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Preying For Help

I've been watching the whole subprime mortgage thing with a vaguely bemused eye -- I've never bought a house, so it's all fairly abstract to me. Listening to some people talk about it, though, has left me more confused than anything else.

I've learned that the second-fastest way for me to learn something is to simply ask you, the readers, to clue me in. (The fastest way is for me to simply state something wrong -- you folks are even quicker to correct me than to educate me.) So I'm going to toss out a few questions that ought to do a thorough job of exposing my ignorance.

1) What exactly is "predatory lending?" Did loan officers stalk would-be homeowners and somehow coerce them into signing agreements against their will? Also, are loan officers solitary hunters, or were there packs of them on the prowl, stalking people with shaky credit?

2) How much did the fight against "redlining" policies (which apparently led to the 1977 Community Reinvestment Act and its revision in 2005) lead to the whole "subprime" mortgages that are the focus of the current situation? (Thank you, Wikipedia, for letting me sound like I know a little of what I'm talking about.)

3) My gut instinct says to take a very hard line on these. If the lenders are violating the terms of the loan, then declare it null and void and hand over the property in question, free and clear, to the borrower. But if the lenders are simply following the terms of the loan, and it's a matter of the borrower not reading or understanding the terms of the loan (despite all the forms I'm fairly sure they signed over and over and over promising they had read and understood everything), then my sympathy for them stands -- but I don't believe they ought to have recourse.

It's often said that buying a house is often the single biggest financial commitment a person will make in their life. (Having kids is up there, too.) Before anyone does that, before they sign an agreement that will bind them for 20 or 30 years -- or longer -- they have a moral obligation to themselves and their family to make goddamned sure they know every detail that's in that agreement. If they can't understand the papers they're being asked to sign, then they need to get someone (and NOT the person on the other side of the contract) to read it and explain it to them.

If there are lenders who are not living up to the letter of their agreements, then they need to be corrected -- financially and, perhaps, criminally. They are the professionals here; they need to be held to a higher standard than the borrower. (A good parallel would be the "good Samaritan" laws that render someone immune from lawsuits for injuries they might cause or aggravate while making a good-faith effort to help someone -- i.e. dragging someone from a car wreck to save them from burning, but causing more injuries by moving them. Most of those laws have a clause saying that the assisting person's liability is on a sliding scale; the better their training and qualifications, the higher the standard they will be held to. For example, if I were to do something stupid while trying to help, I'd be OK, but a trained physician doing the same thing could be sued for malpractice.)

But if it's a simple matter of the borrower not reading and understanding the loan documents, despite all the places where they need to sign and initial indicating that they have read and do understand them, then quite frankly I don't see why it's the lender's, the government's or anyone else's fault when they can't keep up with the mortgages they signed for. As Larry Niven said (and Dafydd ab Hugh is fond of quoting), "Not responsible for advice not taken."

4) A lot of people had the opportunity to get a subprime loan, and declined it -- choosing a more traditional form of loan or none at all. Those who played it safe are now kicking themselves, as they see their decisions are costing them in the long term as those who took the riskier loans and got into trouble are now getting bailed out. In essence, the bailout "rewards" those who made bad decisions, and "punishes" (by depriving them of similar aid) those who played it safe. Is this a good idea? Will this end up sending the wrong message -- don't bother playing it safe, if you make bad choices the government will protect you from the consequences? (This reminds me vaguely of Hillary Clinton's single venture into the cattle futures market, when her agent passed along all the profits, but absorbed all the losses, until Clinton's $1,000 bloomed to $100,000.)

5) Another parallel I'm feeling here is the debate over illegal aliens. Our compassionate instincts tell us to forgive those who have made bad choices, to help them evade the consequences of those decisions. But in both cases, the decision to help can instead encourage even more people to make the same bad decisions (take mortgages they can't afford, enter the US illegally) in the future, trusting that they will be bailed out and protected from the consequences.

OK, those are the thoughts I'm having, based on what little I know about the matter. But I know it's important, because President Bush and the Congress have put it on a higher priority than the federal budget. Now tell me just how wrong (not mean and selfish and lacking in compassion and sympathy, but out-and-out wrong) I am.



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Comments (41)

Predatory lending used to m... (Below threshold)
mikem Author Profile Page:

Predatory lending used to mean making loans to customers who the banks knew would default, for some "advantage" to the bank. But after banks followed the edicts of race hustlers and started making loans to people with poor or little credit it came to mean charging higher interest to poor credit risks, thereby increasing the payments and thusly the risk of default.
It's all about forcing banks to lose money rather than make evil profits.

This is the worst business ... (Below threshold)
WildWillie:

This is the worst business model fix I have seen in a long time. I sure wish I could default on anything and not feel the consequences. Compassion has nothing to do with this. If they cannot afford a home, go to an apartment until you can. Like millions of others. ww

(2)has a bit of a chicken o... (Below threshold)

(2)has a bit of a chicken or egg answer. While the expansion of the subprime loan market may have had something to do with the political pressure, the loans themselves weren't targeted to particular 'areas', but were rather aimed at individuals who didn't qualify under more stringent standards. Interestingly, one of the defenses in favor of redlining was it would unprofitable to loan to these areas... a hypothesis supported by the high number of defaults in the subprime market.

(4) It was easier to get a subprime loan and subprime loans usually carried lower (upfront) interest rates. Thus, anyone who got and has been paying a traditional mortgage had better credit and has had less trouble paying their mortgage and thus wouldn't be eligible for a bailout. Their 'suffering' is the higher price they had to pay for a house as a result of the number of unqualified buyers bidding up housing prices, but even here, as a lot of home buyers trade up, they would have also gotten a higher price for their original house, so there's a bit of a wash.

(5) another parallel is with health care, where society allows people who don't take care of themselves and who don't sign up and pay for insurance to make the rest of us - those who have played by the 'rules' - to pick up the tab for their medical care.

What exactly is "predato... (Below threshold)
Jeff Blogworthy:

What exactly is "predatory lending?"

a) A concept that allows one who went in debt beyond their means to pass the blame, and the responsibility for their actions, on to someone else.

b) A way to demonize corporate America during an economic downturn, fomenting as much hostility and resentment as possible, thus making people more sympathetic towards Marxism.

c) both (a) and (b).

The correct answer is...

I've always thought of "pre... (Below threshold)
wolfwalker:

I've always thought of "predatory lending" as the legalese synonym for what most people call "loan-sharking." The only difference is that "predatory lenders" don't typically threaten your life and health if you default, they just take your property.

There doesn't seem to be any formal legal definition of predatory lending, but there is a list of lender practices that are considered signposts for it. The Department of Housing and Urban Development has an informal definition on its website.

For borrowers who knew what they were doing, I have no sympathy -- whether the loan in question is for a house, a car, or anything else. But for borrowers who were first-time homebuyers who were ripped off by lenders who lied to them or falsified the loan papers -- what happened to them is not their fault. We all know how hard it is to adhere strictly to "get it in writing" and "read all the fine print" when faced with a pleasant, charismatic salesman who talks fast, fluently mixes truth and lies, and readily tells us what the fine print "really" means.

To the extent that the so-c... (Below threshold)

To the extent that the so-called victims were buyers who didn't have the assets and/or income to support their purchase, why should they be offered relief that lets them keep what they never should have had in the first place?

In answer to your question,... (Below threshold)
wolfwalker:

In answer to your question, Steve: to what extent should buyers who didn't have the necessary assets or income but were told by the lender that they did be held responsible for the lender's deceitful acts?

I think of predatory lendin... (Below threshold)

I think of predatory lending as, at its worst, situations where loan originators tried to 'bury' the negative terms of a particular program and focused only on the teaser rate payment. This is unfortunately difficult to prove, and often the bank that now holds the loan wasn't the perpetrator, so who do you hold to account? However, I don't believe there is much evidence that this is the cause of most subprime problems.

I think most subprime problems are due to originators looking the other way on statements of income and/or assets, largely because they planned to sell the loan anyway... because this was abused, the buyers have dried up. The market is correcting the bad behavior.

I was responsible. I got a 30-year fixed, and only as much house as I can afford. People who were less responsible seem to be getting a do-over. I want one too... read on. http://realityblogz.blogspot.com/2007/12/let-me-see-if-i-got-this-straight.html

"Predatory lending" is to b... (Below threshold)
Bob:

"Predatory lending" is to borrowers what "over-serving" is to drunks - it uses spin language to shift responsibility. One area where lenders have aggravated the problem is the exclusion of lawyers from the home-buying process. As pointed out, this may be the biggest purchase of the buyers' lives, yet lenders have increasingly told borrowers that they need not hire their own lawyers to review and explain the documents - just rely on the lenders and their lawyers. (Guess who the loan officers and lenders' lawyers are looking out for.) By saving a few hundred dollars on legal fees, buyers go through the closing process with no professional on their side. This is hardly the sole explanation, but it's one area where the lenders can be tagged with some real responsibility for the current subprime mess.

In any predatory lending th... (Below threshold)

In any predatory lending they count on the buyer not understanding that something that sounds too good to be true usually is. They can be downright deceptive by not disclosing certain terms of the loan as well, because after all, the burden lies with the buyer to read and understand the legalese in the contract. They call it predatory because they know damn good and well that some people are ignorant.

Here's some of the "creative" schemes they came up with to sell homes. If someone has carefully planned and nothing arises to throw a crimp in your plans, then there's nothing inherently wrong with any one of them. But anyone who takes combinations of some or all of these financing schemes indicates a desperation and desire to own a home which overrides common sense.

My husband and I got screwed on our first mortgage. Many years ago we signed a contract stating a higher interest rate than we were verbally given. We figured it out after our first couple mortgage payments were higher than we thought they'd be and proceeded to refinance at a much lower rate and discovered a pre-payment penalty in the contract as well.

It was an expensive lesson to learn. But not as expensive as some people have learned. However, we didn't blame the bank. It was our own fault.

Let's just put this into pe... (Below threshold)
astigafa:

Let's just put this into perspective. Something like a million American households are in the process of foreclosure, and something like three million mortgage loan defaults will occur in the next two years. Banks are going under and the global market is being slammed, and all you want to bitch about is "people who've made bad choices."

The extreme damage to our economy doesn't seem to register with you; the effects of this crisis on the global economy and on the credibility of Wall Street are not an issue with you. Jesus, Jay.

Your problem is an ideological objection to the idea of government helping distressed Americans. (The idea of government subsidizing agribusiness and oil companies doesn't bother you in the least, does it?) Tell me: when the government wants to come to the aid of those banks and mortgage companies that are going under, what will the official neocon line be then? Did those businesses make bad choices, hmmm? Look at what's happening (for a change), think about it (ditto).

As to predatory loans: You talk about mortgages as if all this is about is people buying houses on a sunny day in the marketplace: one person chooses a good loan, one person chooses a bad loan. Nice try.

Most of those subprime loans went out as refinanced second mortgages, based on equity - by people who are trying to survive in an economy that is increasingly hostile to the middle class, by people who couldn't find any other way to pay for Life in These United States.

And the overwhelming majority of those loans were taken out by people who couldn't get any other kind of loan, who nevertheless desperately needed the money, and felt like they would get out of this hole in three years and refinance when the time come - and that is exactly what the lenders promised those people, to a man, to a woman.

I'll tell you what I think this is, Jay: orders were handed down in the Republican neocon echo chamber: Shift the blame from the lenders to the borrowers. You're doing your best, as usual, to comply, by being the biggest asshole you can be.

This time I think you've succeeded.

Let us not forget that many... (Below threshold)
Jeff Blogworthy:

Let us not forget that many of the homes in question are not primary residents but investment properties. All investments carry risks and risk/reward ratios must be duly considered. At least that's the theory.

WW: Notwithstanding your at... (Below threshold)

WW: Notwithstanding your attempt to relieve the buyer from the responsibility of knowing for themselves what they were and were not capable of paying for, by giving up the house, they're not being held responsible for whatever the lender may done wrong/illegal, they are giving up what they never should have in the first place.

Put another way, had they not been lied to, or had they done their homework, or had there been no such thing as a subprime market, they would never have been able to buy the house - so giving up the house restores them to their previous condition (in most cases, renting).

To the extent the lender lied, or even to the extent to which they loaned money to someone incapable of paying it back, they suffer (as they should) by having to re-pop a house that was inflated in value as a result of unqualified buyers bidding up the prices.

WW: Notwithstanding your at... (Below threshold)

WW: Notwithstanding your attempt to relieve the buyer from the responsibility of knowing for themselves what they were and were not capable of paying for, by giving up the house, they're not being held responsible for whatever the lender may done wrong/illegal, they are giving up what they never should have in the first place.

Put another way, had they not been lied to, or had they done their homework, or had there been no such thing as a subprime market, they would never have been able to buy the house - so giving up the house restores them to their previous condition (in most cases, renting).

To the extent the lender lied, or even to the extent to which they loaned money to someone incapable of paying it back, they suffer (as they should) by having to re-pop a house that was inflated in value as a result of unqualified buyers bidding up the prices.

Short story, rising home va... (Below threshold)

Short story, rising home values convinced banks that lending money to people they wouldn't normally lend to (due to questionable credit, and/or low income) was still a good bet because the equity in the house was continuing to climb.

When the housing market leveled out, and interest rates started climbing again, these people (most with arms or balloon payments) are getting their a$$es kicked.

The people who bought the houses were stupid. The banks that loaned them the money were stupid. Now we all get to pay for it.

What I don't understand is that there is still value in those houses. The banks should be fine. The people - we - there is a price for stupidity.

I for one didn't read my mo... (Below threshold)
The Whistler:

I for one didn't read my mortgage but I sure knew what they meant by adjustable rate and what climbing interests rates would do to me.

Then I held off out of laziness to refinance my loan and just happened to get around to it at just about the bottom. I wound up paying a little more but it will be paid off much quicker.

I think the people who took these subprimes knew the terms but were hoping to cash out on the huge run-up on housing costs.

I don't see anything good coming out of a bailout in this case.

The homeowners can go back and live where they were before and the finance institutions can sell the properties on the market and learn from the experience.

Buyers/borrowers had at lea... (Below threshold)
GianiD:

Buyers/borrowers had at least THREE opportunities to review the terms of the loan, when it adjusts, how it adjusts, how much it adjust, etc etc.

Anyone who has bought a house has seen a Truth in Lending, which besides showing you the APR of the loan, calculates maximum possible payments, as well as lets you know if this loan carries with it any prepayment penalties. Additionally, a much more specific document, an ARM Disclosure was signed at least once, and maybe twice.

Anyone who said they never knew the loan terms is a liar, unless they can prove their signature on loan docs is a forgery.

Up to 70 percent of early payment defaults may be linked to borrower misrepresentations on mortgage loan applications, according to the FBI's Mortgage Fraud Report. Also, "The study found that mortgage defaults were largely concentrated in adjustable rate mortgage (ARM) loans, but were present among other loan types, too. The report also revealed that seven of the top 10 states with the highest concentration of mortgage fraud were also in the top 10 states for foreclosures, namely California, Florida, Georgia, Indiana, Michigan, Ohio and Texas."


Most people bought more than they could afford, and now, their 'bet' is turning out to be a loser.

Does anyone have an answer ... (Below threshold)
Les Nessman:

Does anyone have an answer for this, from a previous Wizbang thread?

"Is there anyone/where that tracks totals on things like foreclosures, # of privately owned homes, etc?

Tell ya what I'm thinking, maybe it'll make more sense - we're going to be seeing for a while now the "RECORD NUMBER OF FORECLOSURES!" blah blah blah for a while from the press and talking heads, but I'm pretty sure we have a record number of homeowners around, too. It's like the inflation deal, I can look at the cost of a barrel of oil and use an inflation calculator and see what the inflation-adjusted price was in 1980 or whatever. Is there somewhere I can go to see the number of foreclosures in 1965 vs. the number of privately owned homes to put this in perspective? Anybody?

5. Posted by Falze | December 6, 2007 4:33 PM |"

1) At the bank I work at at... (Below threshold)

1) At the bank I work at at least, we generally don't stalk our potential loan customers. If we were to, however, it would be done individually rather than in a pack.

2) It's been awhile since I did my training on the CRA, but I believe that it does not require banks to offer loans that pose a significant risk of loss to the bank. The fight against redlining may have played a role, but only a very minor one in my opinion.

3) Though it is certainly possible, I doubt that it's the lenders who aren't following the terms of the loan. Banking is a very heavily regulated area, and if the auditors (internal even, but especially the FDIC or OCC) caught wind of it, that bank could well lose its right to give out loans until it could prove it had cleaned up its act.

The problem is you are all ... (Below threshold)
Cstmbuild:

The problem is you are all right, to a degree. (I have been in the real estate industry for 20 yrs. At closing the stack of documents is typically an INCH thick, if you have a HELOC or second mortgage, you about double the paperwork.))
A) There are lenders that used straw buyers to turn houses. The "buyer" agrees to buy the house at an inflated interest rate, thus increasing the lenders/mortgage brokers profit. (I have listings that the "owners" made 0 to 4 payments before foreclosure began.)

B) There are lenders that lied to buyers about how ARMs work. Now the payment is double/triple what it was at the start.

C) There are buyers who lied about their income, using the stated income process (normally for self employed, was pretty well used by anyone the last year or two.)

D) There are real estate sales people that lied about values and property conditions and when investors tried to flip the house, uh oh, no buyers and no increased value.

E) There are investors that didn't have a clue whot bought houses, remodeled them and them couldn't sell for a profit.

F) Lenders had company appraisers that would inflate home values so that the Buyer had no out-of-pocket expense in purchasing. (Seller pays some costs and the Buyer gets 100-103% loan.) Buyer has no money invested in the property and thus feels no monetary loss in foreclosure.

My advice:
1) Stay away from mortgage BROKERs, use a mortgage BANKER. IF your credit is so bad you must use a mortgage BROKER, don't buy. ie, use a reputable lender---ask the realtor, closing company, etc. Ask for references.
a) Never use a lender that will not provide a good faith estimate (est $'s needed to close) upfront. THIS IS A GOLDEN RULE. You will get screwed if they are "unable" to provide one. (I can provide a generic one in about 10 minutes, so there is no excuse.)

2) Use a Realtor: If you are really clueless them hire a Buyer's broker or Single party broker to represent/work for you.

3) Attorneys have little liability in reviewing real estate contracts (and typically all they review is the PURCHASE contract not the loan documents) AND it will cost you sustaintially more than a few $100s to have an attorney at the closing with you.

4) Always close at a closing or escrow company (not the lenders office or real estate office, etc) This adds a third party to review items.

5) NEVER get an ARM for your first mortgage.

6) Shop the mortgage companies. It really is like buying a car. Different companies offer different deals.

There is a lot more, but I figure no one will read all this, just like they won't read all the documents at a closing.

If you have never bought a house, you have NO idea the amount of forms required

Cstmbuild,That is ... (Below threshold)
Maggie:

Cstmbuild,

That is a great post. Thank you.

Cstmbuild,I, like ... (Below threshold)

Cstmbuild,

I, like you am a Realtor. You are right in that the blame can be passed on to so many people. Whatever did happen, though, I hope more and more people are getting educated about what is really involved in buying a home. Many of the people who are upside-down now never should have been buying in the first place, turning them into sellers now when they should be buying for the first time or still renting. We have to be willing to tell people straight up that they should wait to buy or, frankly sell. It might mean less business now, but it would lead to healthier markets down the road.

Steve, I believe you'll fin... (Below threshold)
wolfwalker:

Steve, I believe you'll find you're wrong on both counts.

First, the buyer is not simply returned to the status they had before they bought. Bankruptcy or foreclosure automatically drops your credit rating by a huge amount. Some evicted families might not be able to find other living quarters at all. Some might find that the only available apartments cost more in rent than their mortgage payment was. They've probably lost work time. In some cases they might have lost their jobs completely -- in jobs that require a security clearance, being deeply in debt or foreclosed can affect your clearance and therefore your job status. They've probably lost savings. They've certainly lost any down payment they made.

Second, the bank that performs the foreclosure and takes the property now has a property that it can re-sell for book value, thus recovering most of the money it "lost" on the bad loan.

As a related issue, I was astounded when I saw this report from Ohio that lenders are foreclosing on properties they don't legally own. (I know it's an NYT report, but I crosschecked with other sources and I believe the article is trustworthy.) Apparently, for some of these mortgages, nobody knows who actually owns the loan note, and therefore the property. Some of these buyers might have been able to save themselves by renegotiating, but how can you renegotiate a loan if you don't know who to negotiate with? And nobody in or out of the banking/mortgage industry thought there was anything wrong with that. When this level of sloppy bookkeeping is considered normal, there's something radically wrong with the entire industry.

CST,Over 15... (Below threshold)
GianiD:

CST,


Over 15 yrs in the mortgage business, Ive worked for both bankers and brokers. In fact, my preference is to work for a broker is because its better all-around for my clients. Besides, most mortgage bankers actually broker loans. Thats right, very few shelve their own paper, they broker them out.

Mortgage bankers are always more expensive(even when selling paper to the same outlets), very seldom do bankers have more choices or more flexibility than brokers.

Think of it in insurance terms. You can go to State Farm or Allstate, for instance, and only have access to their single product line, or, you can head to Miller's Insurance Agency, where they have access to maybe 10 or 15 markets/carriers. More choices always leads to a 'better deal'.

Bankers slam brokers every chance they get, because they can seldom compete on equal pricing. Is the reason you say dont use brokers is because bankers are ALWAYS more expensive? Bankers try to claim the ethical high road, BUT, if they were 'so honest' how come they dont disclose what they make off of the loan?

Brokers arent the problem here, although, yeah, there are scumbag brokers, scumbag bankers, realtors, builders, lawyers, appraisers, etc. IMO, anyone associated with loan fraud should either make good on any financial damages, or do jail time.

Possible 70% of delinquencies were because of borrower fraud, and, from what Ive heard, 2 out of 3 problem loans are in non owner occupied homes, meaning these people most likely were trying to flip a home, and the real estate market turned before they could.

Borrowers had at least 3 chances to review loan terms prior to closing. If they chose not to, who's really at fault?

If it sounds too good to be... (Below threshold)
iurockhead:

If it sounds too good to be true, you can bet that it is. "Subprime" implies that you pay a rate at which the lender is losing money, which ain't gonna happen. You'd think that after the savings and loan collapse in the 80's that the lenders would be more careful, but apparently not. Those were loans given assuming the double-digit inflation of the Carter era would continue, and property values would increase and outgrow the debt. Oops, Reagan screwed that up for them.


Bad decisions by the lenders, I hope they have to eat the losses because they knew what they were doing. Bad decisions by the borrowers, but it was their decision and I don't want to pay for it. They will have to pay what Dave Ramsey calls the "Stupid Tax," from which, hopefully, they will learn something.

Oh, and : 11. Posted by astigafa | December 7, 2007 8:47 AM

If you want to help bail out irresponsible people, knock yerself out. But don't drag me into it.

#25 Subprime is for less t... (Below threshold)
GianiD:

#25 Subprime is for less than prime borrowers, in most cases, it means less than prime credit. (Also programs such as all of these 100%, 103%, 107% LTV loans have been called subprime). I never understood why anyone would lend money with $0 down to someone with a bad history of paying past credit obligations.

Mortgage lenders didnt create these programs, Wall St, etc needed new ways to earn greater returns, so they created these programs in transferred all interest rate risk to the borrower. ARMs should be a 'financial planning' tool, best used when someone knows that loan will only be used for a short term, maybe where they expect to move before the 1st adjustment.

Know that the highest market rate out there, in whatever program you want, is the 30 yr fixed. Why? Simple, the lender/investor assumes all interest rate risk. If rates go to 20%, I'm still at 4.75%. If they were to ever drop low enough to refi, I can, as Fannie Freddie loans have no prepayment penalty.

astigafa: You app... (Below threshold)

astigafa:

You apparently didn't didn't read (and comprehend) Jay's entire post. Specifically paragraph 3 of part 3. Or you wouldn't have made this statement:

Your problem is an ideological objection to the idea of government helping distressed Americans.

Conversely, your apparent problem is an ideologigal objection to holding the right party responsible on a case by case basis.

Just for the record, most c... (Below threshold)
WildWillie:

Just for the record, most conservatives are against most subsidies. The government does not earn money, they take it. ww

OK, like you, I've never bo... (Below threshold)
Skip:

OK, like you, I've never bought a house. But I've thought about it. Five or six years ago I went as far as to talk to some lenders, see what I qualified for. And it was astounding. I qualified for a loan with a payment that was about double what I'd have been comfortable paying. When I said something about that, and mentioned not wanting that big a payment, he actually suggested that I go towards the bigger end of the payment, because houses always go up in value. That way I could sell it in 5 years at a tidy profit, and then turn around and have a much smaller payment.

That may not be what people classically think of as predatory lending, but if I'd followed his advice I'd have been able to save no money at all during that time, and any setback would have probably resulted in me losing the house.

Thank you for that insightf... (Below threshold)
matthew:

Thank you for that insightful economics lesson, WW. It's really hard for me to keep my political binaries straight.

#24 From my experience in O... (Below threshold)
Cstmbuild:

#24 From my experience in Oklahoma, Mortgage Brokers have higher fees, make more money off each loan, disclose less and they are the ones who refuse to provide Good Faith Estimates. Several Mortgage Brokers in the "Big City" recommend not using a Realtor. Why? Because we provide Good Faith Estimates and can suggest that they shop around. Are all Mortgage Brokers bad? No, but the possibility of finding the good ones is pure luck.

Yes, very few Mortgage bankers keep their own loans. Most end up being sold to Countrywide, Wells Fargo, Washington Mututal, etc. (Which is one reason that those in the "know" were terrified that Countrywide was going belly up.)

As a note: By Oklahoma law I could not tell you not to use someone and I can't even recommend anyone. We are required by law to provide several options and we can make suggestions, but we cannot steer someone to a specific company. (Although there are some that do. Like I say we all have bad apples.)

On my original post I left ... (Below threshold)
Cstmbuild:

On my original post I left one of the main culprits out:
Buyers that got ARM loans so they could buy larger homes.
Ex: I qualify for $100000 home at 6% for 30 yrs. That is a $599.55 principle and interest (P&I) payment.
At a 4% ARM I know qualify for a $125,000 mortgage. Few seem to release or chose to ignore that interest rates are at historic lows and the only place they would be going is up. One year later the ARM is at 6% on $125,000 and the payment is $749.44. That is a $150 or 25% increase in the original payment.
Guess what? In another year it can go up again.
This example is amplified in expensive markets. You can qualify for $300000 ($1800/mo), with the ARM it is $375,000, but that 2% increase in interest rate results in a $2250/mo payment.
Simply Buyers wanting more house than the can afford, and at times, Realtors, Lenders, etc pushing the bigger house for increased commissions/fees.
I never recommend someone max out on qualifying or use up all their cash, because all it takes is one hospital stay or car wreck and, oops, no more payment.

Exactly, cstm. What one ca... (Below threshold)

Exactly, cstm. What one can "qualify" for and what is prudent is two different things.

As a matter of fact, my home has increased so much in value I wouldn't even buy my OWN home right now.

My late mother always preac... (Below threshold)

My late mother always preached to me that I should never commit more than 1/4 to 1/3 of my take home pay to housing. I've been following her advice for years and thus not living in the most fancy of digs - but in decent and clean neighborhoods in a decent, clean and comfortable apartment.

Yes, I would have preferred to own a home, but I could buy a house and conform to what I had come to learn were very sensible suggestions from my mother so many years ago.

Ergo, and despite the fact that they didn't have the benefit of my mother's advice, I don't have a lot of sympathy for those who have become caught in this crunch. Yeah, yeah, yeah - the dream of home ownership and all that. There's also a sense of entitlement and expectation (that some amorphous someone will help you out) wafting around these subprime loans that appears to be coming to fruition - that pisses me off.

I cannot help but think of the ant and the grasshopper! In this case, the grasshopper should be told to hoe his own row!

When my wife and I bought o... (Below threshold)

When my wife and I bought our house about 3 ½ years ago we had money for a down payment, but not the full 20% so we were going to be stuck with PMI regardless. The lender offered us a 103% loan for almost the same rate as a conventional 30 year. It was pretty much a no-brainer. We took the 103% and used the cash on hand to make improvements. (The house is/was a 'fixer upper.') 15 months later we refinanced, this time at a slightly lower rate (original 30 year rate) and with a 'no closing costs' mortgage (our only out-of-pocket was the appraisal). Due to our improvement's and the climbing market we had (and still have) an over 20% equity stake that allowed us to get out of PMI much sooner.

The moral of the story is that, we, as consumers took advantage of two different 'sub-prime' mortgage programs and we came out ahead. The difference is that, 1.) our credit was good, and 2.) we're not stupid.

I've been writing on this s... (Below threshold)

I've been writing on this subject for 2.5 years and 500 major articles, and I'm not anywhere near done.

I am currently both a Realtor and a loan officer. The mechanics of how it happened are not simple, but the clear enabling factor was lenders' belief in the invincibility of the real estate market, which, as they saw it, gave them the ability to offer "make believe" loans, as in everybody agrees to make believe the borrower qualifies. But this only works if the real estate market is indeed invincible, when it was not.

This enabled all sorts of practices which encouraged people to stretch beyond their real means in purchasing more expensive properties than they could really afford. It wasn't predatory so much as enabling and encouraging people to hang themselves.

The borrowers themselves are far from blameless. If someone were to offer the average person "a genuine diamong ring," for $10, they'd be skeptical. But offer them apparently cheap money "$400,000 loan for $1200!" and huge numbers of people signed up, not understanding this was only the nominal minimum payment, not the real cost of the money. The real cost of the money, in this case, was about $2700 per month - the other $1500 being tacked onto what they owe, so that the cost of money is even higher next month.

I explained this to hundreds of people (and over 2 million visitors to my website), telling them I could get it done if they really wanted, but there were problems they'd have to face in the future. The vast majority decided to go somewhere else, to someone who would pretend everything was all sunshine and roses. The problems were still there, of course, but they were able to pretend to themselves they weren't. People are strange that way. I may be a lot poorer than I would have been, but I don't have any pending court dates in my future, either.

The entire system of real estate need an overhaul, but the part that cries out for reform most is the system of loans, which is completely broken. More than one commenter above me talked about the standard loan forms you are required to receive (Good Faith Estimate or MLDS, the California equivalent. Truth in Lending Advisory. Disclosures up the wazoo) But the games that can be played with those forms are legion, and the forms at loan sign up mean nothing real - they're a joke, and completely non-binding upon the lenders.

You can't cover this in one article, or 100. But if you want to learn more, the website is http://www.searchlightcrusade.net/

My wife and I followed two ... (Below threshold)
hermie:

My wife and I followed two basic principles:

Don't buy more than you can afford or maintain. We saw a number of houses, most of which were simply too large for us to maintain. Too many buyers go for a larger home because they think they need it for status reasons. We settled on a nice little three bedroom ranch and we have been able to re-side, re-roof, and make other changes which we could easily afford. If we had been talked into the original two story, four bedroom house, we would have spent far more in utilities, taxes, etc.

Make sure the payments can be made, and within a realistic budget. We had opportunities to get ARMs, but we wanted the certainty of a fixed rate. If we had taken the ARM, we would have had to depend on other costs remaining static...and we all know that taxes, insurance, utilities and other home-related costs never go down.

The Truth-In-Lending disclosures are written in easily-understandable language. If you can't read and understand the disclosures, you get someone to help you. Even if you agree to the terms of the contract, you have a period of time to rescind it. The Fair Lending laws were written to prevent borrowers from being taken advantage of. If you sign a contract without reading it, understanding it, or getting help from someone else to review it, you shouldn't claim that you were taken advantage of.

The story seems to remain t... (Below threshold)

The story seems to remain the same throughout the entire thread here; except for the rare person who blames only the borrowers or only the lenders. There are responsibilities to be accepted by both sides in an endeavor to realize that American dream of owning your own home.

Gone are the days of the early 19th century where neighbors of the nearby countryside got together to erect someone's house in 48 hours or less and then have a party to "bring the floor down" and then you move in. They weren't installing plumbing or electrical wiring or conforming to "regulations" imposed by municipalities. Nor were they wiring for ambient lighting or surround-sound.

Life isn't that simple anymore. And there are far too many people who think it is or can be. It takes money and planning and forethought. It takes trust in a lender, which is sometimes misplaced these days, and it takes an educated buyer, which is just as rare. One has to realize that no one is "giving" you anything.

It's been my contention that there are two kinds of business people out there; all have taken the time to educate themselves and either have an expectation that their customers are just as educated or count on them being under-educated. We should arm ourselves accordingly.

Get educated. Learn some basic economics. Pay attention to politics and national trends. Quit thinking you're getting something for next to nothing. It ain't gonna happen.

"I mean, talk about a direc... (Below threshold)
astigafa:

"I mean, talk about a direct IV into the vein of your support. It's a very efficient way to communicate. They regurgitate exactly and put up on their blogs what you said to them. It is something that we've cultivated and have really tried to put quite a bit of focus on."
-- former WH communications director Dan Bartlett, on conservative blogs

"It's incredible. Never ... (Below threshold)

"It's incredible. Never an original thought or constructive comment. If he's not having a hissy denouncing whatever the authors say, he's cutting and pasting material that's utterly irrelevant. He's like a human remora -- just a mouth connected to an asshole, with virtually nothing in between."

Jay Tea on astigafa

"My late mother always prea... (Below threshold)

"My late mother always preached to me that I should never commit more than 1/4 to 1/3 of my take home pay to housing."

Posted by Gayle Miller

Right she was, Gayle. A decent lender will share the same advice. We as Americans have bought the advertising hook, line and sinker, that we can have it all and not worry about paying for it until later. Someone who takes your mother's advice can save and invest a lot of money, and probably do better in retirement than many who lived in overpriced and overbuilt homes.




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