Another economic domino falls - Bear Stearns

[Voyager]

[QUOTE=Renob]
Referrals are good. Shopping around is good. Looking at information online about lenders is good. There are a variety of ways to find a good lender. The vast majority of borrowers do.

[/quote]

In the old days, when I got mortgages, I shopped on price. I did that even when I got ARMs back in the '80s. Countrywide is hardly a fly-by-night mortgage company, but it made bad loans also.

I don’t know what they do in Maryland, but in California title companies do the logistics of a loan. In New Jersey lawyers do it. You’d think there would be less abuse if a lawyer was involved - it would be interesting to see some numbers.

Of course, income disparities aren’t the whole picture in how lenders arrive at the terms of your loan. Your credit history, how you obtain your income, and a variety of other factors

That was taken into account. Here is a cite from the NYT last October.

@NYT

The analysis showed that even when median income levels were comparable, home buyers in minority neighborhoods were more likely to get a loan from a subprime lender.

In Jamaica, Queens, for example, where the majority is black and the median household income was $45,000 in 2005, 46 percent of the mortgages were issued by lenders who specialize in subprime loans, the second highest rate in the city. In Bay Ridge, Brooklyn, which had a median income of $50,000 and is mostly white, the rate was among the lowest in the city, with 3.6 percent of home loans coming from subprime lenders.

Those who have trouble paying on time or who are facing foreclosure are a small, small minority of all mortgages.

Not as small a minority as it was a little while ago. But I guess Bear Stearns went under over nothing. How silly of them.

I’m fine with that. Let’s also stop the spending on Social Security. We can’t really afford that, either.

Social Security is borrowing money? News to me - I thought it was the other way around.

[Voyager]

[QUOTE=Maeglin]

The “market” brought us where we are today. I was responsible: I have a 30 year fixed. But thanks to all of the shenanigans, I am affected by this crisis both personally and professionally. The point is, this is bigger, much bigger than the individuals involved.

As usual, when the money talks, the foresight walks. This is the boom & bust asset valuation cycles that have been the legacy of the “free” market since John Law. Are we no more sophisticated than we were in the seventeenth century?
[/QUOTE]

I’m sorry to hear you are being affected.

I wonder if any of our friends would care to cite a case where someone made a bad loan or made a bad investment with the expectation of being bailed out. What the Fed is doing now is unprecedented - I’d love to hear of someone so prescient that they acted based on this slim possibility. Plus, I’m sure the Bear Stearns managers and workers who have lost millions, plus no doubt many of their jobs, are feeling real good about the “bailout.”

[Ocean_Annie]

[QUOTE=Voyager]
Cite that most economists think that the Bear Stearns deal was a bad thing? I wouldn’t quite call it a bailout. Bear Stearns paid bonuses in stock. A lot of execs have lost hundreds and millions of dollars.

Every cloud does have a silver lining after all.
[/QUOTE]

That it does.

I wrote that most economists, American economists, believe the best solution is not to interfere with the market and allow it to tank/self correct. If my comment implied that most economists consider the quasi-bailout of Bear Sterns a mistake, it isn’t at all what I meant. I understand the move to keep Bear from going completely on the chopping block was the only option to prevent unknown consequences, which actually serves to reinforce the dire situation. The $2.00 a share bargain basement sale was really not so much a bail out but an attempt to prevent a possible catastrophe. Most economists that I listened to and read seem to unanimously agree that it was the responsible option.

[Green_Bay_Guy]

I’m way outta my league here, but I’m sort of with renob on this.

If your about to buy a house and sign your life away for 15+ years, would’nt it be prudent to at least have a lawyer look over the paperwork to cover your ass?

I bought a house 4 years ago on a 30yr fixed at 6%, the broker tried the ARM move on me and I told her to take a hike, lo and behold,“we can do a 30 year fixed”, then I took all papers to a lawyer for 200$ and had them glance it over to make sure their were no hidden anythings.

I find it incomprehensible that if they double your closing costs on the spot (per shayna) that you could be held to that agreement or that they could keep your down payment.
would’nt there be some legal recourse? what of the lauded california consumer protection?

[Cheesesteak]

Bear Stearns wasn’t bailed out, they lost 98% of their value in 2 weeks, a ton of people there will lose their jobs when the buyout is complete, and the executives lost hundreds of millions of dollars in stock and option value. If you’re keen on the idea of a “greedy banker” being punished for bad investments, this is what it looks like.

The bailout is for people who did business with Bear Stearns, and would be in a heap of trouble if things were left alone. Those businesses and people presumably did business with them in good faith, and were not necessarily irresponsible by being involved with them.
With respect to the Shayna situation, this is exactly why lower income and minority neighborhoods got more subprime style loans. These are folks who do not have as many options (or feel they don’t have options) to play hardball with a lender. I never had any intention of getting an ARM, the concept was dismissed immediately when discussing with the broker, and never came up again. If we weren’t fairly well to do white folks who had the easy option of staying in our apartment, if the broker wasn’t with my wife’s union (via the credit union) maybe it doesn’t go down that way.

[Maeglin]

[QUOTE=Voyager]
I’m sorry to hear you are being affected.
[/QUOTE]

Thanks. I am a finance manager in the credit industry, so right now, everyone is hurting. My company stock is in the toilet, our volumes are contracting, and our credit metrics are holding on by the skins of their teeth. I’m just lucky I have a job.

Some of my colleagues next door at Merrill probably won’t within a few months.

[mazinger_z]

[QUOTE=unconventional]

You seem to reflect the common philosophy held by most American economists – shake it out and weather the storm. A significant problem facing this economic downturn is that actions generally used to stimulate the economy and head off a recession (e.g., tax cuts, lower interest rates, and deficit spending) are a matter of policy in this administration.
Wall Street doesn’t seem to learn from mistakes. The dot-com bubble was quickly followed by the housing bubble, and there are numerous examples of corporate fraud: cooked books and cheating.

[/QUOTE]
The tax cuts, lower interest rates and deficit spending are the playbook options to stimulate the economy. You can argue against using such tools, but hundreds of years of combined economic theory across the globe will tell you that these are the most efficient (and measurable) options to use. Anything more specific or more targeted either neglects other aspects of the economy or (at best) is too political to use effectively, and in all cases, ends up hurting the economy more in the long run (sooner than later).

There will always be greed (corporate or otherwise). There will always be hedging and there will always be betting (futures, options, margin calls, etc.). The market will bear and internalize its own risk. Once we start monkeying around with risk allocation, inefficiencies and failures will happen more often than otherwise. If investors were all risk averse, or perfectly conscious and prescient of risk involved, we would all be investing in bonds (which would even further slow the economy).

Because of this, we will always have bubbles, and it won’t be the result of nefarious or malicious actions like cooked books and cheating. Bubbles happen because of speculation. Speculation only stops when the bubble bursts, and price and value ratios become normalized. This will never stop happening. See the article on Tulip Mania for both an insight to crazy speculation and the results of government intervention (see the Dissent part, which I didn’t know existed until now.)

As for Shayna’s experience, I e-mailed one of my friends who is a wholesale mortgage broker who does loans in the LA market. The first and foremost test for a buyer to personally qualify his mortgage is to determine if he can pay the fully amortized 30-year mortgage and the stated interest rate (any financial calculator on the web would crunch those numbers). If the answer is “no,” then these funky arms and option only loans become the only option (and a lawyer is a good resource to analyze those contracts). Yes, there are thieving bastards who will convince the buyer that that is the only game in town. As my friend stated, most of these people are minorities or somewhat FOB-ish lenders who prey on their own ethnicities. In her experience, the Polish/Eastern Europeans were the worst, followed closely by the Chinese, and then the Latinos rounding out the top 3.

[MichaelQReilly]

[QUOTE=Eyer8]
My wife and I bought a house a couple of years ago (right at market peak, worst luck) and we actually had to threaten the mortgage broker that we were going to walk if we did not get us a fixed rate. Even though both of us have credit scores 760+, had >30% to put down, and had good jobs, he kept insisting that we couldn’t be approved for a fixed rate, 30 year mortgage. A 3/5/7 arm would be no problem however. It made no sense to to us so we told our realtor and the mortgage broker (who were friends BTW - also jerks in retrospect) that we were happy with our current house as we did not want to take the risks associated with an arm in the current economy. Lo and behold, a miracle happened: we did get approved for the 30 fixed and with a good interest rate to boot. I’ve never seen anything like it. I came away with the sense that the mortgage broker (and the real estate agent, and the inspector, and the apraisor) were all ethically challenged and had honed the system to a fine cutting edge desinged to bleed the most money out of the system as possible. Bunch of crooks if you ask me.

I do love our new house however, even though we would probably lose ~100k if we tried to sell today. We didn’t buy the house to make money on it; I plan on raising my children in this neighborhood and that was the reason for buying…
[/QUOTE]

I had a very similar experience in spring of 06. I was putting 20% down and had good credit. My only potential problem was that I was only a year out of college, but I was in a teaching job at almost 50k in addition to still working at a restaurant I had been at for five years where i made another 20k a year. Somehow, the first mortgage broker my real estate agent put me with could not find me a fixed rate mortgage. Luckily, the guy spooked me so much that I bitched to my real estate agent and we moved to a different broker. She turned out to be spectacularly good. Interestingly, I remember her at my closing railing against the shady, immoral stuff that was going on in the lending industry at the time.

[Flipshod]

I don’t think it’s a matter of regulation or non-regulation. The accounting standards are out there to cause companies to state the value of their assets correctly. They just screwed up and over-valued their assets–that’s the fault of their accounting department and their outside auditors. They thought they could get high returns for low risk.

Hopefully, at least, the upper managers in the secondary market who set policy for evaluating the value/risk of these loans all get fired. Their bad decisions screwed up the whole country, and they merely walk away, well-paid to boot.

[RickJay]

What the hell are “points”?

[Maeglin]

[QUOTE=RickJay]
What the hell are “points”?
[/QUOTE]

Points.

[RickJay]

[QUOTE=Maeglin]
Points.
[/QUOTE]

What a monstrous scam job THAT is. “We’re charging you some money for borrowing money. Oh, it’s not interest, we just want some free money. You want our best rate? Give us more money. No, it doesn’t go towards your down payment, it’s just for us to buy more corporate jets.”

[Maeglin]

[QUOTE=RickJay]
What a monstrous scam job THAT is. “We’re charging you some money for borrowing money. Oh, it’s not interest, we just want some free money. You want our best rate? Give us more money. No, it doesn’t go towards your down payment, it’s just for us to buy more corporate jets.”
[/QUOTE]

Yup. I’ve had two mortgages in my short life, neither of which had any execrable points.

“But they’re tax deductible,” the broker replies, “it’s just prepaid interest.”

In my crazy little world, I prepay principal, not interest. And any lender that tries to charge me an origination fee can eat a bag of dicks.

[John_Mace]

[QUOTE=RickJay]
What a monstrous scam job THAT is. “We’re charging you some money for borrowing money. Oh, it’s not interest, we just want some free money. You want our best rate? Give us more money. No, it doesn’t go towards your down payment, it’s just for us to buy more corporate jets.”
[/QUOTE]

Just to be clear, this is nothing new. I paid points back in 1984 when I bought my first house.

@Flipshod

I don't think it's a matter of regulation or non-regulation. The accounting standards are out there to cause companies to state the value of their assets correctly. They just screwed up and over-valued their assets--that's the fault of their accounting department and their outside auditors. They thought they could get high returns for low risk.

I think you’re mostly right there. I haven’t seen any evidence that there was some loosening of regulation standards that led to this crisis-- more a function of very slimy accounting practices. Bundling these mortgage backed securities and misrepresenting the level of risk attached to them.

Hopefully, at least, the upper managers in the secondary market who set policy for evaluating the value/risk of these loans all get fired. Their bad decisions screwed up the whole country, and they merely walk away, well-paid to boot.

Not sure if these guys set policy, but the folks over at Bear Stearns were certainly big players in the secondary market, and they are getting theirs.

[elucidator]

[QUOTE=Monty Python]
…unimaginative, timid, lacking in initiative, spineless, easily dominated, no sense of humour, tedious company and irrepressibly drab and awful. And whereas in most professions these would be considerable drawbacks, in [the mortgage industry] they are a positive boon…
[/QUOTE]

They wanted to be lion tamers. Not be stuck in some low risk, reliable return backwater, but playing with the Big Boys, shuffling huge amounts of money about and having a bit stick to their fingers.

[Maeglin]

[QUOTE=John Mace]
I think you’re mostly right there. I haven’t seen any evidence that there was some loosening of regulation standards that led to this crisis-- more a function of very slimy accounting practices. Bundling these mortgage backed securities and misrepresenting the level of risk attached to them.

[/QUOTE]

This definitely is not a regulatory issue. No one wanted to do any digging because, as usual, involved players wanted the gravy train ride to last forever. What they didn’t know was that Casey Jones was driving the train.

[RickJay]

[QUOTE=John Mace]
Just to be clear, this is nothing new. I paid points back in 1984 when I bought my first house.
[/QUOTE]

Oh, I knew that; I’d heard of the term before but never really knew what it was. I don’t think we have “points” in Canada.

[Martin_Hyde]

[QUOTE=Shayna]
Poppycock. I’m sick of hearing people say it’s my fault that with a credit score of 720 when we took out our original mortgage loan, and 785 when we refinanced, that it’s our fault that none of the lenders would offer us better terms. We had to buy the house with an interest-only first and adjustable rate second, and the best we were offered was a 7 year fixed when we refinanced. And that was at a terrible rate.

It’s not my fault that these thieves couldn’t care less whether or not I could pay the loan back, all they wanted was their ungodly interest, points and fees. Oh, and to turn around and sell my loan to another bank in a few months. See they weren’t concerned about repayment when they wrote the crapass loans, since they weren’t going to keep them anyway!
[/QUOTE]

I must be missing the part where the bank held a gun to your head and forced you to live beyond your means.

I’m not saying the banks aren’t at all responsible–they have made bad decisions and many of them should be allowed to go bankrupt. But people who willfully decided to take out loans they couldn’t afford were just as stupid as the banks that offered the loans in the first place.

It’s lose-lose for both parties when there’s a loan that can’t be repaid.

[Martin_Hyde]

[QUOTE=Shayna]
What I paid for my house is really none of your business. Our income is well into 6 figures annually. We have no debt other than the house. Both of our vehicles are (and were at the time) paid off in full. We don’t carry any credit card debt. And we’d been house hunting for a year and a half and we wanted the damn house, which is all the reason we need.

A house was for sale, we wanted it, we could afford it (hell, we have enough savings that I could quit working for nearly 4 years and still make every house payment, every property tax payment, every insurance payment, buy gas and groceries, go out to dinner from time to time, buy new clothes periodically, pay all the utilities, and so on). Why shouldn’t we buy the house just because the greedyass thieves in the mortgage business were writing shitty loans?
[/QUOTE]

Then what are you complaining about? If you can afford the loan payments, you have nothing to complain about. If you didn’t like the terms, you shouldn’t have taken out the loan.

What do you want, the government to come in and negotiate a better rate for you with a private party?

[Martin_Hyde]

It’s also worth noting for Shayna’s benefit that it is very unlikely she had no recourse but to lose $20,000 in her situation.

When you took out the loan I’m all but certain you signed yourself into a contractual agreement. Either that contract allowed for all those fees that you never saw coming–in which case you were just not diligent, or it didn’t–in which case you had legal recourse and could have gotten your deposit back and then some.