Here is one:
Re “Credit Time Bomb Ticked, but Few Heard” (front page, Aug. 19):
We in the United States, at the middle-class level, are conditioned to live beyond our means.
“We have a great economy” ”” the slogan of any administration of any stripe ”” is based on our entrenched credit living.
Just wait a few years, and we’ll see how the debt we’ve incurred for the war in Iraq ”” which has filled the pockets of the few ”” will blow up in the face of our self-proclaimed prosperous economy and devastate the backbone of this nation.
Brahama D. Sharma
Pismo Beach, Calif., Aug. 19, 2007
Update:: More from the London Times here, including:
Yes, the bank that for years let me pay even less than the minimum amount of interest due on my mortgage (a phenomenon known darkly as “negative amortisation”) had reached what even amateur economists might have considered the bloody inevitable: it had ran out of money. Or, to use the correct euphemism, it had been forced to “supplement its funding liquidity position” with a $11.5 billion (£5.75 billion) mortgage of its very own.
I mention all this not only because it’s incredible for how long this Ponzi scheme was allowed to continue, but also because it advances the theory that the LA housing boom of the past five years has been primarily responsible for the global financial apocalypse.
Take Countrywide. There is really only one thing anyone has ever needed to know about Countrywide: that it is based in LA suburb of Calabasas, a mountain paradise so absurdly rich, so helplessly adrift in an ocean of other people’s cash, that its population of 23,000 is able to sustain its very own Ferrari dealership.
And we’re not talking about any old Ferrari dealership. We’re talking a massive glass-walled emporium, visible from the freeway, visible probably from near-Earth orbit, stacked wall to wall with the $1,000,000 playthings of Countrywide mortgage salesmen. It was once said that if you went into Calabasas at night, and sat very still for a while, you could actually hear the laughter of the negative-amortisation specialists bouncing off the gated marble driveways.
Isn’t that second quote from _The Times of London_, not of LA? The URL goes to the UK, certainly.
Peace,
–Peter
This credit crunch has been fueled by greed on all sides. Greed on the side of the people who bought homes beyond their means and on the side of mortgage lenders who did not do their duty to help people find homes within their means with credit that they could afford. Bubbles like this break hard and cause hardships that affect all of us.
YBIC,
Phil Snyder
You guys realize that “sub-prime” lending is what allows poor people to obtain financing to obtain a home, right? We’re about to head back to the bad old days when home-ownership is an unattainable goal for all but the most fortunate. That said, I have zero sympathy for anyone who gets in trouble with an adjustable rate, or flexible payment, mortgage scheme. If you can’t afford your house on a straight 30 year amortization, get a cheaper house!
You weren’t “tricked” into that 3 year ARM or the negative-amortization payment scheme. Rather you were greedy and short-sighted. As a result you’re going to have to pay the price for your mistake. Just try not to do it again…
And another thing – home equity is not a piggy bank. I was watching one of those “how much is my house worth” shows over the weekend. The premise was an appraiser would tell you the true value of your home so you could refinance and take money out to make improvements. Of course, the couple in Hawaii we thrilled at the appraisal. “We’re getting new jetskis!!!” they exclaimed. Here’s a hint for financial well-being – don’t spend your “home equity” on new jetskies, travel, etc…
Too late. It is exactly that kind of spending that has kept this economy limping along. And now that the bill is due, watch out.
Maybe, Mike, but given how strong the economy is generally, I doubt the housing “bubble” will have as strong of an impact as people are predicting. At the end of the day, a house is a real asset, as opposed to shares in the tech bubble companies that evaporated into smoke in the tech bubble bust…
The foreclosure numbers aren’t really that bad and housing values won’t nosedive except for maybe the ridiculous areas of Florida and southern california. For most people it will simply mean a levelling off on home value and a buyer’s market generally…
Cabbages,
There is a problem in that dealing in mortgages, there is an uneven distribution of power and knowledge. In such situations, it is the moral duty of the “stronger” party (in this case, the mortgage bankers) to not prey upon the weaker party (the home owners or home buyers). Far too often it has been the case that “customers” are encouraged by the bankers to take on more debt than is safe for them and to do so in ways that are far too dangerous – such as adjustable rate mortgages and home equity loans for things like vacations or consumer goods – not just home improvement or other “good” debt. (I submit that the concept of “good” debt is outmoded and needs to be seriously looked at).
True, the sub-prime market does allow many people who wouldn’t be able to afford a home to purchase one, but the lenders have gone way over the line in encouraging too much debt structured too badly. Almost by definition, the sub-prime market is composed of people who are not financially fluent.
YBIC,
Phil Snyder
Phil, those are all good points. I’ve actually dealt with a case of predatory lendng in a pro bono case I took on – non-english speaking single mother with an under the table income of about $1200/month or less (it varied) with a $100k mortgage on a home appraised at $80k. She thought she could afford it because the broker sold her on the “flexible” payment plan (i.e. monthly payments of a couple of hundred dollars – much less than the carrying costs). Basically every month the principal was growing by a few hundred dollars. Of course she didn’t even understand the “concept” of interest. Saddest part was when she asked how to get her $10k down payment back. Hard to explain negative equity to someone who doesn’t understand interest…
My point above wasn’t that there is no such thing as predatory lending, but that as far as the financial markets and large, mainstream lenders are concerned the problem isn’t with the extreme bottom end of the spectrum, but with the middle class people foolishly buying into homes at 5 or 6 times their annual salary.
Cabbages, something I don’t understand… How does a mortgage company make profit on a $100k loan on an $80K house by letting the principle grow? To my peanut brain it looks like the Company is getting farther in the hole. No?
In faith, Dave
Viva Texas
The media has completely missed the most egregious feature of the neg am ARMs. The effective interest rate on the deferred interest can exceed 200%. Yes, 200%! But that is well-hidden. Even the govt disclosures do not explain that to borrowers.
But Countrywide is only the second-worst offender; the king of the neg ams is Washington Mutual. Not only would it allow 80% neg am 1sts; incredibly it would do 2ds to 100% of the value. Then when the borrower made minimum payments on the 1st, the total of both loans would rise to over 100% of the value. Couple that with slipping values, and you have today’s perfect storm. And we have not even talked about subprime loans.
The most extreme example I have seen involved a client with four rental properties, all with neg am 1sts. Three of them had 2ds, as well. Adding the interest-only payment (not the neg am minimum payment), taxes, and insurance and subtracting the rents resulted in an annual negative cost of $140,000! The final straw was that values had dipped to the point that the client had no net equity. However, the law may permit the client the small satisfaction of walking away from the properties and dumping the loss on the lender.
dpierce, that’s a good question. Any bankers have any insight? I guess that the more the principal grows the more interest the bank gets. Though that assumes that they will get paid at some point in the future, doesn’t it? When she bought the house (with a down payment scraped together by a large extended family) it had an appraisal equal to what she paid. Whether the original appraisal was accurate or not, I don’t know, but I doubt it. I think it was appraised at the level it needed to be to get the deal closed and the loan financed. The reappraisal came when she attempted to refinance her loan.
I think that there is enough blame for all parties involved: 1) the mortgage leanders for offering a product whose intention is to take advantage of their clients; 2) the homeowner for not researching the product well enough and/or living beyond their means; and 3) mortgage broker who actively sells this product without informing the homeowner of the risks. The one thing that stands out to me is that 2 of the parties have some financial risk involved in the transaction. The other, the mortgage broker, has long since received his/her commission when loan is in default.