Another economic domino falls - Bear Stearns

[elucidator]

Hidden within all this tut-tutting at Shayna is an irksome question: if someone as smart as she can be hoist upon such a hook, what happens to all those who are not so clever? Who watches out for them? How many of us are sophisticated in the ins and outs of financial agreements, how many of us know enough to beware of the miracle of compounded interest? Are the dullards amongst us simply the natural prey of the unethical but clever?

I suppose there at least one level playing field if you think you’ve been screwed for $2,000, you can hire a lawyer for $10,000 to recover it. If you aren’t bankrupt, of course. Cold comfort farm.

[Shodan]

[QUOTE=Martin Hyde]
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?
[/QUOTE]

But don’t you understand? He yelled at her over the phone!

Everybody knows that when this happens, it is a sign that this is the best possible deal available, and that the person you are dealing with is guaranteeing that you will never lose money no matter what. I think it says somewhere that you are legally obligated to borrow money from anyone who raises his voice to you.

Come on - that’s just common sense.

Regards,
Shodan

[Martin_Hyde]

[QUOTE=Shodan]
But don’t you understand? He yelled at her over the phone!

Everybody knows that when this happens, it is a sign that this is the best possible deal available, and that the person you are dealing with is guaranteeing that you will never lose money no matter what. I think it says somewhere that you are legally obligated to borrow money from anyone who raises his voice to you.

Come on - that’s just common sense.

Regards,
Shodan
[/QUOTE]

I don’t know any real specifics about her situation. But I imagine it is something like this:

1. She enters into a real estate contract with the seller of the home (or probably a real estate company.)

2. This real estate contract requires her to put $20,000 down as an “earnest money” deposit. This isn’t uncommon, because the house is now “off the market” if her and her husband end up not buying then the seller is out weeks-to-months of time he could have been offering the house to other buyers. A $20,000 deposit would have been somewhat outrageous in the past, but in during the housing boom in areas that were particularly “afflicted” with rapidly rising home prices, it wouldn’t be out of the ordinary.

Either way, Shayna and her husband went into this contract knowing three things about this deposit that:

1. It was nonrefundable
2. They didn’t yet have financing for the home
3. If they didn’t get financing by some date specified in the contract, they could very likely be out their earnest money deposit as they would be in violation of the real estate contract they sold

Now, then the lending company comes into play. They give Shayna terms she isn’t happy with. She either looks for other lenders to get better terms or she signs on with this lender, she signed on with this lender. Come to the closing date on the real estate contract she and her husband signed, and the lending company explains that she owes $7,000 in fees she was unaware of, this leads to two possibilities:

1. These fees were never mentioned anywhere in any of the paperwork she signed with the lender.
2. These fees were somewhere in the paperwork she signed with the lender

If number 1 is the case, then she had legal recourse, if number 2, shame on her. Anyone who has taken out a large loan knows there is paperwork to be signed, this is essentially you promising to pay the loans under X terms, and then further information about what the lender can and cannot do. Lenders can’t just arbitrarily say, “oh yeah, we’re charging you a $7,000 fee.”

There is one more option, and that was she hadn’t actually finalized any of her agreements with the lender until the closing date, and thus hadn’t seen all of the details of the loan until that point.

If that is the case, shame on her. She should have had her financing under wraps long before then and should have known all the details of her financing by then, including the terms, any fees and et cetera. If the lender was dragging its feet, you go to another lender.

[gonzomax]

You guys don’t seem to grasp the significance of a macro over a micro economic problem. When hundreds of thousands of sub prime mortgages were sold it indicates a lack of oversight on the profession. This crisis would not have occurred if the regulation were in place to force better qualifying. Some guy who bought a house is not the problem. It is simply that an unregulated lending system took advantage of the lack of rules to crank out sub primes like an assembly line.
A response that I make a lot of money and got a good mortgage is a silly response. It does not deal with some other people who may not be Renob. There are such people.

[Shayna]

[QUOTE=Martin Hyde]

I don’t know any real specifics about her situation.
[/quote]
And that’s your biggest problem right there.

@Martin Hyde

Either way, Shayna and her husband went into this contract knowing three things about this deposit that:

1. It was nonrefundable
2. They didn’t yet have financing for the home
3. If they didn’t get financing by some date specified in the contract, they could very likely be out their earnest money deposit as they would be in violation of the real estate contract they sold

You’re wrong. We did have financing for our home. At completely different terms than what the lender sprung on us one day before closing, where the final documents were to be signed. That left us with no time to find another lender. Why is this so hard to grasp?

@Martin Hyde

Come to the closing date on the real estate contract she and her husband signed, and the lending company explains that she owes $7,000 in fees she was unaware of, this leads to two possibilities:

1. These fees were never mentioned anywhere in any of the paperwork she signed with the lender.
2. These fees were somewhere in the paperwork she signed with the lender

If number 1 is the case, then she had legal recourse, if number 2, shame on her. Anyone who has taken out a large loan knows there is paperwork to be signed, this is essentially you promising to pay the loans under X terms, and then further information about what the lender can and cannot do. Lenders can’t just arbitrarily say, “oh yeah, we’re charging you a $7,000 fee.”

You don’t read very well, do you? There were no hidden fees anywhere IN our documentation. THAT was the problem. We were given a “Good Faith Estimate of Closing Costs” that was flat out WRONG. The actual closing costs contained a TON more items than what they revealed to us.

@Martin Hyde

There is one more option, and that was she hadn’t actually finalized any of her agreements with the lender until the closing date, and thus hadn’t seen all of the details of the loan until that point.

If that is the case, shame on her. She should have had her financing under wraps long before then and should have known all the details of her financing by then, including the terms, any fees and et cetera. If the lender was dragging its feet, you go to another lender.

Bullshit. As far as we were concerned, everything was finalized except signing on the dotted line at closing. That we ended up settling for shitty terms that were sprung on us the day before is NOT our fault, but that of a greedy, thieving lender who wanted to rip us off. And that he was irresponsible in drafting the “Good Faith Estimate of Closing Costs” is NOT our fault.

The ONLY thing that was our fault was taking the advice of people who supposedly knew what they were talking about (my boss, for one, who has been in the real estate business for DECADES and who told me this kind of shit happens at closings all the time, deal with it), and being too emotionally drained and wrung out to hire an attorney and spend MORE money to sue the thieving bastard when it was done.

And to reiterate one more time; we can not only afford our house payments, but our insurance payments, property tax payments, home improvements, utilities, vehicle insurance, 401k and IRA deposits in excess of the recommended percentage of our incomes, travel to Europe every year, season tickets to two different theaters, groceries, clothing and shoes, and a whole host of other non-necessities.

This is not about not being able to afford to buy a house. This is about being taken advantage of by an unscrupulous lender in the process.

This is my last post on this issue.

[Gaudere]

If number 1 is the case, then she had legal recourse, if number 2, shame on her. Anyone who has taken out a large loan knows there is paperwork to be signed, this is essentially you promising to pay the loans under X terms, and then further information about what the lender can and cannot do. Lenders can’t just arbitrarily say, “oh yeah, we’re charging you a $7,000 fee.”

Well, they kind of can. Their are no penalties for changing things from the good faith estimate; you are legally required to get the final closing costs the day before, but that’s not much time to find a new lender and going through a mortgage app again means adding another month to the close time, which will lose you the house if you contracted to close by a certain date.

See: http://www.bankrate.com/brm/news/mtg/20010607b.asp "Brokers and lenders can tell you anything they want – and even put it in writing – then turn around and say, ‘Oh well, things changed. You owe 9 percent interest instead of 7 percent.’

[…]It’s important to keep in mind that a rate lock agreement does NOT unconditionally guarantee your terms. If you didn’t follow tips one and two, you could end up paying a higher rate or more points than shown on your agreement. The lender or broker would justify the change by saying you overstated your income, your house isn’t worth what you said it was, etc. and would be completely within his bounds because rate lock agreements have fine print caveats in them.

And remember, rate lock agreements, conditional approvals and the like do not guarantee that you’ll receive those terms! If a lender discovers things during the underwriting process that you didn’t mention up front or that weren’t apparent initially, your terms can be changed."

Or: http://www.bankrate.com/brm/news/mtg/20010607a.asp
“Lenders, brokers and banks routinely change loan terms between the time of application and closing. Sometimes they have legitimate reasons for doing so, but often they don’t. […]And while lenders point out that people like Stresser are free to walk away and find new mortgage providers if they don’t like the terms presented to them, the NCLC’s Saunders says that isn’t practical in many cases. Market rates may have risen enough, for instance, that refinancers would have to pay higher rates if they started over at new lenders. And home shoppers can lose the properties they’re trying to buy.”

Basically, if they change the terms at the last minute you can walk away, but that may mean losing the house.

[Voyager]

[QUOTE=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.
[/QUOTE]

A few minor things you are neglecting:
How much would it have cost in legal fees to get the $20,000 back?
How long would the money be tied up before she got it back?

When we lived in Louisiana we sold our house before moving to NJ. The buyer put money in escrow. The first thing we heard when we arrived was that she decided to back out. Now, we could have sued her for performance, (she had signed the contract) but that would have kept the house off the market (with us paying for it) for months or longer. Everyone we talked to said our best course was to just put the house back on the market. Her deposit is still sitting in escrow, as far as I know - there was no way for us to get it.

[Renob]

[QUOTE=gonzomax]
You guys don’t seem to grasp the significance of a macro over a micro economic problem.
[/quote]

And you do? Perhaps one of your famous cites will illustrate our errors.

When hundreds of thousands of sub prime mortgages were sold it indicates a lack of oversight on the profession.

Why? Are most sub-prime mortgage owners in trouble?

According to Wikipedia, 21% of subprime mortgages with ARMs are in foreclosure or borrowers are delinquent in paying them. These types of mortgages (subprime with ARMs) represent fewer than 7% of the mortgage market. Furthermore, sub-prime mortgages does not necessarily mean an ARM.

So, yes, if you have this type of mortgage you are more likely to go into delinquency. But that does not mean that the majority of people who have these mortgages are in delinquency.

This crisis would not have occurred if the regulation were in place to force better qualifying. Some guy who bought a house is not the problem.

Really? According to this economist:

@Tyler Cowen

As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default…

In other words, many of the people now losing their homes committed fraud. And when a mortgage goes into default in its first year, the chance is high that there was fraud in the initial application, especially because unemployment in general has been low during the last two years.

It certainly seems that borrowers share a very large part of the blame for this crisis.

It is simply that an unregulated lending system took advantage of the lack of rules to crank out sub primes like an assembly line.
A response that I make a lot of money and got a good mortgage is a silly response. It does not deal with some other people who may not be Renob. There are such people.

Yes, there are. People who couldn’t afford a home unless they took tricky financing may be suffering the penalties of their foolish decisions. Or they may not. I chose not to go this route. Many other people did, too.

[Voyager]

[QUOTE=Renob]
And you do? Perhaps one of your famous cites will illustrate our errors.
Why? Are most sub-prime mortgage owners in trouble?

[/quote]

Gee, after 9/11 most of the buildings in New York were still standing. I guess we didn’t really have to respond. :rolleyes:

Really? According to this economist:

Originally Posted by Tyler Cowen
As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default…

It certainly seems that borrowers share a very large part of the blame for this crisis.

Wow, a company that sells the service of identifying fraudulent transactions found that there are a lot of fraudulent transactions. What a shock!
And, from your link:

Many of the frauds were simple rather than ingenious. In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers. Too often, mortgage originators and middlemen looked the other way rather than slowing down the process or insisting on adequate documentation of income and assets. As long as housing prices kept rising, it didn’t seem to matter.

Gee, when people don’t check, or ask for documentation, or look the other way, some people wanting houses who can’t afford them lie about it. I wonder if you support citizenship check for jobs with the same level of documentation? We’ve had posts in the past giving stories of lenders who actively discouraged documentation. That’s the borrowers fault also.

Yes, there are. People who couldn’t afford a home unless they took tricky financing may be suffering the penalties of their foolish decisions. Or they may not. I chose not to go this route. Many other people did, too.

The point is, unless you believe in the good fairy and the cabbage patch, it usually makes sense to check people’s credit worthiness before lending them hundreds of thousands of dollars. Do you not lock your house when you leave because if anyone steals from you it is their fault? Would you hire some bum off the street if he claims he has 3 Ph.Ds? Let’s get real here, please.

[Renob]

[QUOTE=Voyager]
Gee, after 9/11 most of the buildings in New York were still standing. I guess we didn’t really have to respond. :rolleyes:
[/quote]

I’m merely asking gonzomax to prove what he is saying.

Gee, when people don’t check, or ask for documentation, or look the other way, some people wanting houses who can’t afford them lie about it. I wonder if you support citizenship check for jobs with the same level of documentation? We’ve had posts in the past giving stories of lenders who actively discouraged documentation. That’s the borrowers fault also.

Of course it is. That is why I have no sympathy for borrowers.

And, incidentally, I don’t support citizenship checks for jobs.

The point is, unless you believe in the good fairy and the cabbage patch, it usually makes sense to check people’s credit worthiness before lending them hundreds of thousands of dollars. Do you not lock your house when you leave because if anyone steals from you it is their fault? Would you hire some bum off the street if he claims he has 3 Ph.Ds? Let’s get real here, please.

Since gonzomax is claiming that it is all the lenders’ fault, I think you have more of an issue with him than with me. I agree that bad borrowers and bad lenders both existed. I think both should suffer the consequences of their actions.

[gonzomax]

Do you have scent of sympathy for Bear Sterns employees.? 18,000 broomed at once. I am sure they all wrote a check for their homes. But their stock which was at 170 a couple months ago was liquidated at 2. Their pensions were slashed. But under those circumstances you would have paid for 5 years of kids college in advance and would have held zero balances on credit cards. I am sure all those people in the financial business did as well. I am sure no foreclosures will result after all they are educated and financially knowledgeable.

[elucidator]

You do realize, don’t you, that the execs may have to sell their summer homes? And run the risk of being cut dead, socially, in the Hamptons?

[Renob]

[QUOTE=gonzomax]
Do you have scent of sympathy for Bear Sterns employees.? 18,000 broomed at once. I am sure they all wrote a check for their homes. But their stock which was at 170 a couple months ago was liquidated at 2. Their pensions were slashed. But under those circumstances you would have paid for 5 years of kids college in advance and would have held zero balances on credit cards. I am sure all those people in the financial business did as well. I am sure no foreclosures will result after all they are educated and financially knowledgeable.
[/QUOTE]

At least they have tent cities they can go live in, right, gonzo?

[Voyager]

[QUOTE=Renob]

Since gonzomax is claiming that it is all the lenders’ fault, I think you have more of an issue with him than with me. I agree that bad borrowers and bad lenders both existed. I think both should suffer the consequences of their actions.
[/QUOTE]

I see him saying that the lenders were the problem, not that all borrowers were sterling pure. In fact he said that all borrowers were not as responsible as you. While it is true that rising house prices probably made some people more desperate, do you really think that there was a sudden spike in dishonest borrowers in the past few years? Or could the problem be the relaxing of lending standards.

People are worried that credit card debt will be the next meltdown. Now I, (and no doubt you) don’t have any credit card debt, and so don’t care. But if the credit card companies knowingly extend credit just up to the ability to pay, and things change, is it really dishonest on the part of the consumer to take it? (Stupid, yes.) My daughter studied this, and says that the credit card companies have complex models of consumer behavior which allows them to raise credit limits right up to the point of affordability. Clearly, the less margin they allow the bigger the loans and the greater the interest. If their models are wrong about the economy, more people will default than expected, they’ll start losing money, and no doubt people will start crying about how dishonest consumers are. But people react in very predictable ways, and if companies who know better set up policies to push themselves and their customers to the brink to increase profits, they have no one to blame but themselves when they go over the brink.
If no one carried debt, the credit card business would go under, or start charging big fees. But, given that people don’t change, a change in results can only be directly due to a change in policy, which is exactly what happened to the mortgage industry.

[gonzomax]

They will be there soon. South Park must have modeled Cartman after you. I got mine screw you guys I am going home.
You are a poor example of humanity. There are several tent cities and homelessness is growing rapidly. Sleep well.

[Gaudere]

You are a poor example of humanity.

[Moderator Hat ON]

Not in GD, gonzomax. If you must, take it to the Pit.
[Moderator Hat OFF]

[Renob]

[QUOTE=Voyager]
I see him saying that the lenders were the problem, not that all borrowers were sterling pure. In fact he said that all borrowers were not as responsible as you.
[/quote]

No, I see him saying:

@gonzomax

Some guy who bought a house is not the problem. It is simply that an unregulated lending system took advantage of the lack of rules to crank out sub primes like an assembly line.

That certainly seems to indicate to me that gonzo puts the blame solely on lenders. His writing is so poor, however, that I often have a difficult time understanding what he is saying, though, so I could be wrong.

While it is true that rising house prices probably made some people more desperate, do you really think that there was a sudden spike in dishonest borrowers in the past few years? Or could the problem be the relaxing of lending standards.

I think it’s a mix of things. There are dishonest borrowers, dishonest lenders, borrowers who took too much money, and lenders who lent these folks too much money.

People are worried that credit card debt will be the next meltdown. Now I, (and no doubt you) don’t have any credit card debt, and so don’t care. But if the credit card companies knowingly extend credit just up to the ability to pay, and things change, is it really dishonest on the part of the consumer to take it? (Stupid, yes.) My daughter studied this, and says that the credit card companies have complex models of consumer behavior which allows them to raise credit limits right up to the point of affordability. Clearly, the less margin they allow the bigger the loans and the greater the interest. If their models are wrong about the economy, more people will default than expected, they’ll start losing money, and no doubt people will start crying about how dishonest consumers are. But people react in very predictable ways, and if companies who know better set up policies to push themselves and their customers to the brink to increase profits, they have no one to blame but themselves when they go over the brink.
If no one carried debt, the credit card business would go under, or start charging big fees. But, given that people don’t change, a change in results can only be directly due to a change in policy, which is exactly what happened to the mortgage industry.

I don’t really disagree with you. But I think the best course of action is to let those who took loans they cannot pay back suffer the consequences of their actions. They are not victims by any means. And if companies are lending money to people who cannot pay them back (and I don’t doubt they are) then they should suffer the consequences of their actions, too. They are not victims, either.

What annoys me is when people try to say that borrowers were blameless or that evil, sneaky companies forced these loans on people or somehow tricked them into taking them. That is not the case. People who are in trouble with their homes made bad decisions. They willingly chose to take these loans. They are responsible for their actions. That does not mean that companies that lent them money are blameless, though. But just because people somehow feel sympathy for people being evicted doesn’t mean we should overlook the steps they took that led them to the cops putting their stuff on the curb.

[Renob]

[QUOTE=gonzomax]
They will be there soon. South Park must have modeled Cartman after you. I got mine screw you guys I am going home.
You are a poor example of humanity. There are several tent cities and homelessness is growing rapidly. Sleep well.
[/QUOTE]

Let’s see a cite not only for the allegation that I’m a “poor example of humanity” but that homelessness is growing rapidly.

Or is this just a manifestation of you being upset that everyone tore apart your unfounded assertion that the housing “crisis” was leading people to live in tent cities?

[Maeglin]

[QUOTE=Voyager]
People are worried that credit card debt will be the next meltdown. Now I, (and no doubt you) don’t have any credit card debt, and so don’t care. But if the credit card companies knowingly extend credit just up to the ability to pay, and things change, is it really dishonest on the part of the consumer to take it? (Stupid, yes.) My daughter studied this, and says that the credit card companies have complex models of consumer behavior which allows them to raise credit limits right up to the point of affordability.
[/quote]

This is true. This happens to be my little corner of the professional world. Keep in mind that different credit card issuers have very different business models. The three basic models are spend-driven, AR (loans)-driven, and fee-driven. What kinds of revenue the issuer is looking to maximize in turn affect these models materially.

The flip side is that credit card companies have models that predict default rates across different card portfolios. These do take into account economic indicators, so we can model the impact of possible future economic decline on default rates and the volume of defaulted balances. This allows us to flex our credit filters to respond as events unfold.

Credit card companies also carry enormous reserves on their balance sheets against loan default. Part of this is due to regulation, and part is due to sensible business practices. My company tossed on another billion dollars in reserves at the end of last year in anticipation of a worsening credit environment.

Clearly, the less margin they allow the bigger the loans and the greater the interest.

All things being equal. Keep in mind that the receivable needs to be funded. Credit card companies have to borrow the cash they lend to people who use the cards. So as the funding environment deteriorates, it becomes very costly to maintain lending balances that are too large. Increased capital requirements kick in. There are a number of moving parts and constraints that need to be understood here. It is not simply a matter of increasing lending balances until everyone explodes, since unlike CDOs, the value of a securitized lending portfolio is very well understood and is based on historically sound metrics.

[Voyager]

[QUOTE=Renob]
No, I see him saying:

That certainly seems to indicate to me that gonzo puts the blame solely on lenders. His writing is so poor, however, that I often have a difficult time understanding what he is saying, though, so I could be wrong.

I think it’s a mix of things. There are dishonest borrowers, dishonest lenders, borrowers who took too much money, and lenders who lent these folks too much money.

[/quote]

The problem, to me, is not the major contributor to the disaster. If some idiot mayor took the cops off the street, leading to a rise in crime, would you consider the problem to be the mayor or the criminals? The criminals were always there - the direct cause of the disaster would be the mayor’s action. Similarly, the direct cause of this disaster is idiocy by the lenders, not a sudden increase in the number of deadbeats.

Now, I’m against giving any breaks to speculators and to people who really defrauded the lenders, as opposed to being encouraged to give false or no information. I think these are a minority, and your cite doesn’t seem to say otherwise.

I don’t really disagree with you. But I think the best course of action is to let those who took loans they cannot pay back suffer the consequences of their actions. They are not victims by any means. And if companies are lending money to people who cannot pay them back (and I don’t doubt they are) then they should suffer the consequences of their actions, too. They are not victims, either.

What annoys me is when people try to say that borrowers were blameless or that evil, sneaky companies forced these loans on people or somehow tricked them into taking them. That is not the case. People who are in trouble with their homes made bad decisions. They willingly chose to take these loans. They are responsible for their actions. That does not mean that companies that lent them money are blameless, though. But just because people somehow feel sympathy for people being evicted doesn’t mean we should overlook the steps they took that led them to the cops putting their stuff on the curb.

No one has ever been tricked into taking a bad loan? Especially those who may not be as swift as you and I? No one ever told them that they shouldn’t worry about the terms because house prices keep going up and interest rates keep going down? The data on loans in minority neighborhoods clearly shows that there is something going on here beyond bad decisions.

Now, beyond finger pointing, I’ve seen two courses of action recommended. One is to get these people (who aren’t behind) into loans preserving their current interest rates - in other words loans at the current market price, not the ripoff balloon interest rate. The second is to have the banks writeoff the difference between the current value and the loaned value, with a new loan that give the bank some of the profit if the house price goes up again before resale. Both of these result in less loss for the banks than foreclosing and reselling at auction. Do you support these, or would you rather have the borrowers on the street and the banks eating the loss just to teach everyone a lesson?