Lots of people buy a car without consulting Consumer Reports. I don’t like it, but that’s the way of the world.
I suspect that due diligence on real estate transactions is conducted by a small (not tiny) share of all real estate buyers, alas. If this weren’t the case, a lot of the bizarre property codacils would be carefully reviewed by a lawyer (you did hire a lawyer, right?) and simply disappear.
Bond rating agencies give the very best debt a AAA score: this indicates a very safe investment. There are precious few AAA companies, simply because access to slightly cheaper credit isn’t worth keeping your books water-tight.
Adams Square Funding secured some AAA debt, which was backed by mortgages. Or at least it was AAA debt earlier this year: Today it is worth nothing. Really: "…no proceeds will be available for distribution to the class A, B, C, D, or E notes. " [A notes were AAA. They were “Senior Notes”. But there were also “Super-Senior” notes, which will receive partial payments.] Some set of poor saps --pension funds, mutual funds, local municipalities-- owns this paper, for which they maybe received 1/2 of one percent above a US Treasury Bond.
I don’t know about nowadays, but the last time we refinanced I shopped around and got rates for creditworthy customers. (Since we were, no problem.) But what if the salesman offers you a lower teaser with a kicker that he assures you you’ll never have to worry about. Shopping around might get you in trouble, since the ripoff artists offer the lower initial rate. Now you and I will do worst case computations and avoid this, but that’s why we’re not loaded with credit card debt.
If every person in this country had IQs of 120 or more, were comfortable with math, and were numerate and skeptical, we’d need no regulations. Why make any scam illegal? If you’re smart enough, you won’t fall for it.
I’m assuming this is a rhetorical question, but even so I’ll answer it:
Because if enough people fall for some kinds of scams, it can undermine the economy and the quality of life for the community as a whole. We insure bank deposits not only because we’re concerned specifically about the person who may be dumb enough to deposit his money in a shaky bank, but because runs on banks in general can disrupt the economy, and insuring deposits is one way of preventing runs on banks. Laws aren’t always concerned about the rights and well-being of the individual. Many times they’re concerned about the stability and well-being of the greater community.
It makes sense when the housing market is booming. loaning money against an appreciating asset is a safe bet for the bank. Not so if the market collapses which is why it’s in the news.
For the record, I find it morally unacceptable to loan money (for a house) to someone who can’t afford it. I also object to any tax funded bailout of the banks involved. The person receiving the loan is in a zero net gain situation because equity is rarely achieved. If anything, it’s to the buyer’s advantage to simply walk away from a house that is losing value when no value has been acquired through mortgage payments. A loan without a downpayment will have a high interest rate so almost none of the payment goes against the principal in the early years of the loan.
Well, that can happen with anything. But “shopping around” means more than just talking to several different banks-- you have to understand and think about what you’re buying. If you don’t do that, then “shopping around” is meaningless.
And yet most people have IQs less than 120, and most people don’t end up “scammed” like this, so I don’t see that as a legitimate argument. If these lenders did something illegal, they should be prosecuted. It’s still unclear to me, though, that a “scam” has taken place. I see a lot of people scamming themselves with their own greed and ignorance. So far, though, I haven’t seen anyone point out anything illegal.
You can’t stop stupid people from throwing money away. Look at the lottery, rent-to-own stores, and check cashing businesses. People will spend money on cigarettes and cell phones before they buy insurance for themselves.
The desire to get something for nothing is the driving force behind no-downpayment loans. Beside the moral implication of doing business with fools this will always occur in a free society.
There are plenty of legal “scams”, mainly because the word doesn’t have a precise meaning. As **Magiver **correctly noted, the lottery could easily be considered a scam-- that is in the eye of the beholder. Or, one could call the selling of filtered water a “scam”. It’s not legal to commit fraud, and that would be the appropriate legal term. If people were fraudulently sold these mortgages, then a crime was committed and prosecution should take place.
If we think that the regulations in place are inadequate, then we can talk about tightening up the regulations. Just keep in mind that some regulations that might seem appropriate in one economic climate, might not be appropriate in another climate. So, if someone wants to change the current system, let’s look (as best we can) at what that will do in bad times as well as in boom (bubble) times.
Maybe those people never got called. Maybe they accidentally went to a legit place. Maybe they always hang up on solicitors. Most people don’t believe the Nigerian scam either, but that doesn’t mean we can ignore it.
Mortgage brokers in California are licensed (or so it seems from the radio ads.) Is it that bizarre for someone confused by the paperwork to trust them? I have no sympathy for anyone who lied on their application, or who went into this eyes open. I think that is a minority.
Did you read every word of your closing documents? I skimmed mine, and understood what each page more or less meant, but I sure didn’t read every word. I wonder how clear the risks were to these people.
I don’t think the situation would be that much better with down payments or non-interest only loans. It’s the spike in payments that is killing people.
Again, the question is how clear a statement of risk was given to these people. The whole purpose of truth in lending laws is to make it unnecessary for anyone wishing to get a loan to do computations, which I suppose are complicated for that large portion of the American public who found algebra difficult.
So far I’ve heard no proposals for bailouts. I’d be against that - let the idiots who got us into this mess and should have known better pay for it. I don’t think any bank is in peril of going under, but they should suffer some. At least some CEOs are losing their jobs for this fiasco.
I just don’t get how it’s possible for people not to understand that they are signing up for an adjustable-rate mortgage with a teaser rate, and therefore that the rate will undoubtedly go up at some point in the future. I mean, honestly, how frigging dumb would you have to be to see that a fixed-rate 30-year mortgage with a 20% down-payment is 6.5%, and think that you’re somehow getting a loan with a 4% rate or whatever, with no down-payment, and think “Duh, that’s much better than 6.5%, and it’s going to stay at 4% for the rest of my life”. Would someone that stupid even be capable of putting the car keys in the ignition to drive to the loan broker’s office? Can individual responsibility EVER enter into the equation? I think most of these folks knew perfectly well what they were doing. They just thought the good times would never end, and they’d be able to cash in on their equity as soon as the value of their home shot up. Does bailing these people out really help society as a whole, or does it just help politicians try to make themselves look good? And who loses here? Seems to me it’s going to be all the people who got priced out of the market and are still waiting for prices to even get close to some semblance of normal so they can finally buy their FIRST home. Who’s helping them?
It’s more than aid for the arithmetically challenged. Lenders used to hire the best accountants and lawyers in an effort to obfuscate the true cost of loans, and to not overlook any chance to screw the borrower. Faced with a document like that, the average person has little hope of really understanding it, whether or not they know algebra.
I don’t have time to type a basic accounting lesson, but I’ll give the McDonald’s drive through version.
The banks make the loans to the homeowners. So Joe Homeowner now has $500,000 of the banks money with which he uses to purchase his home. So the actual money goes to whoever sold the house. Usually some family or whoever. So for all intents and purposes of our discussion, the money is gone.
Joe Homeowner, however, now has an asset equal to $500,000 (his house) and a liability of $500,000 to the bank (plus interest, which is where the bank makes money on this deal). What he does not have, however, is cash to pay the bank with. His paycheck might have covered the monthly payments at 4% interest but not 6%.
Normally, what happens is when you can’t pay the loan back, the bank will work with you to refinance or as a last resort they may take your house. They don’t really want your house. Not because of any altruism on their part. Evicting people and reselling their foreclosed homes is time consuming and expensive and the bankreally isn’t in the selling foreclosed homes business.
So “the money” actually went to a bunch of people who were just legitimately selling their houses and isn’t available to be “hocked up like a hairball”.
The problem is that are are hundreds of thousands of people who OWE money to banks and they can’t pay it back. There are so many people, in fact, that the banks don’t even have the resources to forclose on that many homes. Not that making hundreds of thousands of people homeless is a solution anyway.
The banks are losing billions because they made a bunch of shitty deals. The problem is that a lot of people are indirectly affected by those banks financial difficulties. It’s not simply a matter of telling a bunch of Lehman Brothers bankers to forgo their multi-million dollar bonuses. There are thousands of regular people who may lose their jobs, not to mention ordinary people who will see loses in their 401ks and other investments.
Basically what has happened is that a systematic failure in the financial system has destroyed billions in wealth (not money). It can be argued, however, that wealth was never there to begin with. Like the dot-coms, much of it was the product of a speculative bubble. How would you get the money back from the dot-com bubble? You can’t. It’s gone. People bought something that eded up not worth anything. Same thing here - banks invested a lot of money in uncollectable loans.
You seem very indignant about something you admit not to understand. Everyone knows the expression “a fool and his money are soon parted”. Who’s the bigger fool? The fool who asks for a loan he has no hope of ever paying back or the fool who gives it to him? If you go into a financial deal without understanding it, the onus is is not on the other party to do your due dilligence.
Homebuyer: “Look, I needed a place to live. And sure, the house was about $10k more than we wanted to pay, but the missus really fell in love with it, and the mortgage guy told us that that’s only about $30 more per month. An ARM was the only kind of mortgage that I could get (due to that phone bill that never got paid when I was in college). I figured that I would keep getting raises at work and, by the time the rate changed, I’d be making enough money to pay it…. That or we’d just refinance…… or, worst case scenario, we’d sell the house for a nice profit and buy a smaller house. Then the plant closed……”
It is illogical to shift from micro to macro economics is placing blame for the crisis. To suggest that if individuals didn’t accept what appears as a sweetheart deal to buy a house they are responsible stretches credibility. The regulation of the industry was systematically shredded. Lenders dropped their qualifying standards over and over making the pool of borrowers bigger. The borrower had nothing to do with that. If the standards for qualifying had been maintained ,it would not have happened.
There was a lot of money made. Lenders paid huge salaries and bonuses to executives who generated these loans. They do not have to give that back.They alone are responsible. A person who buys a house and fails does not hurt the industry or the economy. just himself.
Over 50% of people who got subprime loans qualified but I assume weren’t told about the better fixed rate ones. I suspect some of them were also told that they could just refinance before it reset. I don’t know how the lenders snuck through the early payment penalties. I’m sure there was a bit of “take this loan or you won’t get the house” going on.
All this talk of individual responsibility seems to give the responsibility of the lenders, who made loans to people who wouldn’t be able to pay, a free ride.
The seller got cash for his house, more than they would have gotten if it were not so easy to get a loan. A real estate rep got a commission.
The Mortgage broker got a commission.
The Mortgage company sold the loan to the investment bank. Their team made a bonus for dumping the loan.
The Investment bank bundled the loan with others and sold it. Their sales boys made a commission here.
The loan is now held by all of us (prior posters have talked about this). We are making money on the interest paid.
There is a servicing company that collects the cash right now, and takes a cut.
So - if you want to get that money back, you have a long list of people to get it from. The ONLY people who came out ahead are the original home sellers.
Home buyer - facing foreclosure
Real Estate agents and mortgage brokers - the good days are gone and they are hunting for jobs.
Sub-Prime mortage firms - going under left and right (I live in Orange County where many of them are headquartered)
Investment banks are selling their souls to Middle Easter investors.
Investors are finding out that their loan portfolios are in bad shape.
Servicing firms MIGHT be OK, but they need to find out if they should just foreclose or negotiate or wait for the US government to jack up the financial system even more.
Many did refinance. That doesn’t change the fact that if you sign a loan, you are ultimately responsible for your own ability to repay it. If you gambled that equity, a pay raise at work, or refinancing would bail you out of a loan you knew you couldn’t afford, then you only have yourself to blame.
Everyone I know who has taken out an ARM, did so because they couldn’t afford the house otherwise, not because they didn’t know that fixed-rate loans existed, or because the loan broker refused to tell them about fixed-rate loans. If you don’t know what a fixed-rate loan is, you need to IMMEDIATELY buy a copy of “Home Buying for Dummies” and read up on it. Like I said, if anyone is honestly that stupid, can you really say they don’t deserve what happens to them?
So here’s the thing: The bank is not your mommy. It’s not their job to say, “Gee, maybe this house is too expensive for you”. If people decided that the only way to get the house they wanted was to take out a risky loan, perhaps a better decision would have been not to buy the house. The bank doesn’t make that decision for you. They might not give you a loan if you obviously are a bad risk, but they can’t decide for you whether you are going to be able to make the payments in the future. That’s YOUR decision, and the responsibility you take on when you take out a loan.
I agree that the situation was out of control. And anyone with any sense knew it was out of control while it was happening. Yet nothing was done. Why? Because when the roller coaster is going up, it makes all the politicians look good, so nobody’s going to say squat about reigning it in. Now everyone wants to close the gate after the horse got out. Too late. The market got out of control, and now it has to correct itself. And some idiots who spent outside of their means are going to lose their homes.
If lenders committed fraud, investigate them, find out who did it, and prosecute. But a blanket bailout of everyone whose eyes were bigger than their checkbook, on the backs of those who were responsible enough not to spend outside their means, is an insult. The market is going to return to sanity eventually. All they’re going to do by monkeying around with it is forestall the inevitable.
Where’s my refund for all the money I lost in the dot-com crash?
If the loans were made with down payments the interest would be lower. That’s the point. The spike payment is a function of interest which is based on risk. The “home owner” is taking zero risk against the loan. And the process of borrowing money for a house involves signing a ton of paperwork declaring that specific parts of the loan were explained. It’s not like they hand out 20 sheets of paper with a dotted line to sign on pg 20.
