you feel sorry for these people? Obviously over extended themselves. Are you going to feel sorry for me next month when my rent increases and i'm going to to have to figure out where in my budget that extra money is going to come from? Don't feel sorry for me, my lease (which I actually read) told me this was coming, so I factored all that in when I moved into my place...stupid me for taking responsibility for my own financial decisions.

Entitlement? Perhaps people want too much when it comes to housing--but isn't housing a human right? Not that I accept this as right is popularly understood. But surely if we do not have the means and opportunity to build our own homes, then government needs to make some sort of provision that will enable citizens to have housing. If anything, the root cause i the "market" being regulated poorly, and I don't mean the housing market, but for more basic goods, like land and natural resources, which are common.

PB, the choice here isn't between living on the street and staying in this particular house. Why can't they rent? Why can't they live within their means? Is it the governement's responsibility to make sure they have what they want not just what they need? I live in Manhattan where it would be virtually impossible for me to ever own a home, is that fair? I want to own property, is it my right to be able to own vrs rent??

Rod, maybe i'm too cynical, but I have a hard time feeling sorry for people who make poor decisions then play the victim card.

That said, I think the mortgage industry is full of slimy decietful people who knowingly led ignorant (not meant as a pejorative) home buyers right into the "dream house" they could not afford.

Rod, maybe i'm too cynical, but I have a hard time feeling sorry for people who make poor decisions then play the victim card. That said, I think the mortgage industry is full of slimy decietful people who knowingly led ignorant (not meant as a pejorative) home buyers right into the "dream house" they could not afford.

Katie, the second sentence pretty much indemnifies many of the people you are accusing in your first one. There is no doubt that some buyers were greedy, but many - perhaps most - turned to "advisors" and "experts" who were dishonest. The WSJ recently ran a story about a minister of a church with a heavily immigrant population, who ran a subprime business on the side. Of course his flock believed him when he said it was a safe investment - but he was a crook. See: House of Cards: How the Subprime Mess Hit Poor Immigrant Groups
By JONATHAN KARP and MIRIAM JORDAN, December 6, 2007; Page A1

In my state, MA, the city with the biggest foreclosure problem is Lawrence - also heavily immigrant.

The problem is not that the borrowers are greedy or stupid - if they were, they would have run into financial trouble much earlier. The problem is that they were lied to and exploited.

Hillary

Katie:

PB, the choice here isn't between living on the street and staying in this particular house. Why can't they rent? Why can't they live within their means? Is it the governement's responsibility to make sure they have what they want not just what they need? I live in Manhattan where it would be virtually impossible for me to ever own a home, is that fair? I want to own property, is it my right to be able to own vrs rent??

Just some quick points--

Renting or living within their means--yes, these would be prudent things to do w/i the system. However, just because these are the prudent things to do does not mean that the political-economic structure within which these choices are made are just.

Should a few have so much control over what many consider a fundamental human right? In another day, would loans for buying houses be considered usury?

Not only that, but the more fundamental issue is this: if communities respected the limits of size set by questions of sustainability, perhaps the few wouldn't have as much power. To take as a relevant example--is NYC unsustainable? Should so many people be trying to live there?

The internet boom pulled the economy up. The same will probably happen with the new green energy economy.

I have doubts about the economy being pulled up by the internet boom; rather it was due to real estate: construction of houses and commercial areas to service those houses and the creation of jobs in services involved with both. And this was all sustained by... easy credit.

Sarah is right. $80,000 income for a $172,000 home is well within standard, conventional mortgage standards, and always has been. $172,000 is comparatively cheap, it's below the national median house price, and $80,000 is above the national median household income, so they are better prepared than the average homeowner to handle their debt. The mortgage crisis is about households with $80,000 income in $400,000 homes.

"'Ensure originators retain the risk of every loan they originate.'

This was called the conventional banking system, as set up in the 30s. Securitization and the system of non-bank mortgage originators eliminated it over the last decade or so.

Heh. Headline: "Stupidity rampant in America"

Nonsense. ADULTS read the papers before they sign them; they know how much they will pay or could potentially pay;they know how much they can realistically expect to pay every month; and they don't after so reviewing all those things buy more house than they can afford. You KNOW what you rate is, what your taxes and insurance are, what your monthly payement is. And adjustable means it can rise. It's infuriating for anyone to claim the cloak of victimhood because they didn't take a half hour to figure it out with your home computer and a calculator, or simply read the Truth in Lending statement you sign with your mortgage commitment.

Wow, Bugg, you must never make any bad decisions at all! That's probably because, whenever you used to - or whenever you indulged in whatever suboptimal habits you had (but are now 100% gone) - there was someone around yelling at you to "be more adult!" Because it's such an effective tactic, after all.

Maybe one day you'll have the "opportunity" - perhaps because of economic or political oppression - to have to pick up your life and resettle in a country where the language, culture and mores are all foreign to you. Then you can show everyone what it really means to be an adult and make 100% correct decisions.

One of the main points of Crunchy Con thinking is that our culture acts on us in good and bad ways. Yes, personal responsibility is important, but to ignore the pernicious role of consumerist culture - not to mention corruption - played in the subprime mess is as wrong as ignoring the role of personal responsibility. In other words, there's an entire grey area here that you seem to be overlooking.

btw, just because the situation is "infuriating" does not mean that you're right in your analysis of it. In fact, you're much less likely to be right.

Hillary

adjustable means it can rise.

I once pointed this out to some friends who were buying a house with an ARM. Their response: "Well, we'll sell the house (presumably at a higher price) before the rate increase hits." Luckily they were able to do so, but I can't help but wonder how many others also took this gamble - and lost.

simply read the Truth in Lending statement you sign with your mortgage commitment.

When evaluating credit card solicitations, pretty much the _only_ thing I look at is the "disclosure box".

One can make the argument that improved mortgage disclosures would be helpful; see here, for instance:

volokh.com/posts/1184331779.shtml

how about squeezing in some more basic accouting and economics classes so everyone can understand personal finance?

Agreed. I went to Catholic schools (which, in my area, tended to be better than the public schools), and I was taught almost nothing about personal finance. Everything I learned, I picked up on my own. Fortunately, I bumped into the concept of compound interest before I started using credit cards.

That being said, if someone manages to convince themselves that real housing prices will appreciate indefinitely, even a thorough understanding of personal finance probably won't save them from disaster.

I'd like to ask the commenters here a question.
I also learned nothing about personal finance growing up. Not from my schools, and certainly not from my family. My father, who grew up in terrible poverty (the kind where he did not know if he would have dinner sometimes). His father was a lazy and abusive alcholic. So my father overcompensated by giving us kids whatever we wanted. He didn't mean to, but he taught me how to be an irresponsible spendthrift.
The fact is, I still feel like I'm overcoming a very deep-rooted problem. I am doing my best to get out of credit card debt and stay within a budget. I have a wonderful wife who is much better at this than I am and has been very patient with me.
But when I see financial documents, it just doesn't compute. Although I understand where the commenters are coming from who say that these people shouldn't be treated as victims, the fact is I can relate. I'm not in a desperate situation, but I do know what it's like to sit down with someone and look at a bunch of documents and just draw a blank inside. Yes, you should know how it all works out, you should understand percentages, you should understand the various rates, you should know what you're getting into. But what if you just can't figure stuff like this out?
I'd like to ask the commenters who wrote things like "I had to figure this all out on my own": How exactly did you go about it? Did you just go through a bunch of hard knocks and learn in retrospect? Did you read something, or get some kind of practical mentoring? What do you recommend for someone who is perhaps a "man-child" but doesn't want to be, and who doesn't know where to start in becoming practically responsible?
Just asking...

I'm one of the few with advanced skills in interest, having been required to master much more than simple and compound interest, like annuities, present and future value, and amortization (the fancy word behind mortgages). The simple truth is the vast majority of people just will not understand the math behind mortgages unless one takes the time to draw a picture for them and hold their hands until they get it. That is the flip-side of Katie's excellent answer to seeking advice, but also a mitigating factor: people just don't know what the right questions are to ask, and they often are culturally inhibited from using trial and error (and lots of time) to find them.

I'm not just talking about immigrants, either.

So I'm personally squarely in Hillary R.'s camp on this: making that extra buck facilitates and abets corruption in the home lending industry. I can well imagine the following scenario: bank CEO stands before the board and strongly advises them to stay out of the subprime market, because it is too risky; a week later, he's been fired. Three years later, the board's replacement CEO gets fired for doing what they wanted him to do, try to make more profit. Feh, and I say again, feh.

My personal view is that you shouldn't buy a house unless you can make the mortgage payment on *one* income. Rod, simply by doing this, you are miles ahead financially of many people. There is a fantastic book which confirms this, called "The Two-Income Trap: Why Middle-Class Parents are Going Broke" by bankruptcy expert Elizabeth Warren. It was written before the House Bubble Bomb, but she eerily predicts it in her descriptions of out-of-control American spending.

But the problems of the $80k/yr couple in the $172K house are twofold: first, they got an ARM (and I agree there was probably bad credit history before hand), and second, they probably had no down payment.

The third factor in many of these situations is the mortgage broker. We had never heard of those when we bought our house. They are NOT necessary to obtain a mortgage. Rate information can be obtained from the internet; from phone calls; from the realtor printing out a simple MLS listing (that's how we found our lender.) MBs are not licensed or certified (they should be), and they get kickbacks from "steering" people to certain lenders. If people don't have the smarts or resources to find their own loans - *they shouldn't be buying a house.*

seeking_advice, I'm not being facetious when I recommend the "For Dummies" series of books. They have faintly insulting titles but the ones I've read are written in clear, concise prose, and IMO they communicate very well. Start with "Personal Finance for Dummies" and "Home Buying for Dummies." They are most likely available in your local library (BTW, another very good place to start, for learning about stuff.)

Katie and " ", thanks for the helpful suggestions.