Have Banking Tactics Run Amok?

Great Debates
81

[QUOTE=Voyager]
From what I’ve seen, the people getting foreclosed are not McMansion owners, but those just on the borderline of being able to afford a house, or those snookered into refinancing.
[/QUOTE]

but those [del]just on the borderline of being able to afford a house[/del] who couldn’t afford the kind of house they wanted, but took out loans to try to anyway.

Fixed that for you.

Every time anyone has ever extended credit to me, anywhere, the terms have been pretty explicitly set out. But I’ve never taken out a mortgage. So, do we hold hundred-thousand dollar multi-decade mortgages to more lax standards than we do $500 credit-limit credit cards? Or did people just figure "Well, it’s never happened before, and not bother to read the rest of the fine print?

Despite the tone, I am seriously asking, since I’ve never taken out a mortgage: Credit card and other loan applications and statements have the terms set out. They list the APR and interest calculating method, among other information. Are mortgages not required to have this, or is something else at work here?

82

[QUOTE=Garfield226]
but those [del]just on the borderline of being able to afford a house[/del] who couldn’t afford the kind of house they wanted, but took out loans to try to anyway.

Fixed that for you.

Every time anyone has ever extended credit to me, anywhere, the terms have been pretty explicitly set out. But I’ve never taken out a mortgage. So, do we hold hundred-thousand dollar multi-decade mortgages to more lax standards than we do $500 credit-limit credit cards? Or did people just figure "Well, it’s never happened before, and not bother to read the rest of the fine print?

Despite the tone, I am seriously asking, since I’ve never taken out a mortgage: Credit card and other loan applications and statements have the terms set out. They list the APR and interest calculating method, among other information. Are mortgages not required to have this, or is something else at work here?
[/QUOTE]

The reason for the spike in foreclosures when the rates reset is that the homeowners can afford the current rates, and no doubt a point or two higher, but can’t afford the big jump. When I had an ARM the increase in rates per year was strictly limited - but the discount on the teaser wasn’t very big either.

Despite the terms being laid out, I’d suspect that many people were told that they could refinance before the jump, perhaps to a better rates since they’d be refinancing a smaller percentage of their house due to the “inevitable” rise in housing prices.

The real problem was that people were qualified (those that weren’t given no documentation mortgages) on the teaser rate, not the final rate.

The FBI is investigating 12 companies. I’m eagerly awaiting a report on what really was going on.

When I got my mortgages, I didn’t self qualify. What’s the point of the qualification process if you’re going to give loans to people who can’t afford it? I’ll answer my own question - get the origination fees, and sell the paper to some sucker who thinks you’ve qualified the borrower.

83

It seems to me the subprime crisis is similar to the practice of buying stock on margin that intensified the 1929 crash. It’s fine if the stock goes up, and it’s fine if you have enough reserves to pay when the stock goes down, but when buyers who can’t afford it get qualified, then disaster is inevitable.

Buying on margin got banned - and imagine how worse the popping of the bubble would have been if there were a lot of margin calls around. What should we ban to prevent a recurrence of this mess?

84

[QUOTE=Voyager]
But people have been using ARMs for years with no issues, so Joe Average is likely to believe the broker. I had ARMs in the late '80s which kept on going down. The problem is that the reset on these ARMs was so great, from their being subprimes, and that teaser rate was so low.
[/QUOTE]
That’s not really comparable, though. In the early 80’s interest rates were at historic highs in the double digits. It was reasonable to think that interest might come down.

In 2000-2004, interest rates weren’t just at historic lows, they were very close to absolute lows. Did people really think that the Fed was going to put rates below 0?

85

[QUOTE=Caffeine.addict]
One colleague was telling me that he had someone come in to his office looking to declare bankruptcy. She had at least two different loans on her properties which totaled up to $600,000.00. She had a series of no doc loans in which her income was claimed to be $175,000.00 per year. She was a cleaning lady. When he asked her about that, she said, “Thats what the mortgage broker told me to put down”.

[/QUOTE]

Frankly, that’s really the crux of the issue - if there should be additional regs, its for the brokers (and the lender’s use of them). Most of the loans originated in-house at banks had the proper due diligence performed on them.

The banks love the brokers as they allowed them to funnel money to non-qualified borrowers- they could always blame it on the broker’s fault/negligence/malfeasance, etc. and the poor info they provided, all the while turning a deliberate blind eye to the fact that the brokers were gaming the system and were heavily incented to help originate loans outside lending requirements.

Across the board there was zero oversight in this area.

86

[QUOTE=iamthewalrus(:3=]
In 2000-2004, interest rates weren’t just at historic lows, they were very close to absolute lows. Did people really think that the Fed was going to put rates below 0?
[/QUOTE]

I got a mortgage (and just sold the house) in January 2005. The agent tried to convince me for a few seconds - until I demonstrated that he was insulting my intelligence and didn’t appreciate it - to go for a variable rate loan.

As someone who actually keeps an eye on things, obviously it wasn’t going to happen. But there’s lots of people that doesn’t apply to.

-Joe