700 Billion Dollar Question

its hard for me to accept that mortgage brokers are the primary cause of the collapse especially when we see the rising cost of houses, the wages not keeping up and the larger wages going away for a large sector of the middle class (loss of prime factory jobs)creating less qualified buyers under the old housing buying rule of 20% down, payments at 25% of wages etc.

the brokers simply provided a means at which millions of currently successful home owners were able to obtain their dream who otherwise may still be renting today. Most who are struggling now were fully aware of what they were getting into, many saw that balloon payment for the end of “interest only” payments months before it happened, etc. but that is human nature. A certain percentage of people will always be in trouble because they are simply not prepared.

I had built my own house with a construction loan that I easily converted to a home loan with payments less than 50% of average. But a job loss, separation of family, etc forced me to sell the home to pay off other obligations. This happened in 2003 when the housing and job markets were good along with a booming, expanding economy, so as you see, this will happen no matter what.

What I really see is a failing of several different areas with more failure to come. The most announced, talked about, and chronicled generation needs were simply overlooked. It took 15 years for the repercussions of our mistakes to fully hit us, but when the baby boomer generation started looking to buy houses, there were simply not enough creating a runaway buyer's market which fueled housing prices that should have been stopped YEARS AGO. At the end of WW2 a similar housing shortage happened but the feds helped builders build to keep up with demand and KEEP HOUSE PRICES LOW...

well too much money has gone into this pot, so a readjustment is probably not possible. Tooo much time has passed. Too many people will get burned in an adjustment to something that has been allowed to go on for years.

I see the same thing happening to the health care system (which is already overloaded) soon, baby boomers will have a greatly increased need for services and will die waiting for them. My SO works at a major Oncology Center here and its alarming at how many patients end up dying before they can be approved or scheduled for vital procedures.

 

ooops

 

What's interesting watching the hearings is the most "conservative" Republicans (like that Senator Bunning--the former pitcher) speak out strongly about protecting the citizens against this bailout--when it is these types who are responsible for this mess--cutting tax revenues and then overspending shamelessly like drunken sailors the past 8 years.

The other thing these so-called "conservatives" did was deregulate the oil and mortgage industry, allowing oil speculation and unregulated 2% ARMS (the latter should be called Greenspan's Folly). A part of their "small government" philosophy. The "small" part is reduced regulation--while increasing the size of government and carrying a big stick around the World.

What is the media doing in all of this? Well, they aren't pointing any fingers--as usual. Afraid somebody will shout "liberal bias." Fox is laughing.

 

Dave: You are very right that there are systemic problems underlying the present problems. But the key factor of this particular crisis was the mortgage lenders lending to people who obviously could not pay back the loans. Not the working people who had an income with which to pay. They made huge numbers of loans to people with no income and no assets. (The so-called NINA mortgages.) And they did it because investors were offering to buy mortgage-backed securities without examining the underlying mortgages, because they were greedy, and because they accepted without questioning the AAA ratings of these securities, which in turn were based upon the rating agencies (such as Moody's) assumption that investments in property never lose value.

Moody's didn't do its job. Investors didn't do their homework. And lenders made a pre-meditated decision to exploit these facts to scam the investors.

The lenders belong in jail for fraudulent business transactions. The investors deserve to lose their money. Moody's deserves to be taken far less seriously in the future. But the problem is that being a capitalist society we need investment, and this fiasco has scared investors so badly that now they don't want to invest in anything, and if companies cannot get investment, they cannot operate, and that means unemployment and shortages, and general financial dislocation.

I do not know if the bailout will help. I do not know if the system will find its own equilibrium on its own.

But the systemic solution is to adopt an economic model that is not dependent on private wealth and investment by individuals to operate smoothly. Sadly, capitalism is the national religion, and when you criticize capitalism you are called a crackpot.

 

Your $50 plus the $50 of the person you sold to, went to the person you bought the stock from. Since that person paid something for the stock, the $100 replaces the money he paid for it. If he originally paid less than $100 for it, you have given him some money for nothing, in the hopes that the next person will give you some money for nothing. If you sell it for less than you paid, you've acknowledged that you had previously paid something for nothing.

If I give you $100 for an empty box, and then sell the box for $1, which is what it was worth in the first place, where did my money go? It went to you. I got a box for my dollar, and I gave you $99 as a gift.

In your original example, you bought a $50 asset for $50 and you gave a gift of $50 to the previous owner of the stock.

I hope this helps. It is, of course, complicated, because the "real" value of stock is hidden in the complicated asset structure of the company and the vagaries of the market, which often pays more or less than the real, underlying value of the stock. Also, stock can increase in real value as a company grows (or the opposite) and a company may pay dividends, so that you receive income from your investment. All of this obscures the "real" value and makes it impossible to determine for sure how much of your money was a gift to the seller, and how much was the purchase of something of value.

 

sorry, but no mortgage broker is going to be able to determine who will increase their income in the next 5 years, who will spend responsibly saving their money for the balloon payment, etc...

what THEY DO KNOW is that they are immediately putting the bank at risk by a 100% financing because 94% of "qualified" first time home seekers did not have a down payment. they had the income, but no down payment. to eliminate this segment of america who have simply destroyed the real estate market.

what has happened in my area (actually about 5 years ago due to faster than normal rising real estate values) is that many builders are doing what they term as "affordable starter homes" (i call them apartments that are not connected but as little as 8 feet apart with a postage stamp yard)
these houses run 30% under market value for similar sized houses. but even with them, less than 80% of home buyers have the down payment

so what many did, is lived within their incomes, saving, budgeting, etc...the ones who failed simply did not. they are one of the 70% of americans who hold $9000 in credit card debt PER FAMILY MEMBER

so explain to me when the mortgage broker also became a budget director and BABY SITTER!!

 

A couple of points about this 700 billion "taxpayer" bailout.

First, it isn't really 700 billion, since the government expects to sell those assets it buys, probably for less than what it paid. So it might be half that 700 billion. Maybe 350 billion ultimately--about what Bush has paid for Iraq.

Secondly, the financial debt was incurrred by taxpayers who defaulted on their mortgages. Much of this vacation properties in Florida, California and Nevada.
Figure out how much money this is if 10,000 taxpayers default on $500,000 loans each--leaving the banks holding the bag. Somebody gave that 500 grand to the bank down the line for the loan (maybe the Chinese? or the Russians? certainly some Europeans), so there is a domino effect world-wide.

10,000 defaults at $500 grand each is $5 billion. 100,000 defaults is 50 billion. A million defaults is 500 billion. My guess is we are dealing with a half a million defaults or so. I suspect the average per default if probably more than 500 grand--since the properties in the most affected areas are more expensive.

To emphasize again, it was the taxpayers who created the problem by not paying their mortgages. Many in vacation areas just walked away from the their properties leaving the banks holding the bag. I know this has happened in Florida--which has destroyed the real estate market there. Sure, Greenspan is at fault for pushing interest rates too low in January 2000, when Bush took office--and not regulating the ARM mortgage industry in the process. He blew it. And there is enough greed to go around as well--buyers, mortgage lenders, real estate sharks, etc.

But the taxpayers are the source of the problem, and it's now payback time.

 

reportedly it could be as much as 1.2 trillion...estimated defaults run around 2.2 to 2.9 million per one estimate.

and IF the plan works as promised, we should get most of the PRINCIPLE back... but how much interest will be out for the time we hold these notes?? im estimating a minimum 3 years to dig out of this hole

 

Dave you answered it with your first sentence. The fact that these people were able to sell off the risk to a bunch of idiots willing to buy them is the problem. Everyone wants the world. These loan officers should have said "Sorry, but we're unable to offer you a loan because you are too great a risk." Instead, they told these people what they wanted to hear, "Sure, you're good. You can have that big 3700 sqft house. No problem."

You're correct that there are two sides to the coin, but the side making the loans is ultimately responsible for the mess we're in, not the fools who don't understand basic budgeting and home economics (which should be a mandatory HS class now that it's so painfully obvious so many haven't a clue).

 

CORRECTION: See post 39.

 

We're talking here about loans to people who had no income and no assets, and paid no money down. Giving loans under these conditions is malfeasance. And these loan officers were pushing these loans hard, telling people "What have you go to lose? This is free money." And many of those people never made a payment on those loans. Or while the bubble was still expanding, they took out additional loans, against the increased value of their homes, to make the payments on the earlier loans.

And that's why it collapsed. The investors finally realized that these mortgages were producing no income: people were not making their payments. Many people never made a payment on their NINA mortgages.

People who bought homes in good faith, and then lost their jobs and were wiped out because the crash left them with upside-down mortgages, are among the victims. Some people, of course, used the free money to speculate on the rising housing prices. And of those, the ones who sold before the crash made big bucks, and the ones who did not got hurt.

The real criminals here were the loan officers, and they were able to conduct their criminal activity because the government refused to do its regulatory job. But the motivating force behind it was investor greed. It's just like drugs: The investors were waving money around and begging to buy mortgages, like addicts demanding drugs. And the loan officers, like drug dealers, stepped up to meet the demand. It was pure capitalism, and the outcome demonstrated why a totally free market will destroy a society.

 

no assets, no income?? i dont think i would go quite that far. sure there are some and in any business, there are crooked lenders no doubt, but that is not where the problem really stems, its just an inevitable result of the piss poor housing market.

i know a few people who are in the mortgage game. they say about 90% of first time buyers and more than 50% of current home owners dont qualify for standard home loans because they dont have a down payment even under the relaxed 10% rule.

its not uncommon in this area (state capital mind you with 60% being better than average paid state workers) to have people who qualify big time on income but still have little or no down payment

if you want to blame anyone, blame credit card companies and the cut throat, kick em when they are down, take no prisoners business model they have created. along with the insurance industry, they are more to blame for the problems we currently face than anyone else

 

Dave, go to thisamericanlife.org and listen to their show "The Global Pool Of Money." It explains very well how the sub-prime debacle happened. All the things you mention are systemic problems with our economy. But what I outlined above (and maybe in another thread) is how this particular crisis unfolded. It was crooked lenders/brokers acting in a market where the number of existing mortgages and qualified borrowers was dwarfed by an international demand for mortgage-backed securities as investments. Combined with a lack of regulatory oversight, and completely unfounded and erroneous ratings by companies like Moody's.

 

Alan Greenspan certainly did his part in encouraging folks to take advantage of ARM and other non-fixed rate mortgages. Easy money, baby, easy money.

Can't wait to see McCain and Obama debate this issue tonight...

 

well, lets face it. when you really get down to it, there is so much going wrong right now. it is just that this is making news. the health care and education jokes... i mean systems we have now dsserve just as much attention but will we get it?? ....no, because money is instantly quantifiable, health care and education is not and THAT is the real tragedy.

it may be difficult to put the blame on the loan market, but its much harder to assign blame concerning the failure of our education system, especially when the blame lies on us.

 

Nice find, klodhopper.