I had gotten the impression that lots of people had gotten variable rate mortgages and then the rates went up, making their monthly payments higher than they had anticipated.
Yes, because the higher rates after the initial period were to be tied to the prime rate at the time. The assumption was that those future rates would stay as low as the rates were when the mortgages were written. Instead, the rates were much higher because the Fed had had to raise the rates in the interim. This made payments significantly higher.
In some cases it appears that the higher payments would have been unaffordable regardless because people hoped to flip the house at a higher selling price before those higher rates kicked in. These people are idiots.
I second this, it explains all of the moving parts.
National Public Radio (NPR) has a good 12 minute segment that explains a lot of things.
That link goes to a NPR search page.
Oops. Try this one
I’m really sorry. I’m sure you said some really smart things, but I shut down after reading those bolded bits.
My mother works for the Benton County (MN) News. It’s a weekly paper and, before the current crisis, was generally 6-10 pages. Courts are required to publish foreclosure notices, however, and as it’s the “paper of record” (or whatever they call the ‘important’ newspaper) it’s been double its size for the past year simply for the sheer number of foreclosure notices.
I’ve been comprehending the rag for coming up on 30 years and it’s just now that there are more foreclosures than there are probate notices.
Right, my post probably wasn’t clear enough. GS essentially created a wall between the loan and securitization process so that a bank had to decide whether it was going to be a traditional bank (granting loans) or an investment bank (which could perform securitization). This way a single bank couldn’t issue risky debt and then securitize it. With GS repeal, that barrier was no longer gone and thus is was easier to securitize risky debt (as I understand it, anyway).
This is merely anecdotal, but it’s based on my professional experience of seeing about a thousand foreclosures a month. While an overwhelming majority of these subprime loans were adjustable, they are going into default even before the rates started to adjust (most adjustable rate mortgages - called ARMs - have a fixed rate for a few years, and most foreclosures are happening in the first few years).
The problem isn’t necessarily that the adjusting rate caused people’s mortgage payments to skyrocket, although that would be a deathknell for most subprime borrowers. The problem is that they weren’t financially secure enough to afford the payments to begin with. The efforts to verify income were so lax, and the assumption that every property was on the fast track to increased values, led people to qualify for loans that they never should have had.
Another factor is increases in taxes and insurance. In many cases, those fees were being escrowed as part of the mortgage payment, separate from principal and interest. As these payments went up (here in Florida, insurance rates were especially a problem after the rash of hurricanes a few years ago), so to did the mortgage payment. Or, they weren’t being escrowed, but the borrower didn’t make the payments, so the lender paid them on their behalf, then tacked these payments onto the mortgage (“forced place” insurance is nearly always more expensive then the insurance you might get for yourself, since the lender isn’t looking for the cheapest rate).
Time and time again, I see people in default because their budget was so tight that they couldn’t sustain an unexpected emergency (i.e. some medical issue), or they lost the “extra” income that was helping them pay their bills, or the flip they were anticipating never came to fruition. Helped along by eager brokers, realtors, closing agents, et al., these people were talked into loans that were never a good idea.
I did say “almost nonexistent.” I’m well aware that there are pockets where conditions are very bad, and Detroit is a perennial problem area.
The top states for foreclosures, however, are all in the south and west. It is comparatively much less a problem in the northeast and midwest, local conditions notwithstanding.
Ahh, true, good point. Sorry. 
No problem. Now go back and read those really smart things you missed.
Updating this thread, there is recent research that something quite different happened:
It’s good to see that hard evidence that the crisis had more to do with well-off speculators than poor people making bad decisions - I always had the impression that it was really the ‘take out a loan, who cares if the payments balloon because I’m going to flip it before that happens’ that caused the problem. I’ve always found the notion of blaming ordinary people, especially poor people with little education, for cruelly taking advantage of sweet, innocent banks to be rather absurd. Banks have lobbyists, lawyers, and people with years of school and experience analyzing their loans, and whenever there’s a conflict typically have the police and judges on their side. If some poor person with no legal or financial expertise manages to con a bank into giving him a bad loan, I’m willing to put all of the blame on the side with the deck stacked in their favor.
If s bank loans a mortgage, then takes the repayment obligation, bundles it with a thousand other such loans and sells securities which will take those repayment obligations; then it walks away with a big wad of cash, probably a commission over time for coordinating repayments, and very little of its own risk. So the incentive is to push mortgages on anyone or everyone who would possibly want to borrow, since the big profit is in immediately selling that loan to someone else. Hence, less concern about borrowers and their qualifications, and more about how many suckers (I mean, clients) they can find to buy these bonds based on loans with high interest rates. And in a world where interest rates had been pushed down close to zero, there was a world of suckers-born-every-minute who were willing to take high-interest securities and believe that they were unlikely to default in volume.
By loading thousands of high-risk mortgages into a single collection, the banks thought was “only a few will fail” based on past lending; nobody counted on the risk being even higher than before. Buyers figured they could sell and break even based on rising prices - assuming they could do math at all, and meanwhile lived in fantastic new houses; mortgage sellers were paid on commission, so ignoring or fabricating numbers for applicants’ eligibility got them rich; investors all over the world parked the funds they managed into bonds that were called safe and paid fabulously higher rates… It was a win for everyone until it wasn’t.
The biggest failure was the bond rating agencies that somehow failed to notice that they were blessing piles of turds with AAA - which essentially meant they failed to do the one critical job they were paid to do.
I suspect flippers also raised the average house prices, since they took inventory off the market, which might have hurt. But the article doesn’t mention a big source of foreclosures around here - those who got underwater after borrowing on their equity, and those who were more or less financially responsible but who got laid off during the crash and then couldn’t keep up with payments.
However I’m sure the subprimes had something to do with it - but remember that the mortgage companies actively solicited them, so it is not like they are off the hook.
It was always right wing Republican propaganda, that poor people, and the Democrat push for more fairness and lower cost housing caused it all.
All you really needed to recognize how obvious that lie was, is that there was never enough low cost housing available for poor people TO try to buy, in the first place. So how in the hell would ANY bank manage to loan out that much money to poor people to begin with?
No. No bank has ever failed in the US because of the small loans it made to poor people. No bank or lending institution was ever ordered to give loans to people who they knew could not afford to make the payments.
And no bank or loan institution ever failed because they loaned money to people who could not pay them back, even. Because the loans were, before the lead up to this disaster, given out against correctly evaluated property. If you loan money to someone who can’t pay, against correctly evaluated property, then you get that property when the borrower defaults, and you go back to business as usual.
Even the Democrats most intense moral outrage attacks on lending never once declared that properties should be wildly overvalued, before the loan was given. And that wild over-valuing, not the misjudgment of the borrowers ability to pay, was what brought everything down.
The way that the lending system is supposed to work is, that a property is evaluated, and a loan given to pay for it, based on the estimate of the borrowers ability to CREATE WEALTH IN THE FUTURE which will repay the loan, plus interest. At the time the loan is made, the money that pays the previous owner of the house, is created out of thin air by the lender. AS actual wealth, it doesn’t exist, at the time of the loan.
When these loan institutions made hundreds of thousands of loans, most of which were NOT backed by real property at all, they created a huge tidal wave of fantasy cash. This fantasy cash was invested in turn, and created even more fantasy cash.
I remember my mother asking me after the crash, where all the money went. I told her accurately, that the thing to understand was, that the wealth that disappeared, NEVER EXISTED TO BEGIN WITH. And since non-existent “wealth” was used again and again to create MORE fantasy “wealth,” the amount of fake cash sloshing across the globe, poisoned almost everything.
But it was ALWAYS the rich who were to blame for all of it. It wasn’t even the middle class, who did us all in. The people who set policy at loan institutions are decidedly NOT middle class. And they are the ones who did all the real dirty work.
Bolding mine. I read that the fundamental flaw is that the basic economic value of a property is 15 times the annual rent. As a bank, you shouldn’t underwrite a loan for more than that. Even when you’re talking Silicon Valley or LA, the people who live (and businesses who operate there) there only make so much money per year. They are only willing and able to spend so much of it on rent - if rent is more than some fraction of their income, it will make sense for them to take that tech job in Austin or New York, instead. (or move the business there if you are talking commercial real estate)
So even in those areas, where real estate prices are ridiculously inflated, rents aren’t quite so high, and much of the property there is selling for far more than 15 times annual rent.
What props up property above that economic valuation is that if you can get the bank to just give you more than the place is worth, you can put in a bid for the place above it’s true value. And then if the banks are really idiotic, 2 years later the value will have risen even higher, and you can sell the place, essentially speculating using the bank’s money.
It’s a solid way to make money and millions of people were doing it. You just borrow money from the bank, buy a place in an area with rising values, and fix the place up, doing some of the labor yourself.
If the market keeps going up, you sell the place, making money in the meantime as an unlicensed innkeeper through Airbnb.
If the market goes down, you just give the asset back to the bank and leave them with the tab. Essentially it’s a way to gamble with other people’s money, where you get to keep the winnings if you win and stick the banks (and ultimately the federal government) with the tab if you lose. Great gig if you get in on it at the right time. If you lose, your credit may be damaged, but you can just have your household operate using your spouse’s credit score, so it doesn’t do as much damage as you might think.
Instead of 15 times annual rent, the banks use some idiotic method that essentially takes into account sale prices of nearby properties only. And then they tend to fudge the numbers as well since their mortgage officers have a financial incentive to make the loan and then unload the note on someone else, so they don’t care if it’s a bad loan. So essentially the bank’s valuation method is using fantasy prices as a bedrock pricing mechanism to justify further fantasy prices.
I have also heard the government was the ultimate root cause in the crisis, as it (more or less) forced lenders to make loans to poor folks with bad credit. (“You bad, evil banks have been discriminating against poor folks. We are going to fix that problem by forcing you to make these loans!”) But I have only heard this from conservative commentators, and am thus somewhat skeptical about it. What’s the real story?
The real story is that the commentators are lying. There was NEVER any law or regulation that required loan institutions to over value property. Never.
After everything went to hell, THEN those on the right, looking for a scapegoat to blame for THEIR utter failures, invented the idea that the phrase “be nicer to poor people” was what magically forced them to cheat, steal, and lie to each other.