Mortgages in the News
There were three articles in the Houston Chronicle today that got me thinking. Before I write any more, let me give the links to the three articles.
Prosecutor: loans were worth $5.6 million
by Brian Rogers (HouChron)
Those indicted included buyers, sellers, loan officers, mortgage brokers, real estate appraisers, escrow officers and construction company owners, prosecutors said.
The administration’s effort is aimed at stemming a further tidal wave of foreclosures in coming years as 2 million subprime mortgages — loans provided to borrowers with spotty credit histories — reset from their introductory rates of around 7 percent to 8 percent to levels as high as 11 percent, adding hundreds of dollars to the typical monthly payment.
Industry: U.S. foreclosures hit record level in 3rd quarter
Home foreclosures shot up to an all-time high in the third quarter, fresh evidence of the problems afflicting distressed homeowners amid the housing meltdown.
The Mortgage Bankers Association in its quarterly snapshot of the mortgage market released today said that the percentage of all mortgages nationwide that started the foreclosure process jumped to a record high of 0.78 percent during the July-to-September period. That surpassed the previous high of 0.65 percent set in the prior quarter.
Background
Before I begin talking about today, let’s set the way-back machine to about 1980, and examine the Savings and Loan Debacle. Basically, government bungling, investor greed, bad lending practices, and the omnipresent criminal activities were the cause. The linked article gives you the details, but my synopsis is fairly accurate. All in all, it cost around a quarter of a trillion dollars to over 10 trillion dollars to fix it. This all depends on who you ask, and where their vested interests lie. For argument’s sake, I’m just going to say that the $250 Billion number is probably much closer to the truth than the other.
I find it very interesting that part of the S&L crisis was blamed in the linked article on:
A federal ban on adjustable rate mortgages until 1981 further magnified the problem of S&L maturity mismatching by not allowing S&Ls to issue mortgages on which interest rates could be adjusted during times of rising interest rates. As mentioned above, during periods of high interest rates, S&Ls, limited to making long-term, fixed-rate mortgages, earned less interest on their loans than they paid on their deposits.
I find this most interesting in today’s climate. Today, if you were to name ONE thing most to blame for the present crisis, would it not be what was blamed for the previous crisis in the preceding quote? I’m not asking you to bet your house on the answer, but I’m asking if it is true that ARM’s are apparently today’s bogeyman?
Now, to continue from the 1980’s, and the linked article, I find the following quote particularly interesting:
Delayed closure of insolvent S&Ls greatly compounded FSLIC’s losses by postponing the burial of already dead S&Ls. Chart 1 shows how losses in insolvent S&Ls grew during the eighties as the closure of insolvent S&Ls was delayed. Mid-1983 would have been the optimum time to close hopelessly insolvent S&Ls. Instead, Congress chose to put off the eventual day of reckoning, which only compounded the problem.
So, not shutting down those S&L’s who made bad loans and were going under… propping them up or letting them continue to founder… was another root cause of the crisis. What was just proposed? Was it propping up those who are failing rather than letting them fail?
I’m wondering if you can complete this phrase: “Those who refuse to learn from History _________________.”
Motivations
You cannot analyze anything if you do not investigate the motivations of the major players. In today’s mortgage news, we have several players:
The President
The Lenders
The Loan Holders
The Borrowers
The Media
The president’s motivation is completely hidden from me. Once again, he seems to be either doing something he has no business doing, or getting into something that he could have easily stayed out of. Why is the POTUS even addressing this issue? He is not to blame for it, and he had no hand in developing or writing the policies that have contributed to it. The economy is not going to founder if he does nothing. In short, he should have kept his mouth shut altogether. His motivation: Stupidity
The Lenders want to keep lending money to as many people as possible. They make their money up front in origination costs, document fees, and a host of other “services” that they provide when they initially qualify and grease the money transfer. Their motivation: profit
The Loan Holders are the people who hold the notes right now. They purchase the notes from the lenders after the paperwork is done, and hope to hold on to them for a sufficient period of time to get a solid return on their investment. Their motivation: greed Editor’s note: I don’t think “greed” in and of itself is evil, but it can become so if left unchecked.
The Borrowers are, most importantly, voters and customers. They are the ones who are really to blame for this mess. “They loaned me too much money, and didn’t charge me enough,” they are really saying. These are the people, prodded by the lenders, who borrowed too much for their financial situation. They made bad decisions, and are having problems now because of it.
The Media is reporting this as if it were another World Trade Towers attack. Their interest is political. In a presidential election year with a sitting GOP president, the liberal press (which is about 85% to 90% of the media) needs to paint the economy as the “worst in 100 years, except for the one that Clinton got, which was even worse.” Now, in hindsight, we know that Clinton inherited a recovering economy, and that his economic moves (read: raising taxes and increasing spending) only slowed the recovery, and eventually led to an unreported downturn around 2000. Why was that economy not lambasted? It is because the roles were reversed: a sitting Dem president during an election year. The NYT has all of its economy-related articles from 2003 at this link.
Among the gems there:
Jobs being outsourced overseas… Mortgage rate spike hurting the economy… Army recruiting up because the economy is “soft”… Job losses add to “mixed signs.
You know the drill: Find anything at all that’s moving and say it is in the wrong direction; find anything that’s not moving, and say it is stalled or stagnated; find anything that’s undeniably moving in the right direction, and state random outside forces or Democratic politician inspiration or driving force; unable to do that, get democrat’s opposing opinion or point of view and make it very prominent in the article. The key word used to describe anything good: “surge,” because it acknowledges the upward trend, but surrepticiously instills the feeling that it is short-term and an anomaly. Contrast with Clinton’s “booming” economy.
Today
Firstly, is there really a “crisis?” Sure, foreclosures are going up. Who is losing his house? The guy who took out a loan that was giving him short-term promises for long-term payments is losing his house. He’s benefitted for three to five years paying a nearly-non-existent interest rate, and now that the piper is playing, he finds his purse is empty. I’m looking for my sympathy button, but I’m not finding it.
Secondly, the changes being proposed are not that drastic, and they certainly aren’t coming from the government. Essentially, they are codifying the rules they are already following. I’m not too happy about Bush chiming in, but I lost all confidence in his leadership abilities over a year ago. He just needs to stay out of this one.
Thirdly, who is getting hurt? The real people that are getting hurt are the Loan Holders. If they foreclose, then the property will be liquidated, for probably less than they have invested. They have probably already received a good portion of that in interest payments, but the paper value of the loan will probably exceed the amount generated in the sale. They, too, made a bad financial decision. I don’t see why we should do anything about it.
Fourthly, is anyone else getting hurt? Right now Home Buyers are getting hurt. This is because the artificially-inflated market created by approving unqualified mortgagees caused housing prices to go up. This apparently unending upswing caused more and more speculators to look for more and more loans, and drove even the bad loans into their hands. See my point that starts with “thirdly.” If you own a home in Houston, your appraisal value has been going up year after year, because home prices have been going up year after year, because the number of borrowers/buyers have been increased year after year.
Who is really already paying for this inflated market, due to no fault of their own? Homeowners who didn’t borrow too much, who pay their taxes, and are prudent with their investments.
Everyone else.. well, “too bad” is all I can say. We’ll weather this storm, as long as the Government will stay out of it. Or, since Dubya has already put his foot in it.. to GET OUT of it.
