Risky-mortgage meltdown was predictable, preventable

[babylonsister]

Risky-mortgage meltdown was predictable, preventable

It's called "payment shock." A typical home buyer with slightly blemished credit starts off with a $200,000 mortgage, a 7% interest rate and an initial monthly payment of $1,531. Everything's fine for two years until that low "teaser" rate expires and jumps to 11.5%, adding a whopping $625 to the monthly payment.

What was a stretch becomes unaffordable, the homeowner falls behind and, in the worst case, loses the home.

This domestic tragedy, multiplied many times over, has triggered the meltdown in the subprime mortgage market, where people with less-than-perfect credit records go to find home loans. About one-fifth of the 6.5 million such loans originated in 2005 and 2006 will likely end up in foreclosure.

It's still uncertain how far the pain will extend beyond the unfortunate homeowners and the housing market. But fallout from the subprime meltdown is already chilling the broader credit markets and threatening to spread to the broader economy. All of that terrifies the stock market, where the jittery Dow Jones average plummeted a sickening 387 points Thursday on credit worries.

There's plenty of blame to go around. Predatory lenders and ignorant borrowers share much of it, but they will always be with us. A more pertinent question is where were the regulators who are supposed to curb excesses and protect consumers?

The answer is, mostly looking on and doing nothing.

more...

http://blogs.usatoday.com/oped/2007/08/post-8.html

[Warpy]

1. All you had to do to know what was coming was

read the Economy forum right here on DU.

[Commie Pinko Dirtbag]

12. Or Tom Tomorrow. This cartoon is from March 23.

[Javaman]

21. To paraphrase this whole failed administration*...

"I don't think anyone could have anticipated the housing bubble..."

[Ilsa]

2. Yesterday morning on MSNBC, the stand-ins for Joe Scarborough

were claiming "blame France for today's market woes." They even had "Blame France" in large print at the bottom of the screen. All bcause they want to protect themselves from the mess we created.

[babylonsister]

4. Dumbing down the masses, were they?

I often wonder if they have a clue as to what's really going on or do they just like to hear themselves talk/have to fill air time.

[Ilsa]

22. Mika wasn't on. The guy hosting was dumb as a pile of rocks.

Look, I'm merely above average in intelligence. And I generally don't care to be judgmental about people's smarts. But I wondered if he was Neil Bush progeny or something.

[TwilightGardener]

3. Why have so many people fallen for this? That's my question--

I know quite a few people who make income similar to that of my household, and they are all buying brand-new McMansions, not modest 50-year-old ranches (or in my case, old falling-apart victorians). It's almost like nobody wants to buy normal "existing" homes anymore, the kind that have 1500 sq ft and a one-car garage and laminate countertops. Have we all gotten too greedy? Too much Home and Garden TV?

[MrCoffee]

5. if you find one of those in my neighborhood for less than $350k, let me know

the new town-houses are going for $650k and up.

[TwilightGardener]

13. I suppose it does depend on where you live--that's definitely something

to take into account. I live in the midwest on purpose.

[babylonsister]

7. I don't know; they thought the real estate values wouldn't skyrocket?

I remember years ago when we bought our first house; the balloon payments were explained to us, and we both immediately knew we weren't going there.

And I too live in a suburban ranch home and am happy to have it.

[AlCzervik]

9. it's the American on steroids imo. I was a realtor and there were many times i had 1st time

home buyers that wanted way more than they could afford but they could get a questionable mortgage. I always talked to them and went over everything they would be getting themselves into, some would decide to forgo super sizing and some would not but they all came in the same way--"i want bigger and better because thats what is the thing now".

it's combination of so many things, predatory lending and emotional decisions---just because you can doesn't mean you should. Forclosures in my area are up, waayyyyyy up.

[TwilightGardener]

14. That mirrors my experience buying my second home--

only in reverse--our realtor was stunned that we never came anywhere close to our pre-approved loan limit (we undercut it by almost 90,000). But we're kinda cheap in my family. I think a lot of otherwise rational folks have an inflated sense of what they "deserve" in terms of lifestyle, but I'm not trying to sound holier-than-thou. I'm just too chicken of getting sick, losing my job, whatever--and having to suddenly scratch and claw to make that payment. My driving philosophy is, we should still be able to meet our mortgage payment on one income.

[sandnsea]

23. And not low income folks

I wish you would explain that the bottom 40% still weren't qualifying for homes through all of this, at least not in most of the country. This was median income people, $60,000 or so, who did this. You can't get any kind of a mortgage working at Walmart.

[BlooInBloo]

6. Irresponsible lending, irresponsible borrowing.

[DaveJ]

8. Homes shouldn't cost $200k in the first place

I just found this website of someone claiming to build nice homes for $10 per square foot (or $20k for a 2,000 ft home)... http://www.hollowtop.com/cls_html/limited.htm. I don't think the real robbers are the mortgage bankers (though they have their faults) but real estate investors driving up costs.

[Sapere aude]

15. You need land to put the home on and you need to pay for the infrastructure.

You are looking at the building only. They don't make land anymore so the price of land will keep going up as more people want some.

Here were I sit today you can buy a nice manufactured home with all appliances for $49,999. But there is no place to put it unless you tear down an existing one and put up the new one. The problem is you have to buy the existing one first.


I live in a manufactured home on 20 acres. The land was undeveloped when I bought it. I'm now trying to sell since my wife doesn't want to live in the country any more. I can't sell because no one can get a loan.

[DaveJ]

16. That was sort of my point....

Since the cost of the actual home should be affordable, it is the real estate that is skyrocketing, and the real estate investors who are going to encourage it. If you already have a home or are making money in real estate it's great, but for everyone else it makes life miserable.

I am pro capitalism, but housing is one area where I think the government should step in to make sure everyone can afford the American dream. Regardless of the population increase, everyone is going to live somewhere, the only variable is how much we have to pay for it. Not having a home makes people miserable and the idea of making exceeding profit off people's misery is not good for our country.

And even though the cost of land in the city is enormous, that problem is easily remedied by building skyrises. I can find a small place on the lake for less than $700/mo. The problem is no matter how long a person pays, they will never own it. That's the kind of capitalism that I'm against.

[no_hypocrisy]

10. And so was the Crash of '29. Greed makes people do stupid, risky things.

And the Free Market just encourages this kind of behavior one way or the other.

[onyourleft]

11. Ninja loans.

I learned about these this morning on CNBC. In essence, a loan made to someone without a job, without assets and no income. I was shocked (or was I?). Truly a mess of their own making (lenders).

[youthere]

17. How did people NOT see this coming?

I know virtually nothing about real estate and markets and all that crap and I knew when I saw 18 and 20 year olds that were working at the convenience store getting morgages for $150,000 homes that something just wasn't right. I saw people who I KNEW made a lot less money than my husband and I taking mortgages for homes I knew we couldn't afford, I saw people who couldn't keep a fricking checking account or pay a bill on time buying homes (and I know how DH and I were scrutinized when we bought our first home) and it all STUNK to HIGH HEAVEN. I kept saying to myself "What are these people thinking?" and "Why isn't anyone stopping them?" "Why are banks loaning them money?" and now they are all screwed and everyone acts SOOOOOOO surprised. I just don't get it. My father always said,"If it sounds too good to be true...it probably is." (yes, yes, I know he didn't make that up himself...he just said it..ALOT)

[BlooInBloo]

18. I found the following book useful in that regard....

http://www.amazon.com/Manias-Panics-Crashes-Financial-Investment/dp/0471467146/ref=pd_bbs_sr_1/105-5329376-1200443?ie=UTF8&s=books&qid=1186775024&sr=8-1

[tanyev]

19. No one could have anticipated that giving huge loans to risky borrowers would end badly.

[BlooInBloo]

20. Snark-truth, but it's actually irrelevant.