View Full Version : Hillary's latest pander: The Mortgage Bailout
Sen. Hillary Rodham Clinton (D-N.Y.) warned Tuesday that the ailing mortgage industry could go the way of the disastrous savings and loan failures of the early 1980s if the federal government doesn’t intervene to protect borrowers and police lenders.
With the Democratic presidential candidates competing fiercely for voters in financial straits, Clinton traveled to an elementary school in Derry, N.H., to announce a “mortgage lending abuses” plan that includes establishing a $1 billion fund to help state programs that help citizens avoid foreclosure.
She also wants to eliminate the penalty for prepaying mortgages, which borrowers impose in part so they can guarantee a reliable cash flow when they package the mortgages and sell them to investors.
Afterward, Clinton said in an interview with CNBC that she favors “smart intervention before problems get out of hand.”
more...
http://www.politico.com/news/stories/0807/5287.html
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I dont know where to start.
First off, this is classic Clinton looking to buy votes with a 1 billion $ bailout. Nanny-state anyone?
Being in the industry I have lots of thoughts on the correction that is happening right now with the housing and mortgage industry.
Personally I think both sub-prime lenders/investors as well as buyers/investors got too greedy and now the house of cards is suffering from a catastrophic breeze.
The fact of the matter is, some home buyers bit off more than they can chew and now refuse to give up the lifestyle they pictured in order to save the mortgage. Add to that the low interest rate/easy obtainable sub-prime loan period (which is now coming to a screeching halt) where small retail/correspondant lenders have popped up like weeds in a summer lawn.
Some of the packages I've seen come across my desk are stupidly insane. Add to that the amazement I have when looking deeper at the financial picture of the buyer and realizing that they are buying way over their head in hopes of speculative value appreciation in a short period of time so they can refinance and pull out unearned equity in order position themselves into a more stable fixed loan program. More than once I've had buyers bemoan the fact that they have to bring money to closing on a 100% financed loan for a home over $300K (here in an area where property values average ~$75 sq.ft.). Bemoaning it because they are strapped for cash. YOU'RE BUYING A FUCKING BIG HOUSE PEOPLE, WHAT DID YOU EXPECT??? TO WALK OUT WITH CASH AND KEYS?
A lot of what we're seeing in the correction is the buy now pay later mentality of our latest level of consumer. People would rather spend $50K+ a piece on new autos, rack up the revolving credit debt, and then decide - hey! Lets have kids and go buy a big new house in modern surburbia. :banghead: And then wonder why they can barely pay the intro rate on their hybrid ARM, utilities, car notes, live life on the hog, and OH SHIT PAY TAXES!!!. And whats even more laughable (in a sad way) is the expiration of the fixed rate of the ARM coming at them like a freight train in a tunnel while they're tied to the tracks, and they keep spending like more money will grow out on the tree in their backyard...
BUT NEVER FEAR - NANNY HILLARY IS COMING TO THE RESCUE with her Billion dollar tax subsidized bailout. Its not their fault that they suck when it comes to finances or managing money, lets spread the burden around instead of letting the market correct itself as it should.
ARRRGH!!!
When one applies for a loan for a home, by law they are presented with a GFE (good faith estimate) by the lender/broker outlining all anticipated fees and costs, including taxes. They are also given estimates of what their property taxes are going to be at time of closing and at years end, not to mention most tax bills are available online as a matter of public record on any property (especially available in larger cities (www.hcad.org (http://www.hcad.org)) is an example of the Harris county tax database).
Lender disclosure is already mandated by state and federal laws with regards to rates, terms, and fee disclosure. Thats why you get the GFE and also when you sit down at closing you review important documents such as the NOTE and TIL (Truth In Lending) statement. The best part is, if at any time the buyer wants to back out of the transaction they can up until the point they complete the closing process and sign ALL documents required for the transaction to successfully complete. Everything is disclosed at the closing table.
It should be no secret what a buyer is getting into when they initiate the steps to buy a home, apply for a loan, and start the closing process.
Let the market correct itself, let the predatory lenders go belly up as they should - they've been riding the thin ice for too long as it is, and force people to be more responsible when making financial decisions as important as buying a home.
/end rant.
Jessaril
08-10-2007, 04:01 PM
Greed inflicted this, and it's just correcting itself now, just let it correct itself and we'll be back flipping houses in a few years.
Bailing out people on foreclosures is a baaad idea, the mechanisim is there for a reason.
TheEschaton
08-10-2007, 07:18 PM
Yeah, I actually agree, don't think we should bail out people who made stupid, greedy investments, and lived above their means.
Although that is "the American Way", supposedly.
Kembal
08-10-2007, 07:27 PM
No kidding. The Fed bailed out those who invested in mortgage-backed securities to the tune of $38 billion.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aZ.cxsJa71xg&refer=home
Fed Adds $38 Bln in Funds, Most Since September 2001 (Update9)
By Ye Xie
Aug. 10 (Bloomberg) -- The Federal Reserve added $38 billion in temporary funds to the banking system through the purchase of securities including mortgage-backed debt to meet demand for cash amid a rout in bonds backed by home loans to riskier borrowers.
I'd have to say Hillary's plan for a $1 billion bailout doesn't really cover every at-risk homeowner. Probably just makes them current...they're still on the hook for the rest of the mortgage.
And this isn't just a correction by any means. There's a significant liquidity crisis going on.
Yes, there is a liquidity crisis, brought about by the massive correction in the mortgage industry.
The liquidity crisis is the symptom, not the cause.
Mortgage meltdown contagion
A grim forecast has economists more pessimistic over how far the collapse will spread to the rest of the economy.
NEW YORK (CNNMoney.com) -- The outlook for the housing market looks even bleaker than it did a week ago. Last Friday we reported that foreclosures were skyrocketing, home prices falling and recovery forecasts were being scaled back.
And now this week, the mortgage meltdown spread to the financial markets with ebola-like speed, sparking fears that tighter credit will have a broader impact on consumers, markets and the economy.
The U.S. government continues to downplay the danger. When the Federal Reserve met this week, the central bank said that inflation is the greatest threat to the economy, not the mortgage crisis.
Yet, Countrywide Financial, the nation's largest mortgage lender by volume, reported Thursday that "unprecedented disruptions" in the mortgage market were forcing it to cut way back on the number of loans it was securitizing and selling in the secondary markets.
In the financial markets, credit, including corporate bonds, has become harder to get. Mark Zandi, chief economist of Moody's Economy.com, had been loath to call it a "credit crunch." Instead, he called it a "liquidity squeeze," that had spread to corporate bond and other financial markets.
The difference: In a crunch, nobody can get a loan; in a squeeze, only the riskier borrowers are cut out.
"I think it's still a liquidity squeeze," Zandi now says, "but it has elements of a credit crunch, affecting much of the mortgage market."
It has yet to severely disrupt the prime loan market, however, according to Zandi. The situation will continue until financial institutions revalue their mortgage-backed securities to what they're actually worth.
"They're faced with redemptions and margin calls, and they have to value their securities to their market prices because they have to sell them," said Zandi. That will determine how hard a hit the investment community will take.
Peter Schiff, president of Euro Pacific Capital Inc. and author of "Crash Proof: How to Profit from the Coming Economic Collapse," has said the problem goes way beyond subprime.
"It's a mortgage problem," he said. "Subprime is like a little leak where the underlying problem is the integrity of the dam itself. Most of the mortgages taken out during the past few years will fail."
Schiff expects huge losses in the housing market with home prices falling by half in some areas, which he said has to affect the overall economy. He said he'd been expecting the financial markets to start taking hits long before this week's drop.
"This week is making more sense," he said. "The economy is a basket case."
Most economists are nowhere near as pessimistic. Standard and Poor's chief economist, David Wyss, and Moody's Economy.com's chief economist, Mark Zandi, have forecast 8 percent price drops (http://money.cnn.com/2007/05/23/real_estate/prediction_big_home_price_drop/index.htm?postversion=2007052413) in the housing market, peak to trough.
Zandi does not believe a consumer spending slowdown is enough to trigger a recession, but he hasn't counted it out. What it will do, he said, is "ensure that the economy grows at a pace below its potential. I wouldn't dismiss the possibility of a recession. I put the possibility at one in five."
Ken Goldstein, an economist for the Conference Board, has said he doesn't believe the subprime contagion is enough to send the economy off-track, and that "the idea that average consumers are quaking over the prospects of losing their homes or much of their equity is wrong."
Your Home: When to cash out (http://money.cnn.com/galleries/2007/real_estate/0708/gallery.house_financial_moves/index.html)
The mortgage market adds up to about $10 trillion, according to Goldstein, with about 10 percent to 15 percent of that in subprime. Of that, some 15 percent or so is imperiled, he said.
"It's big, but not the tipping point that will bring the whole housing market down."
But on Friday Goldstein did concede that "The panic and concern over credit is even spreading across the pond to European markets."
On Friday the European Central Bank (ECB) pumped extra cash (http://money.cnn.com/2007/08/10/news/international/bc.centralbanks.reut/index.htm?postversion=2007081006) into the system for a second day in a row, as a means of calming nervous traders. The ECB added $83 billion in liquidity Friday.
The Federal Reserve followed suit (http://money.cnn.com/2007/08/10/news/economy/fed_liquidity/index.htm?postversion=2007081012), adding $19 billion in temporary reserves. The move was the biggest single temporary open market operation in four years, the New York Federal Reserve said, according to Reuters.
Subprime problems have not, so far, slowed consumption down much. The pace of consumer spending is still brisk, although growth slowed in June.
And the Conference Board reported last week that consumer confidence is at a six-year high (http://money.cnn.com/2007/07/31/news/economy/consumer_confidence/index.htm?postversion=2007073110). Steady job growth and low unemployment (between 4.4 percent and 4.6 percent since September) have kept it that way.
Consumers don't really care much about changes in housing prices or, for that matter, in the stock market, according to Goldstein.
"If you really want to screw up consumer confidence," he said, "go for the jugular - the labor market."
Said asset manager Mark Sirinyan of Ineo Capital, "I don't think there will be a recession because of private equity or the credit markets. There are lots of [positive] things going on. We're fighting a war and spending money."
Schiff, however, said, "What [the optimists] don't realize is that consumer spending has been a function of easy credit and the high housing market.
The idea that Americans will keep spending is wrong. With [lower home equity and less access to credit] where're they going to get the money?"
Steven Cesinger, chief financial officer for Dewberry Capital, said, "People think liquidity will carry us forward. I've been in financial markets for 25 years and i've seen that the faucet can turn off as rapidly as it turns on."
According to Goldstein, though, as long as employment stays strong and workers' earnings grow substantially (4 percent annually, according to him), confidence - and spending - will remain high and the economy will chug along.
"Consumers can continue to stay resilient in the face of lower stock and home prices," he said. "Not only is the economy strong enough to survive the crisis, it's strong enough to quiet it." http://i.cnn.net/money/images/bug.gif (http://cnnmoney.printthis.clickability.com/pt/cpt?action=cpt&title=Mortgage+meltdown+is+crushing+other+markets+-+Aug.+10%2C+2007&expire=-1&urlID=23413342&fb=Y&url=http%3A%2F%2Fmoney.cnn.com%2F2007%2F08%2F10%2F real_estate%2Fmortgage_meltdown_crus#TOP)
http://money.cnn.com/2007/08/10/real_estate/mortgage_meltdown_crushing_other_markets/index.htm?postversion=2007081016
Jessaril
08-11-2007, 01:02 AM
Sounds like good news for me, I'm lookin for a lakefront home in the next couple of months =).
Only problem is sellin my current home I guess though.
Sean of the Thread
08-11-2007, 01:16 AM
THE SKY IS FALLING OMG.
Warriorbird
08-11-2007, 01:20 AM
While I'm no fan of this... when you compare it to what the Republicans backed for the Savings and Loan buyout (lotta Bush involvement there) or the amount wasted on the Iraq War....the figures seem pretty small. The Republicans even out spendthrift Hillary.
Sean of the Thread
08-11-2007, 01:33 AM
You almost sounded matter of factly about wasted money in Iraq.
While I'm no fan of this... when you compare it to what the Republicans backed for the Savings and Loan buyout
Of course that was the FSLIC which was created in the 1930s as part of the Great Depression by Franklin Roosevelt.
While I'm no fan of this... when you compare it to what the Republicans backed for the Savings and Loan buyout (lotta Bush involvement there) or the amount wasted on the Iraq War....the figures seem pretty small. The Republicans even out spendthrift Hillary.
Bush involvement in bailing out the Savings and Loan crash in the 80's? Expound plz?
Parkbandit
08-11-2007, 09:33 AM
Bush involvement in bailing out the Savings and Loan crash in the 80's? Expound plz?
Was it bad? YES. So clearly Bush can be blamed somehow.
Ever play the 7 degrees of Kevin Bacon? This is the same game, only with Bush.
Was it bad? YES. So clearly Bush can be blamed somehow.
Ever play the 7 degrees of Kevin Bacon? This is the same game, only with Bush.
My thoughts exactly. I cant even find any reference with Bush Sr. in what happend back in the early 80's.
Clearly this must be another ass-pulled WB statement.
Kembal
08-11-2007, 12:46 PM
Yes, there is a liquidity crisis, brought about by the massive correction in the mortgage industry.
The liquidity crisis is the symptom, not the cause.
Right. If this were just a correction in a certain market or industry, I wouldn't be worried much about it. However, a liquidity crisis caused by a run on securities (as opposed to banks) is not something we've set up adequate safeguards to handle. And if it breaks loose and hits the rest of the economy, well, it's not going to be pretty.
Quoting from the New York Times (damned paywall):
A New Kind of Bank Run Tests Old Safeguards: A few generations ago, savers responded to financial panics with runs on banks, and even healthy institutions could fail if they could not raise enough cash quickly enough. For a long time, that all seemed to be safely relegated to the past. But now the runs are back — and this time the targets are not banks but the securities that have replaced them as the prime generators of credit in the new financial system.
“Our current system of levered finance and its related structures may be critically flawed,” said William H. Gross, the chief investment officer of Pimco, a mutual fund company. “Nothing within it allows for the hedging of liquidity risk, and that is the problem at the moment.” This problem has plagued the United States at regular intervals. The Panic of 1907 was halted only when the banker J. P. Morgan persuaded banks to stand together and halt the string of closings by lending money to threatened institutions. That led to the creation of the Federal Reserve, as Congress recoiled from the notion that the country’s financial health had relied on the wealth and wisdom of one private citizen. Then the Depression, with a wave of bank failures, led to the establishment of deposit insurance. With that, savers became convinced that they need not worry about the health of their bank, and bank runs vanished.
But a new financial architecture emerged in the last decade — one that relied more on securities and less on banks as intermediaries. With the worth of those securities now being questioned — and no equivalent of deposit insurance — some who financed the securities want their money out, a fact that has created the 21st-century equivalent of a run on a bank. Left to deal with the run are the institutions that were created to deal with the old system’s problems — notably the central banks like the Federal Reserve and the European Central Bank. But, in contrast to their close involvement with the banking system, these banks have little regulatory oversight of the securities that are in trouble and may not even know who is holding them....
The problem first gained widespread attention when two hedge funds run by the brokerage firm Bear Stearns collapsed and a third Bear Stearns fund had to suspend redemptions as investors sought to get out even though there was no evidence that the fund was in trouble. “The third Bear Stearns fund announcement was the key,” said Robert Barbera, the chief economist of ITG. “You have to believe that in the hedge fund and mutual fund complexes, there is a decision that is building that says, ‘I want to hold some Treasuries to have a cushion if I see redemptions.’”...
Yesterday, BNP Paribas, a major French bank, said it could no longer value three investment funds that it managed, whose assets had been invested in highly rated securities that were backed by dubious mortgages. “The complete evaporation of liquidity in certain market segments of the U.S. securitization market,” the French bank said, “has made it impossible to value certain assets fairly, regardless of their quality or credit rating.” Adding to the problem is that the questionable securities are widely owned and sometimes have been repackaged to form the basis of other securities. European banks and funds own paper tied to subprime mortgages, and it is not clear who else does, or how investors will react....
The central banks, while clearly crucial to dealing with the loss of faith in the new financial system, lost influence under that system. Loans could be arranged by nonbanks, not subject to bank regulators, and the regulators were hesitant to impose rules that would not apply to all lenders.... Prices in the futures market for federal funds show that just a few weeks ago investors thought there would be no Fed easing this year. Now they seem to think such a move is highly likely, and some expect it as early as next month. But the Fed’s influence is limited when lenders are suddenly risk-averse. “The impetus of lowering interest rates may not help, if they don’t let you borrow in the first place,” said Kingman Penniman, the president of KDP Investment Advisors.
The new financial system is not the one the Fed was created to deal with, but it is the one it must try to handle.
Warriorbird
08-11-2007, 12:51 PM
"Neil Bush was a member of the board of directors of Denver-based Silverado Savings and Loan during the 1980s' larger Savings and Loan crisis. As his father was Vice President of the United States, Neil's role in Silverado's failure was a focal point of publicity. According to a piece in Salon Magazine, Silverado's collapse cost taxpayers $1 billion.[2]
The US Office of Thrift Supervision investigated the failure of Silverado and determined that Bush had engaged in numerous "breaches of his fiduciary duties involving multiple conflicts of interest." Although Bush was not indicted on criminal charges, a civil action was brought against him and the other Silverado directors by the Federal Deposit Insurance Corporation; it was eventually settled out of court, with Bush paying $50,000 as part of the settlement, as reported in the Style section of the Washington Post [3]."
:coughs:
Funny how those 1 billion 1 billion figures match up. Not to say I'm particularly FOR either thing.
I'm still not worried enough to panic. Depending on which economist you listen to you'll get a variation of whats happening.
As long as the other indicators arent tanking at the same clip, and because the Fed can use the 80's recession as an example of bad fiscal policy, I dont see a huge crash coming. I see this as a correction.
We'll see a shift of investment into other sectors as folks revaluate their holdings and things will settle down.
Gloom and doom? I dont think so. But its not rose colored glasses either.
PS. I heard rumor that NYT was eliminating their paywall? Anyone else heard that?
Warriorbird
08-11-2007, 02:18 PM
I'd have expected some of the family stuff to get a lot harder market wise...but suprisingly we're doing pretty okay.
I don't think a "bailout" is necessary...but people get real panicy.
Kembal
08-11-2007, 02:31 PM
I'm still not worried enough to panic. Depending on which economist you listen to you'll get a variation of whats happening.
As long as the other indicators arent tanking at the same clip, and because the Fed can use the 80's recession as an example of bad fiscal policy, I dont see a huge crash coming. I see this as a correction.
We'll see a shift of investment into other sectors as folks revaluate their holdings and things will settle down.
Gloom and doom? I dont think so. But its not rose colored glasses either.
Maybe. The Fed bailout did seem to calm a lot of people down on Friday. On the other hand, I did read today that the administration is planning to enforce strict new measures on employers regarding the employment of illegal immigrants in 30 days. Whatever anyone's thoughts on the political merits of that idea are, it does strike me as a singluarly bad time to be messing with the labor market in that manner. (I think even the optimistic economist, Ken Goldstein, in the second article you posted, Gan, mentioned that labor market trouble would really screw with consumer confidence)
PS. I heard rumor that NYT was eliminating their paywall? Anyone else heard that?
I read the same a couple of days back. That'll be nice.
Actually, I would see that as creating a vacancy in the labor market thus dropping unemployment even further. My greatest concern was inflation driving up unemployment during this.
Shipping out a bunch of illegals and creating a stronger barrier for employers to hire them back would create a pretty decent demand for domestic legal jobs in the short run, probably more than enough to compensate for any short run labor vacancy stimulated inflation.
Fickle thing the economy is, especially with it so attuned to a global perspective now that our markets are so closely linked with foreign markets. We're not the only players on the block anymore.
This thread has kind of evolved into the other mortgage thread with generic discussion of the activity of the Fed.... with that in mind.
Here's a really good article interpreting Bernake's stance on the economy.
http://economist.com/finance/displaystory.cfm?story_id=9622090
Kembal
08-22-2007, 02:44 PM
Bumping this thread a bit, since Gan mentioned the Truth in Lending Act in the OP.
Just caught this off of a blog...if this is right, and it looks like it is, then what Hillary is proposing isn't really that far off the mark in terms of disclosure requirements. Some of these lenders were really not disclosing the information to borrowers.
Link: http://bigpicture.typepad.com/comments/2007/08/coming-soon-tru.html
Gan, I'd really like your take on it, since you've said you work in the industry.
Edit: I should mention that the link is about borrower lawsuits alleging that lenders violated the Truth in Lending Act regarding specific disclosures.
Bumping this thread a bit, since Gan mentioned the Truth in Lending Act in the OP.
Just caught this off of a blog...if this is right, and it looks like it is, then what Hillary is proposing isn't really that far off the mark in terms of disclosure requirements. Some of these lenders were really not disclosing the information to borrowers.
Link: http://bigpicture.typepad.com/comments/2007/08/coming-soon-tru.html
Gan, I'd really like your take on it, since you've said you work in the industry.
Edit: I should mention that the link is about borrower lawsuits alleging that lenders violated the Truth in Lending Act regarding specific disclosures.
Interesting article Kembal, thanks for posting.
At each and every closing that has a lender (3rd party) involved, there MUST be a TIL sheet. (Truth In Lending). With lenders who do not have in house doc prep legal, the legal oversight of this is reviewd by an outside attorney's office, the same who prepares the affidavits, deeds, note, and other docs the lender requires in order to complete the transaction (we call them closing docs).
The TIL has a set criteria of information that is required by Federal Law to be included. It is a synopsis page of the lending transaction that must be gone over with the prospective buyer/lendee and then signed/dated. Without this, the loan can not legally be processed and the Title company who closes the transaction can not complete the closing transaction.
Basic information on the TIL is:
1. APR
2. Total finance charges (cost of borrowing money over term of loan)
3. Amount being borrowed (less any credits, down payments, POC items)
4. Total cost to borrower (items 2+3)
5. If the loan has an adjustable rate.
6. Schedule of payment amount and number of payments. (principal and interest only)
7. Date of first payment, date of last payment.
8. If there is a call feature on the note. (instant demand option by lender)
9. If the note is assumable.
10. When payment is due each month, grace period for payment receipt, and late payment calculation (usually a % of monthly payment).
11. If there is a penalty for prepayment and if the borrower is entitled to a refund of finance charges if prepayment takes place.
There may be a few other items I'm forgetting, but thats the basics. Everything you see on the TIL can be found in the actual Note, which is the actual contract you sign with the lender, which transfers to every lender that buys your loan if it is serviced out. The TIL is just the bullet/highlight form designed for people who are easily overwhelmed by legal language that usually surrounds the figures in the Note.
In the article, its demonstrating where the 2/28 ARMS are the focus of litigation. Thats not suprising. In fact, 99% of all the litigation that seeks to exploit this loophole (which does not remove the obligation of the borrower to pay, just the lien position of the lender - which affects investment/risk on the secondary market) will be on ARM mortgages. Because of the type of loan they are.
With 2/28 ARMs, your interest rate is fixed for the first two years after the note date (the number before the slash refers to the number of years that the initial rate is fixed), after which the interest rate can change every year to the index (http://mortgage-x.com/general/mortgage_indexes.asp) value plus the margin (http://mortgage-x.com/library/loans.htm#margin) (subject to the interest rate caps (http://mortgage-x.com/vocablry/a-to-c.htm#Caps)).
These programs (often called "B paper loans") are primarily offered for borrowers with less-than-perfect credit who don't qualify for an "A paper loan". They allow you two years to rebuild your credit, at which point you may refinance at a better rate. 2/28 ARM loans offer an initial higher interest rate than the fully indexed rate (index plus margin) during the initial period of the loan and usually have a two year prepayment penalty (http://mortgage-x.com/vocablry/n-to-z.htm#Prepayment).
http://mortgage-x.com/library/2_28_loan.asp
I bolded the most important part of this description, because its generic for any ARM. And because it has a higher risk factor, lenders started giving incentives to brokers to push these packages in the form of lender discount on the yield spread (back end) that meant higher money when the loan is bought by the investor group. In a nutshell we had lenders offering unregulated incentives for brokers to play fast and loose with loan applicants who wanted to buy a home but were not financially ready. Thats not a very solid foundation to build a house of cards on.
IMO - its this area right here that I would like to see regulation on. Simply because the average joe q. public is ignorant of the banking mechanisims that are available to them when purchasing something as significant as a home. I would like to see mandated rates based on criteria such as credit worthyness, LTV, and Income/Debt. That way lenders and brokers would be forced to provide loans without arbitrarily assigning rates above and beyond what they have been locked in at with their respective investors/lenders. And yes, I know this violates Rule 1 of a free market and competitive economy. However, as it stands now there is no competition since the lenders are 99% of the time the only ones with a clear picture of how the loan will impact the borrower (because its their business to be able to forcast the risk of the borrower - thats what underwriters do). (Italicized to emphasize - not as irony)
The only reason an ARM would not be a B-paper loan is when an investor wants the low interest rate because his money is making more interest in another security or he's going to flip the property before the adjustable rate starts. This allows him to keep from using up capital that can remain elsewhere.
So Mr. and Mrs. MiddleIncome decide to buy a home. They really like the house thats right outside their budget, but they think they can squeeze it and make it work in the long run. They get their credit scores and find out they do not qualify for an A paper loan; so the low interest fixed rate is not available.
Now comes the carrot.
They can get a fixed rate mortgage at 2 points higher than the A paper rate, or they can get an ARM at the A paper rate and have the option to refinance to a lower rate within the window the ARM is fixed - while reparing their credit, lowering their debt, etc. But the one big caveat that most brokers wont tell the borrowers is, because they arent financal advisors (they make their money off of pushing the loan/any loan) the chances of new home owners actually lowering their debt within the first few years of home ownership is almost a negative. Home owners can attest to this.
Now comes the stick
So after two years (say they bought a 2/28 ARM), they now try to refinance but find out that their credit is worse because they did not curtail spending, cut their living habits or lifestyle, etc. And now they're in worse shape because the adjustable rate is totalling out double what the low fixed rate was. This means their monthly house payment has almost doubled. So they try to refinance again at either a higher Bpaper fixed rate OR another low rate ARM. Viscious cycle.
And guess who keeps on making money.
Guess who is guaranteed refi business at the end of the fixed term of every ARM?... and guess who has a natural bias to make rates on loans arbitrary because of lender incentives or because of yield spread?... the broker or the broker/lender. In my opinion, thats predatory lending even if its legal under the current system. And thats why I dont turn loans anymore. I understand that there has to be a cost to borrowing money, but on the same thought, there needs to be some borrower protection when our economy encourages property owenrship/home owning and at the same time fails at educating the general public on the lending laws and methods necessary for people to afford those homes.
Kembal
08-22-2007, 04:23 PM
Thanks Gan. I learned quite a bit reading your post. :) And the steps you propose sound good, to my somewhat uninformed self.
Clove
08-22-2007, 05:03 PM
Did I read this right? Did Hillary just bring up Savings & Loans? Am I the only one who finds this ironic?
Atlanteax
08-22-2007, 05:19 PM
No, you are not...
Clove
08-22-2007, 05:31 PM
And guess who keeps on making money.
Guess who is guaranteed refi business at the end of the fixed term of every ARM?... and guess who has a natural bias to make rates on loans arbitrary because of lender incentives or because of yield spread?... the broker or the broker/lender. In my opinion, thats predatory lending even if its legal under the current system. And thats why I dont turn loans anymore. I understand that there has to be a cost to borrowing money, but on the same thought, there needs to be some borrower protection when our economy encourages property owenrship/home owning and at the same time fails at educating the general public on the lending laws and methods necessary for people to afford those homes.
And that's the crux of the biscuit Gan if you ask my opinion. Some states, such as Washington require participants in their first-time buyer programs to attend buyer education classes. I wonder if anyone has examined the default rate in states that offer buyer education vs. those that don't.
Regardless, understanding financing is a vital component to success in the United States in my opinion and needs to be required learning at the high school level.
There will always be snake-oil salesmen, where we fail is not providing the public with the tools to spot them.
Warriorbird
08-22-2007, 07:19 PM
Did I read this right? Did Hillary just bring up Savings & Loans? Am I the only one who finds this ironic?
Not a good subject for Bushes or Clintons.
Sorry for the earlier post being so long.
Now that I'm in this facet of the real estate industry I see the cause and effect every day. It frustrates me to no end to see the uneducated get ripped as bad as they do on their loan packages. If we could just step up client education on how the system works, and how to easily understand how the process goes, then competition among lenders would get extremely efficient because of the loan applicant not being taken for granted at every turn.
But in absence of education I'll vote for regulation, simply because its land ownership that sets this nation apart from other nations... and its sad to see raw predatory capitalism take advantage of the unwary/ignorant in dealing with this very complicated process.
Until the playing field levels out, there needs to be something working on behalf of the consumer thats holding the short end of the stick.
Kembal
08-23-2007, 02:47 PM
Just read this off of the NYT. This almost sounds like Enron and its phony side deals.
http://www.nytimes.com/2007/08/23/business/23mortgage.html?_r=2&hp&oref=slogin&oref=slogin
Assurances on Buybacks May Cost a Lender
By GRETCHEN MORGENSON
Published: August 23, 2007
Expanding rapidly as the nation’s largest home mortgage company, Countrywide Home Loans quietly promised investors who bought its loans that it would repurchase some if homeowners got into financial difficulties.
But now that Countrywide itself is struggling, it may not be able to do so, making it even harder for troubled borrowers to reduce their interest rates or make other changes to their loans to avoid foreclosure.
Read the full thing. It's stunning. Who the hell promises investors, "Oh, hey, if this investment isn't as good as when you bought it, we'll buy the investment back?"
According to company figures, last year 45 percent of Countrywide’s loans had adjustable rates; many begin with low rates and adjust to much higher levels.
This is the alarming part for me.
This was a marketing ploy that might come back to bite CW. Bad move, really bad move.
It is likely that Countrywide put the language into its agreements as an incentive to make its mortgage pools more attractive to investors, in turn generating more money for Countrywide when it sold them.
However, it does make sense to keep the borrower paying rather than foreclosing. Less money coming in is still better than no money.
Here's the silver lining for CW though.
Changes in rate are considered a modification. Changes in term arent.
Lesser changes are not, strictly speaking, modifications. Getting a delinquent borrower current on a loan by adding the payments that are owed is considered a forbearance, not a loan modification.
Kembal
08-23-2007, 03:12 PM
Hmm, but would investors sue if they didn't get the promised return because of those forbearances? I don't think investors would be happy if all the deliquent loans in a securitized pool were suddenly made current by that method. (and it'll really depend on the specificity of the language regarding loan modifications in the agreements...considering how vaguely the buyback term was put in, that'd be a concern)
Hmm, but would investors sue if they didn't get the promised return because of those forbearances? I don't think investors would be happy if all the deliquent loans in a securitized pool were suddenly made current by that method. (and it'll really depend on the specificity of the language regarding loan modifications in the agreements...considering how vaguely the buyback term was put in, that'd be a concern)
As long as there is no time reference or expiration on their investment opportunity then there's no direct loss (IMO). The only loss they could pursue would be interest costs for the additional term extension; however, since its probably not in the language of the contract, it would guarantee it to require a judgement to resolve - which also reduces profit (legal fees).
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