I fail to see how any of this supports the idea that it is the bankers fault. Ignorance about the true cost of a home is understandable and unfortunate, but not the bankers fault. Accepting a loan offer you shouldn’t isn’t the fault of the person who offer it. At most, they share some culpability, they certainly aren’t the only party at fault.
Why would anyone ever intend to be in foreclosure? Do you think the bankers were trying to get them into foreclosure?
The answer is that everyone in a financial transaction should (the normative “should” is basically IMHO) do their due diligence. If I were a shareholder in a bank, or a buyer of mortgages in the secondary market, I would be very upset with a banker who offered a loan without doing anything to ensure the nuts-and-bolts of the feasibility of repayment by the borrower. (You may well reply, well, the secondary market buyer or the banker should have been smarter, and you’d be right).
Oh, by the way, lenders definitely felt under pressure to loan more to marginal (minority) buyers under Clinton – see this article
which in 1994 describes a “multifronted assault” on so-called “redlining” by the Clinton Administration. If nothing else, this conditioned bankers to err on the side of loose, not tight, underwriting guidelines. And when housing prices were rising and interest rates falling, the problems were masked.
Actually they seem to be blaming the end of what I think is called redlining, the refusal by banks to make loans in minority neighborhoods. This practice had nothing to do with the credit-worthiness of the lender, and IIRC the rules against it were designed to force banks to apply the same rules for everyone.
A study in New York, referred to by the Times some time back, showed that the incidence of subprime loans tracked the ethnic makeup of neighborhoods, not their income levels, so that areas with well to do minority populations still got stuck with the loans, despite them being qualified for better ones.
And I certainly agree with your comment on timing. I heard predictions on trouble ahead when these loans reset before the actual crisis hit. Loans made during the Clinton years, of whatever caliber, had certainly already stabilized, and people who bought then have plenty of equity even now - unless they fell victim to the equity loan scam, of course.
I’m not sure that I understand what you mean with “minority populations got stuck with [subprime] loans.” A “subprime” loan is not a different kind of loan; it is a loan to a different kind of borrower (one whose credit score is “subprime.”). Credit scores are very readily calculated using a standard methodology (see FICO). There’s not much subjectivity in what your FICO score is – it’s a formula (it gets subjective only when people lie about the FICO inputs, which many borrowers and mortgage brokers did).
So the subprime borrowers could not qualify for “better [mortgages],” because they lacked the solid credit profile that prime borrowers needed to have. Therefore, it is only logical that lenders would price in the risk of a lower credit rating borrower defaulting, whether through higher interest rates, more stringent default/foreclosure provisions, etc. (esp. with the Clinton Administration breathing down their necks to make loans to minorities).
In fact, your entire post suggests or shows that what you claim in your first paragraph was not true: that there was some widespread phenomenon of “redlining,” which was motivated by race and not by sound underwriting, that needed to be fixed. That the loans in previously-“redlined” neighborhoods tend to be defaulting at a disproportionate rate suggests that the lenders had very good (non-racial) reasons not to loan there in the past (or, suggests that disproportionately-minority neighborhoods contain a disproportionately high ratio of people who can’t or won’t keep up with mortgage obligations that they voluntarily contracted to keep up – hardly the bank’s fault).
I agree with almost everything you say but I don’t believe the people who bought these had no fault in it. I have been nagged for years by everybody I know to buy a house. “You’re wasting your money!” But nobody thinks about how expensive a house is, really.
I did, so I never have even thought about buying a house. People need to understand more about their finances.
Tho I’ll grant a good portion of this was caused by the “American Dream” of owning a house. There truly is this mindset in everybody that owning a house is the only way to go, that it’s the smart way to go, and honestly, I just don’t see it, and even less so now. We could not afford a really nice house. We live in a really nice house now, though, for rent, and we can leave it at anytime.
Why is it considered such a good thing to be able to dump the house and move in a few years? Is that the dream of home ownership? To just keep upgrading, to a bigger and bigger house? Making money along the way? It doesn’t work like that.
That assumes that the mortgage broker has equal incentives to sell regular and subprime loans. If the broker gets a bigger commission for a more profitable subprime loan, perhaps he will not tell the borrower that she is qualified for the lower rate loan. Now sure people should shop around, but being told by a professional that this is all you can get might make some accept it.
The same attitudes that motivated redlining might have motivated this. The study showed a big difference between neighborhoods of comparable incomes, with minority neighborhoods doing worse.
The cited article was from 1994. Not that discrimination has vanished, but if steps against redlining led to a crisis, it sure took a long time.
I don’t know what statistical measures were used, but they certainly were not only ethnic. The Fed study cited showed no difference for well qualified borrowers, but only for marginal ones. (I assume unqualified borrowers were rejected no matter what the ethnicity - oh for the good old days.) So I doubt that the metrics would force lending to unqualified borrowers.
I haven’t seen the data, but I’d not be surprised if poorer areas had higher default rates now. First, those less able to pay got higher interest rates. Second, they are more susceptible to income fluctuations. Third, they are less likely to understand the terms or to be able to shop around. However, I’d suspect the vast majority of loans in default now were made after 2000, and I just can’t see the Bush administration pushing lenders to make additional loans in these neighborhoods. Lenders did push into these areas, but it wasn’t to end discrimination or out of the goodness of their hearts. It was to make money.
Don’t you think that people who fell for this were in general exactly those people who were the least able to understand interest rates, the state of the market, and the details of the loans? The ones who were confused by the language, and who trusted the guy in the suit wanting to get them in a house? Who no doubt showed them pretty graphs of how the market went up, and scared them with true stories about how those who tried to save for a house kept getting further behind?
You and I can go to our computers, open up Excel, and build models of how much we’d pay under various scenarios. They can’t.
Around here, btw, there were numerous stories of people in houses cold called for home equity loans, and who went from a standard loan they could pay into a subprime. I don’t know about where you live, but around here I never heard an ad for a home equity loan mentioning that you had to pay it back. It was all about the sin of not getting that money just sitting in your house out for you to use.
The formula for middle class comfort in the retirement years was to scrape together enough money to afford a starter home. You had to be well qualified to get the mortgage. The when you advanced, had a few kids or whatever and the starter home was too small you used money you had been saving to buy the house you really wanted. You had a 30 year mortgage that would probably be paid off by the time you were ready to retire. Then you could decide to keep living in your home or sell it to buy something smaller with cash in the place you wanted to retire. It was/is a great formula. It works.
Where it all went haywire was when people started upgrading again into homes they didn’t really need and really couldn’t afford. People that were strapped for cash were encouraged to take the equity out of their home (the equity they would need for retirement). Millions upon millions of dollars were spent on advertising to convince people to deviate from the proven formula. Meanwhile the lenders kept lowering their qualification standards. It was like yelling “free booze” to a bunch of non-recovering alcoholics.
Now back to my earlier post, “What kind of a business plan is it to lend $1 trillion to people that can’t or won’t pay you back and have your accounting department book it as profit generating assets?”
Subprime mortgage crisis aside, the tactics of lending in that fashion are creating a further problem as the boomers hit retirement with inadequate financial resources. It didn’t take a genius or a soothsayer to see the current crisis coming but nobody in authority had the balls to put the brake on the runaway freight train. The same thing happened before with the S&L crisis and it will happen again with a “retirement crisis” (or whatever you want to call it). In this country greed always seems to win out.
The guy being foreclosed because he got a mortgage he couldn’t afford is the least culpable in the long line of people how should have known better.
They were sold their mortgages by salesmen who got their commision when the schmuck signed on the dotted line, irregardless of their ability pay the mortgage. Because of this the salesmen activily encourage costumers to lie about their incomes, as it was more commission for them.
The banks didn’t bother checking the statements of income they received on mortgage applications.
Finiancial companies then brough the debt from those mortgages (the banks sold their debt so they could circumvent regulations limiting the assets-to-liabilities ratio that a bank could maintain).
The debt was then repackaged, some of it as “low risk” (as assessed by credit ratings companies, who were of course getting paid by the people selling it).
Other financial institutions took the credit ratings at face value and brought up that debt without bothering to checkwhat they were actually buying (i.e. betting on John Q Public’s ability to pay a mortage that was 8 times his salary with an APR that was about to sky rocket).
All these people should have known better and unlike John Q Public were paid astronomical to KNOW BETTER. Blaming it on the guy who understood least, and was paid least, seems a bit of a cop out to me (espically as he’s not just received a few hundred billion of taxpayers money to try and correct his mistake).
I agree that the person shares some culpability, no question, BUT ultimately it was the loan officer’s decision to loan them the money. They werent’ obligated too. While it’s lamentable that some people bite off way more than they can chew housewise, it’s human nature- there are many very intelligent people out there who are complete numbskulls when it comes to budgeting and finance.
The loan officer/banker/loan companies weren’t doing this from the kindness of their hearts or because they genuinely thought “this’ll turn out just fine”- they didn’t care. Banks have access to all kinds of actuarial tables and risk analysis services and market analyses and software that should tell them “someone with $3300 a month in net income, $5000 for a down payment, monthly expenses of $800 to child support and $400 to car payments [reducing the income to 2100 per month], and no savings to speak of simply cannot swing a $900 per month house payment plus taxes/insurance/etc.”, and this is in case common sense doesn’t tell them so first. It should also say "IF this person defaults, we’ll be repossessing a $150,000 house that has only a $5,000 equity, meaning we’ll end up selling it at a loss and losing money rather than gaining money, which is really more of our goal.
Instead they said “Make the loan, we’re going to sell it anyway so if they default, no skin off our nose”, and they did. They hold more culpability than most of the people who truly wanted a house but simply couldn’t afford it and never should have gotten the money to buy one. (I think home ownership is a wonderful thing, definitely something I hope to do some day, but it’s really not always the best option.)
I agree and may have overstated my case- personal responsibility has to kick in at some point. BUT, I find the people who loaned them the money more responsible.
AND WELCOME BACK!
On the subject of homeowner culpability, this is anecdotal but true:
My least favorite job ever was when I was a customer service rep in a call center for a multibillion dollar mortgage company here in Montgomery. This was long before the huge foreclosure crisis of course.
You would be absolutely AMAZED at the degree of complete ignorance people have about their mortgages. They signed these papers 59 times but don’t know a damned thing on it, and I’m not talking about high-risk sub-prime people but middle class and above professionals who seem reasonably intelligent and have good credit and good interest rates.
I would lay money that I had variations on the following synopsized conversations hundreds of times in the months I was there.
[QUOTE]
Caller: I want to know why my payment went up $200 per month!
Me: Because sir, your homeowners insurance is paid from your escrow. You live in [Fort Walton Beach/New Orleans/Tampa/some other city where insurance companies had to pay billions for hurricane and flood damage] and your insurance was cancelled. We sent you notification that it would be cancelled upon expiration date and that you needed to shop for a new policy or we’d assign you one, and the one we found for you is $2400 per year more than your previous policy, thus the extra $200 per month.
Caller: I never got any such a letter!
In the file- copies of the letter and copies where he signed for a copy= not only did I have conversations like this one several times, I had them many times in a single day when the escrow accounts were refigured
Then there were the people whose stove blew up/refrigerator stopped working/found termites in the attic/any number of homeowner nightmares here who thought it was the mortgage company’s responsibility as owner of the property to fix this or pay for whatever the insurance deductible was (again, actual calls). People who didn’t understand why they were responsible for the foreclosure on a home they’d sold to new owners who’d assumed the loan on an unqualified assumption (another one that happened lots of times and again, it says on the paperwork they signed, “this is an unqualified assumption- if they default, you pay us back”) or didn’t understand why they should be responsible for a loan that their son defaulted on when it was his ex-wife who lived in the property and “all I did was co-sign!”
ALL OF THESE- ACTUAL CONVERSATIONS- ALL OF THEM HAD MULTIPLE TIMES.
And again, most of these people weren’t “Riverside Social Club and Pool Hall” riff-raff, these were professionals and seemingly intelligent people- some of them in million dollar homes. And complete idiots on finance.
That’s why I can point to posts on SDMB and other places where I was screaming for years “YOU CAN’T LOAN THESE PEOPLE THIS MUCH MONEY! THEY DON’T HAVE A CLUE WHAT THEY’RE SIGNING OR WHAT THEY CAN AFFORD!”
Eh? I have never heard of this. Why would ANYONE ever sell their house but keep responsibilty for the mortgage ?
Another problem with blaming the people who took these loans is that it’s not in human nature to think “this loan officer is a conman who’s trying to screw me.” The loan officer himself does his utmost to present himself as an expert on financial matters and the first reaction is to assume that he knows what he’s talking about - after all, it’s his job, isn’t it? You can try to go through life thinking everyone is a liar and a cheat, but at some point you just have to trust what people are telling you.
I was recently talking to a financial planner who tried to get me to change my mortgage loan to one with his company. He said that with his loan I would pay off my mortgage faster. I went to three different mortgage calculators available online to prove to him, in black and white, that his loan was worse (for me) than the loan I currently have. He refused to admit it after about 10 e-mails (of course I didn’t pick him as my financial planner.)
Someone like my wife, who is by no means an idiot, might very well have believed the numbers he wrote down on a piece of paper, “proving” his loan would save her money, and refinanced.
. . . and let’s look at it another way that may make it more understandable:
We’ll pick Wal-Mart (just to use a recognizable name). They’ve shown strong and steady sales growth for years. It’s made them rich and strong. The amount of goods that they move makes them powerful when dealing with their suppliers. Now, let’s imagine that they get so caught up in showing continued growth that they say, “to hell with profit margins, we’re just going to move goods because that makes us big and strong.” So they have sales agents go out and hand out Wal-Mart credit card to just about anybody they can find.
Don’t have a job, have a card on us. Credit checks, those are for pansy’s. All these people start shopping at Wal-Mart and business booms.
Of course, eventually, the accounting dept. is going to figure out that they can no longer hide from the stockholders the fact that, despite the impressive sales growth, their receivables have blown through roof. They haven’t been selling merchandise at a profit, they’ve been giving it away. Time for a write-down of their receivables. Of course as soon a news gets out, the stock tanks. They haven’t been selling goods at a profit, it’s been a fiction. The cash registers have been ringing up numbers that are greater than what they are paying the suppliers but there is not sufficient cash going into the registers to support the financial statements. The states and the federal government figure out that if all Wal-Marts close tomorrow thousands and thousands of people are going to hit the unemployment line. It will ripple down through the economy in numerous ways. Every person, mutual fund and pension fund that holds Wal-Mart stock is going to take a huge hit.
This is very close to what has happened with the mortgage bankers. Now who’s to blame? Yes, people shouldn’t charge stuff that they can’t afford but they wouldn’t have the opportunity to do it if the business had been run prudently in the first place. Under this scenario are you going to blame the “deadbeat” customers or the guys that made the decision to run their business in such an irresponsible fashion?
Cite?
After providing a cite, can you explain what Congress has to do with the bonuses offered by private companies?
Finally, can you explain how any of that relates to term limits?
There are qualified and unqualified assumptions. In a qualified assumption, A sells B his house, B assumes the mortgage, and A is free- if B defaults, no skin off A’s nose. In unqualified (which is often the case in VA and other Federal loans) B is considered the primary mortgagor, and when the house is paid off it’s his/her’s, but if B defaults then the mortgagee can go to A as a secondary mortgagor. My understanding is that it’s not going to look quite as bad on A’s credit report as long as he’s allowed to explain it and the like, but it is bad and he can’t truthfully say he doesn’t have a foreclosure on his record and it will be a nightmare to get lenders to sit down and listen to “okay, here’s what happened…”.
At the same time, however, if B pays the mortgage off, A has no rights to the property.
It’s a stupid thing to do for A to sell to an unqualified assumer. HOWEVER, it goes back to the “people have no clue what they’re signing”. A lot of people hear the “well, B’s assuming the mortgage, it’s on paper that they’re the primary mortgagor, I’m off the hook”, then 7 years later B defaults (or dies even) and A, now 2000 miles away, starts getting registered letters and learns too late what “unqualified” means. They may sign or initial this, but they don’t read it or understand it, and if the mortgage broker is speaking in mortgagese they probably just here adfja j aozll zvnoa f A aojfaodjf a fadf a B adfjadf A adifadf assumed". This too happened several times- not as often as the others, but several times.
My brother sold these loans and that is almost WORD FOR WORD what he told us in a conversation two years ago.
Him: “I’m try to focus more on high interest rate mortgages.”
Us: “Why?”
Him: “Higher interest rates mean higher commission.”
Us: “Doesn’t that also mean a higher rate of default then your stuck with the house?”
Him: “No, that’s the bank’s problem.”
ETA: He wholesaled loans to banks, not to customer’s directly.
Um no. You borrow money from someone, you are person who ultimately made that decision, not the person who said that a loan was available. I simply can’t see how any reasonable person would think otherwise.
Ones got nothing to do with the other. No one enters into financial transactions out of the kindness of their hearts. And you can’t seriously think that banking houses wanted this “current financial turmoil”. Countrywide and Lehmans aren’t rubbing their hands together laughing at how well everything worked out.
Is this for me? I never left…
Yep, they’re idiots. Doesn’t make them less responsible, or somehow magically make the loaners the bad guys. It’s not entrapment, and the borrower isn’t mentally retarded.
I guess we’ll have to agree to disagree here. Getting IMHO or GD-ish.
The person who made the loan available also made a decision. It takes two to tango, it takes two to enter a financial agreement.
In the case of sub-prime mortgages those two were:
If you don’t mind my saying it this way… I expect person #1 to make a bone headed decision, because that’s their history. I do not expect person #2, the professional lender who has access to financial reports, and the expertise to understand what they mean, to make the same bone headed decision that #1 did.
The reality is that #2 made the decision in large part because they wouldn’t be on the hook when this crappy loan went south. The remaining part of the decision was based on the assumption that the bank would get all their principal back when this crappy loan went south.
The bankers knew these loans were sketchy, there’s no way you can make this many bad loans without knowing a lot of them would wind up in foreclosure, or at least with the homeowner being forced to sell in order to pay off the loan. What the bankers figured was that the only person who would get hurt is #1, the dupe who bought the house, and the bank would get away scot free.
I also expect the stereotypical person #1 to be more bone-headed. There’s an asymmetry of information. But ignorance doesn’t make them less responsible. Well, maybe a little less responsible. It just doesn’t make them completely free of any responsibility.
If you buy some overpriced crap at Nordstroms, is that Nordstroms fault? Do you blame the big bad boutique store for manipulating your tiny little brain? Do you go whining to Congress and the newspapers that they took advantage of you with their marketing and their spell-inducing piano and 0% interest until 2012 and the good-looking staff and perfume and it’s all their fault??
Again, I was responding to Sampiro’s claim in a couple of posts that it was **ALL **the fault of the bankers. I agree the truth is somewhere in the middle. But if you have to pick one, it’s the one accepted the deal, not the one who offered.