Two perspectives on the subprime mortgage crisis

[bascule]

First, Glenn Beck:

 

http://www.cnn.com/2008/US/03/14/beckfloridamichigan/index.html

 

"People who bought houses they couldn't afford with loans they didn't understand want their lenders to change the terms."

 

Next the BBC:

 

http://www.youtube.com/watch?v=eBIJH6--vsM

 

First, let assume Glenn Beck wasn't directing his comments at everyone affected by this situation but just at the people who were truly ignorant of the terms of their loans. The BBC program highlights people who were unable to meet their mortgage payments resulting from outside circumstances like illness.

 

However, I'm a little bit annoyed by placing the onus of this problem squarely on the mortgagors. To add to Glenn Beck's little list, how about:

 

"Banks who financed mortgages with predatory terms they knew their leasees couldn't afford want the federal government to bail them out."

 

The big problem: that's been the main solution until now. The government is buying up worthless loans by printing money. As as much as I advocate a fiat currency system, this is clearly an abuse of one.

 

Furthermore, it's not a solution. Foreclosures destroy the value of the loan and transfer it into a liability for the bank.

 

Wouldn't changing the terms of the loans to something sustainable make sense here? Why is it okay for the federal government to bail out the banks but not the borrowers?

[Pangloss]

Interesting post.

 

Why is the BBC interested in our subprime mortgage situation? /boggle I wonder sometimes if Brits even get local news. (grin) (Just kidding, of course -- I think the BBC is a first-tier source, and their international objectivity is often quite useful, it just strikes me as really odd sometimes!)

 

Anyway, I saw Treasury Secretary Henry Paulson on This Week today and one comment he made stood out in my mind. He said that 92% of the mortgage holders in this country are paying their loans on time, and only 2% are in foreclosure. That's not the way foreclosure statistics are generally reported, that's for sure.

 

Obviously he's doing a bit of spin, because it only takes a relatively small percentage of foreclosures to wreak havoc on the economy, thanks in part to the use of those mortgages are collateral, which is what has gotten so many companies into trouble. I actually agree with you here to a large extent -- these companies are guilty of more than just those instances of mortgage fraud. Other companies knew about the fraud and bad lending practices, but used the loans as collateral anyway.

 

Put another way, we may need to see a few of them fail for the same reason we may need to see a few $9/hr single-mom hairdressers lose their $350,000 homes -- as a warning against future stupidity.

 

But I disagree with your last question -- we ARE bailing out some lenders, and it seems increasingly likely that we'll bail out even higher numbers than are currently planned. And we'll be bailing out banks and Wall Street firms too. (sigh) My only hope is that we learn a lesson from this and update the rules and regs that made this possible.

[ecoli]

I tend to agree with Beck's libertarian attitude on this one. Government bailouts and interventions for corporations who shot themselves in the foot? That is, if you even consider the Federal reserve part of the government. It almost seems to me like bank buddies helping each other out of their poor business decisions with taxpayer dollars.

just my initial, semi-uninformed reaction though.

[Mr Skeptic]

Maybe the government should stop with the bailing. I understand they did that a few times now. If they make a habit of it, lending agencies will simply increase their rates and borrowers will accept them, because the government will bail them both out. Though letting them crash and burn is not an ideal solution either. Anyhow, maybe the government should hire some people to babysit borrowers so that they don't get themselves over their heads, or keep an eye on lenders so they don't accept people unable to pay. That would be cheaper than bailing people out...

[bascule]

Some context on the latest government bailout:

 

Bear Stearns was in danger of bankruptcy. They turned to rivals JP Morgan and the federal government to bail them out:

 

http://www.msnbc.msn.com/id/23630319/

 

JP Morgan has agreed to buy them for approximately $2 billion. The federal goverment will "fund up to $30 billion of Bear Stearns' less liquid assets."

[iNow]

Why is the BBC interested in our subprime mortgage situation? /boggle

 

Probably for very much the same reason that news outlets in Australia are. Our economies are hardly siloed, and the negative economic impacts here have negative economic impacts there.

 

 

Put another way, we may need to see a few of them fail for the same reason we may need to see a few $9/hr single-mom hairdressers lose their $350,000 homes -- as a warning against future stupidity.

I think we need to see many or most of them fail, as as much more than a simple warning against future stupidity. The market must first bottom out if it's ever truly going to correct itself. The same was said by Alan Greenspan himself when this first all came up. I'll see if I can find the quote...

 

 

EDIT: I haven't been successful finding where I came across that information. I just remember his comments suggesting that anything we do to step in and change things will simply delay the inevitible and make the situation last longer than it needs to. But, alas... I could not find the source, so for all I know I was hallucinating and a leprechaun told me this after too many Guiness.

[Pangloss]

Wait, you've read Alan Greenspan?

 

I think iNow just picked up 13 Republican delegates in Pennsylvania.

[ParanoiA]

First of all, what's a "predatory" loan? What practice are they in when they finance people with tenuous credit and low income to own a home in a decent neighborhood? Not to mention the recent pressure on the real estate market to respond to these low income families, to 'share in the american dream'. They came through and everybody involved got carried away and we got a bubble. Now we turn it into predators and victims. Whatever

 

Second of all, why aren't we appreciating the flip side to this business cycle? This is a great time for buyers. Right now is the time for other low income families to get cheap housing, on better loan terms.

 

If this was the oil business taking a hit, or Halliburton stock going into the tubes we wouldn't be freaking out so much. I wonder if it's only because we happen to own the capital that's taking the hit, that we even consider it a crisis. I say let the market correct itself on its own.

[john5746]

I think we need to see many or most of them fail, as as much more than a simple warning against future stupidity. The market must first bottom out if it's ever truly going to correct itself. The same was said by Alan Greenspan himself when this first all came up. I'll see if I can find the quote...

 

http://sgpropertypress.wordpress.com/2007/12/18/greenspan-favours-govt-bailout-for-home-owners/

 

Not sure what Greenspan said at first, but he seemed to favor cash bailouts eventually.

[iNow]

I say let the market correct itself on its own.

I see you are making much the same point as I did above. It's a bit harsh in the short-term, but it makes the most sense. However, just to argue the counter-point...

 

Letting these loans fail will have significant trickle effects, and the problems will cascade unecessarily. When people cannot pay their mortages, they will be evicted and will be forced to find family or friends to strain and help support them. Not all people will have family or friends, and many will wind up on the streets. We will have an increase in homelessness with a parellel increase in vacant houses, which makes terribly little sense.

 

Also, the predatory point are those loans which raised payments 300% after the first year. I think most of us would be unable to pay if our mortgages changed so drastically so quickly. Some banks wrote loans with these terms as everyone had the intention of refinancing with a different bank within 1 or 2 years. They accepted the "temporary" lower rate knowing that the next year they could negotiate a lower interest rate with a different bank and keep their payments the same.

 

However, when the value of the homes decreased so quickly, people could not get the new/refinanced loan with other banks because their houses were worth so much less than they originally paid. No other banks would take on the original loan amount, and people were forced to stick with the original "temporary" loans and pay the grossly inflated payments.

 

That's why people want the government to step in and help with this.

 

 

All that said, though, the government stepping in will only extend the issue, and while it's not very humane to just let everyone suffer, it's the most economically sensible position to take.

 

 

 

 

 

 

http://sgpropertypress.wordpress.com/2007/12/18/greenspan-favours-govt-bailout-for-home-owners/

 

Not sure what Greenspan said at first, but he seemed to favor cash bailouts eventually.

 

John, you're beautiful baby! That got me there!

 

 

I should have guessed I saw it on THIS WEEK. Here's the quote from their site, as well as a video link:

 

 

http://abcnews.go.com/ThisWeek/story?id=4008041&page=1

 

"It's very critical that this thing reach a selling climax -- if I may put it in other words, exhaust itself," Greenspan said. "It's only when the markets are perceived to have exhausted themselves on the downside that they turn. Trying to prevent them from going down just merely prolongs the agony."

 

 

VIDEO (the housing issue starts about 9.5 minutes in) --> http://abcnews.go.com/Video/playerIndex?id=4007604

[bascule]

First of all, what's a "predatory" loan?

 

Banks offering ARMs with a low introductory rate then ratcheting it up to an exploitative one, as if a mortgage were the same thing as a credit card. Well, the same idiots who got those credit cards with low introductory rates fell for mortgages with one hook, line, and sinker. Except unlike credit cards, basing your entire business model on this approach is, in 20/20 hindsight, completely f*cking stupid. New Century Financial is probably the prime example (ARMs were practically the entire business model for this "New Kind of Blue Chip") and now they're under SEC investigation for their seedy business practices. And now we have the federal government buying out Bear Sterns mortgage-backed bonds to the tune of $30 billion.

 

Now we turn it into predators and victims. Whatever

 

The victims now have no home and are living in tents. The predators get bailed out by the federal government to the tune of hundreds of billions of dollars. Yeah, I'd say the description is pretty apt.

 

Second of all, why aren't we appreciating the flip side to this business cycle? This is a great time for buyers. Right now is the time for other low income families to get cheap housing, on better loan terms.

 

We're in a recession. I'm in the tech/media sector and we're feeling it here. The economy is jacked, and people don't want to spend money on tech gizmos right now. While it's great the bubble has burst and homes may reach reasonable pricing levels again, in the meantime the US economy has been sucker punched and is now staggering around bewildered.

 

I say let the market correct itself on its own.

 

Well, that's certainly not what the federal government is doing. They're propping up the banking industry by buying up their "assets" (i.e. mortgage-backed bonds, a.k.a. liabilities)

[PhDP]

I say let the market correct itself on its win.

 

It's perhaps the best thing to do, at least for now.

 

However, one thing's certain; the U.S banking system enjoys too much freedom, it's less efficient and less stable than our system in Canada. And we will all pay the price for this lack of efficiency.

[ecoli]

I just heard some guy on the radio railing against the Fed, because he thinks they didn't do enough to help out Bear Sterns.

 

Apparently there are some rules from the Depression era which Clinton repealed, which would have allowed the Fed to make a temporary loan to Bear Stearns, which could have tided them over. However, they aren't allowed to make loans to an investment bank, because of the repealed rules.

 

The Fed, instead, lent money to JP Morgen so they could buy up Bear Stearns 'for a song.'

 

As a result, Bear Stearns employees, which own 1/3 of the company's stock are getting screwed out of their stock, and might lose their jobs to boot.

 

I'm not sure if I agree that tiding over Bear Stearns would have been the 'right' thing to do either, but if the Fed is going to meddle anyway, isn't there a more effective way to do it?

[bascule]

Apparently there are some rules from the Depression era which Clinton repealed, which would have allowed the Fed to make a temporary loan to Bear Stearns, which could have tided them over. However, they aren't allowed to make loans to an investment bank, because of the repealed rules.

 

[Pangloss]

The victims now have no home and are living in tents.

 

Well, now we just have one more good reason to shovel leftover Katrinites out of those cleverly formaldehyde-laced FEMA trailers!

[ParanoiA]

Banks offering ARMs with a low introductory rate then ratcheting it up to an exploitative one, as if a mortgage were the same thing as a credit card. Well, the same idiots who got those credit cards with low introductory rates fell for mortgages with one hook, line, and sinker. Except unlike credit cards, basing your entire business model on this approach is, in 20/20 hindsight, completely f*cking stupid.

 

I still don't see the predatory part. I got an ARM, and will likely go up to an exploitive amount and I agreed to this when I closed. THAT's why I got the good rate to begin with. I plan on having my home sold before this rate increase happens and that's business. I'd hate to think that because this loan is labeled "predatory" that this option wouldn't be available to me. It was a calculated risk and no one in this business is so stupid not to see the potential catastrophe - that's where the word "risk" gets its power, that's kind of the whole point with "risk" in the first place.

 

So, when you have risk, you have fall out. You HAVE to have fall out or else there is no risk in the first damn place.

 

The market is learning a lesson. A lesson it should have already learned but with the current nanny state people sign things without even looking because "the government wouldn't allow me to get screwed". Seriously, I know of two people who claim to have thought exactly that. In fact, the first house I bought, our realtor told us not to worry about reading everything at the closing table because "the government regulates them so there's no need".

 

New Century Financial is probably the prime example (ARMs were practically the entire business model for this "New Kind of Blue Chip") and now they're under SEC investigation for their seedy business practices. And now we have the federal government buying out Bear Sterns mortgage-backed bonds to the tune of $30 billion.

 

Yeah, I don't get this either. We bail everybody out and then wonder why we feel the need to regulate them to death to keep them from doing this crap. Gee...maybe it's because we never make them sleep in the bed they made? Let them share the streets with those that lost their houses.

 

The victims now have no home and are living in tents. The predators get bailed out by the federal government to the tune of hundreds of billions of dollars. Yeah, I'd say the description is pretty apt.

 

The victims here are the tax payers getting their money stolen from predatory legislators that don't have the spine to say "No, you're not getting the people's money to clean up your mess...go find a job and get out of my hair".

 

We're in a recession. I'm in the tech/media sector and we're feeling it here. The economy is jacked, and people don't want to spend money on tech gizmos right now. While it's great the bubble has burst and homes may reach reasonable pricing levels again, in the meantime the US economy has been sucker punched and is now staggering around bewildered.

 

Yeah, I'm in the same sector and consolidation and job insecurity are the only things in my future. However, that was the case 4 years ago too, when I was forcibly moved here.

 

My point was that we don't bail out Mars Inc when candy prices take a fall. We take advantage. That's capitalism. Now, however, it's the american people's capital taking a dump - not XYZ company. It's my house, and yours. Now all of the sudden we don't think it's fair and demand government come in and fix it.

 

Interesting how we rationalize interference for our own benefit, yet hold others in contempt for the same.

[Dak]

"Banks who financed mortgages with predatory terms they knew their leasees couldn't afford want the federal government to bail them out."

 

Why do the banks need bailing out? If someone can't pay their mortguage repayments, don't the banks reposess the house and then sell it to cover the outstanding debt?

 

If anything, the banks should get a quicker return on their interests when the debtors can't keep up payments

 

Why is the BBC interested in our subprime mortgage situation? /boggle I wonder sometimes if Brits even get local news. (grin)

 

Northern Rock recently collapsed, at least partially because of the american housing slump IIRC.

[Pangloss]

Northern Rock recently collapsed, at least partially because of the american housing slump IIRC.

 

I had to look that up before I knew what it was -- a British bank owned by the British government that, as you say, has apparently been hit by the mortgage crisis (not housing slump, btw -- different issue).

 

I'm curious whether British citizens are questioning the validity of bailing out their bank, as they are here.

[Dak]

oops, sorry (both for the lazyness in not linking and the mistake).

 

The bank isn't being bailed out per se (it used to be a private bank, now it's owned by the govournment along with it's debts), but yeah the gov' came under fire for it a bit.

 

I'm not entirely sure why tbh... the bank would have collapesd, evaporating peoples savings and mortguages, but the gov' stopped that from happening

[Severian]

The BBC program highlights people who were unable to meet their mortgage payments resulting from outside circumstances like illness.

 

I must admit, I have very little sympathy for people who lose their homes due to not being able to pay their mortgages. There are pretty much no outside circumstances which you can't plan for, and it is just people paying for their own stupidity and lack of planning. To many people take out loans they simply can't afford and then whine about it once they have lived the good life and find themselves in debt.

 

For example, take the grandmother living in a trailer after losing her home, in the BBC clip. They lost their home when her husband became ill and couldn't work. But why didn't they have disability insurance? If you have a long term loan which you must pay off, it is a small extra cost to take out insurance in case you suddenly can't work. And I am 100% sure that the bank that sold them the mortgage would have offered them such insurance (they never lose a chance to sell you something).

[Pangloss]

Exactly. I do agree that we can afford to extend a helping hand in rare cases, but they should very much be the exception and not the rule. I also think we can do better about educating the public about debt and regulating the industry to stop some of the seedier, more predatory practices. But in the end, free people are powerful people, and they need to be careful how they use that power.

 

During the housing boom there was no shortage of complaints from people who couldn't get those loans, complaining about being held back by the man and demanding that the government do something about it. It's funny how you don't hear from them anymore. No matter how far you lower the bar, there will always be people who think it should be lower.

[doG]

I'm not entirely sure why tbh... the bank would have collapesd, evaporating peoples savings and mortguages, but the gov' stopped that from happening

 

IMO the government still overstepped its bounds. The government has no money to give to those bank customers that it didn't take away from someone else that earned it. Why are the people responsible to the members of this bank?

[bascule]

I still don't see the predatory part. I got an ARM, and will likely go up to an exploitive amount and I agreed to this when I closed. THAT's why I got the good rate to begin with. I plan on having my home sold before this rate increase happens and that's business.

 

Do you also plan on selling your home for more than the purchase price in this market? Unless you're in a unique market where prices are likely to remain artificially inflated, chances are you're going to lose money.

 

I'd hate to think that because this loan is labeled "predatory" that this option wouldn't be available to me.

 

I would prefer that to the present state of the US economy.

 

It was a calculated risk and no one in this business is so stupid not to see the potential catastrophe - that's where the word "risk" gets its power, that's kind of the whole point with "risk" in the first place.

 

Provided you are actually able to turn a profit on your loan (which even in an artificially inflated market like mine would be extremely unlikely), your case would be extremely atypical.

 

The market is learning a lesson. A lesson it should have already learned but with the current nanny state people sign things without even looking because "the government wouldn't allow me to get screwed".

 

I think this whole fiasco is evidence that deregulating the mortgage market was a horrible mistake. In my opinion the blame falls equally upon Greenspan and Bernanke.

 

The victims here are the tax payers

 

True enough.

 

Before being mired in scandal, Eliot Spitzer wrote an excellent editorial on predatory lending practices and the steps the Bush Administration took to prevent state governments from acting to curb predatory lending:

 

http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783.html

[ParanoiA]

Do you also plan on selling your home for more than the purchase price in this market? Unless you're in a unique market where prices are likely to remain artificially inflated, chances are you're going to lose money.

 

Or when you purchase it for 70% of the market value to begin with. We always buy houses that need work since we enjoy remodeling, but we won't make much due to the slump. These low interest rate ARM's from enthusiastic lenders also allowed us to get away from hard money lenders on investment property. Want to talk about predatory loans? This was a good thing used for the wrong reasons.

 

I think this whole fiasco is evidence that deregulating the mortgage market was a horrible mistake. In my opinion the blame falls equally upon Greenspan and Bernanke.

 

Yes, I also blame the reserve, but if the free market weren't so regulated to begin with, then these lessons would have been learned years ago. These ARM's wouldn't have been so prolific if the notes weren't being purchased. The people we're angry at are relatively untouchable - they made their money and they're out of it. So, we want to save everyone rather than let them learn a lesson from it.

 

In this case, we're saving the institutions and ignoring the individuals, and that's inconsistent.

 

Before being mired in scandal' date=' Eliot Spitzer wrote an excellent editorial on predatory lending practices and the steps the Bush Administration took to prevent state governments from acting to curb predatory lending:

 

http://www.washingtonpost.com/wp-dyn...021302783.html[/quote']

 

An excellent reason why a) we shouldn't be prying into the personal lives of our civil servants and b) prostitution shouldn't be illegal in the first place. Nice editorial, but I also blame the states for incrementally giving up too much power.

[Dak]

IMO the government still overstepped its bounds. The government has no money to give to those bank customers that it didn't take away from someone else that earned it. Why are the people responsible to the members of this bank?

 

the point of a society should, imo, be that we all look out for one-another; if loads of people, through no fault of their own, would have lost their pensions etc then i think it's right that everyone help them out with their tax money. it'll probably be them paying a little extra in tax, but it could be them being saved, so it's more-or-less a national insurance scheme.

 

also, as i understand it, stabalising the bank stabalised the economy, and the economy taking a beating would have been bad for us all.