Financial Catastrophe

[Dante]

This is your freaking retirement, people shouldn't play "investment games" with their retirement money with the stock market!!!  

Seriously, that's the worst comparison I've ever seen you make in the years we've been posting on these boards.  The timeline on retirement for most people (measured in decades) allows for the smoothing out of downturns so you can take advantage of the AVERAGE gains and compound interest.  The recent (last 18 months or so) downswing in the stock market has happened plenty of times before and it works itself out.

In the situation you described the timeline for the "investment" was 2-3 years and in an investment like real estate, if you can only afford to hold the investment for 2-3 years (without a refinance) and it takes a downturn in month 26 or so, you won't be able to wait for the upturn.

Also, part of the housing issue was VERY similar to Enron - Enron was using its stock during most of its dubious investment bank deals and everyone was banking (literally) on the fact that the Enron stock would go up - and all the illicit money the IB's pumped into Enron helped keep the stock up (I say illicit because of the illegal arrangements the IBs made with Enron where they would buy assets and hold them with the verbal understanding Enron would buy them back in the short term after the stock went up).  Once the Enron stock slipped a little, it started a cascade of things unraveling.

I see the housing market as the same - you had people making investments that they couldn't afford unless the value of the asset dramatically increased in the short term and because of massive amounts of "loose" cash being pumped into the system (e.g. basically all loans were approved), it was driving the price up because of increased demand and being able to buy "more for the money" - which also led to people buying "beyond their means" - meaning they could only afford the place IF it went up in value and could be refinanced.  Once the market took a bit of a downturn and the economy stalled a little, it created a spiral, similar to Enron where the housing price (stock price) went down, so people couldn't refinance (get cheap cash based on Enron stock price), etc etc.

Part of the problem is that industry and corporations typically have one goal - make as much money as fast as possible and use that money to then make more money.  Unless a company has a strong board of directors that will focus on long-term goals, most public companies will fall prey to the "this quarter's stock price/earnings" syndrome.  Given the typically executive team compensation packages, it's not in the executive team's best interest to focus on anything beyond the short-term.  This is exaggerated in the financial services industry, particularly futures and options trading.  As a trader/trading manager if you/your team makes $10 million in profit one quarter and loses $10 million the next quarters, most compensation packages have you making a huge bonus the first quarter and then having some penalty second quarter, but not enough to offset the first quarter bonus.  So while your company had a net zero return, the trader/trading manager makes out nicely.  This leads to a culture that rewards big risk home-runs without equal negative penalty for swing-and-a-miss strikeouts.

[Smmenen]

This is your freaking retirement, people shouldn't play "investment games" with their retirement money with the stock market!!!  

Seriously, that's the worst comparison I've ever seen you make in the years we've been posting on these boards.  The timeline on retirement for most people (measured in decades) allows for the smoothing out of downturns so you can take advantage of the AVERAGE gains and compound interest.  The recent (last 18 months or so) downswing in the stock market has happened plenty of times before and it works itself out.

In the situation you described the timeline for the "investment" was 2-3 years and in an investment like real estate, if you can only afford to hold the investment for 2-3 years (without a refinance) and it takes a downturn in month 26 or so, you won't be able to wait for the upturn.

Give me a break on the hyperbole. 

Whether it's real estate, stocks, bonds, cds, currency, securities, options, or whatever, it's all investing.    It's the same thing.  There is nothing sacred about a home as compared to any other investment.  The only difference is that most people's biggest asset is a home.   But from an investment perspective, it's all the same: investment opportunities. 

I have alot of friends who invest on a scale of 2-3 years in all sorts of financial instruments.   If you think you can make some good money with low risk on real estate, that's no different than a particular stock.  The only relevant thing is the rate of return.    I mean, what do you think day traders try to do? 

[Moxlotus]

First of all, I have already explained this multiple times, but many of the people who are being foreclosed upon DID NOT by houses they couldn't afford.   Instead, they were buying houses they could afford, with the assumption that they would refinance before the adjustable rate set in. 

Let me explain.   You buy a house that is worth $200,000 with a subprime loan.   After three years the rate will adjust, likely upward.    That's what makes it unaffordable.  However, your broker tells you that you will be able to refinance before the new rate kicks in.   You won't be paying down on the principal during the three years, you'll just be paying a low monthly payment mostly on interest.  However, if your home appreciates in value, you'll be able to refinance in 3 years on a home now woth $230,000.  You'll then have $30,000 in equity.
 

You took a deal that you couldn't afford, with the intention of hoping things work out so you will be able to afford it.  At the time you signed your name, you took a deal you could not afford.  "They were buying houses they could afford, with the assumption they would refinance later"  means that they could not afford it unless something else happened.

That's not stupid, it's a sound, low risk investment.

It clearly was stupid.  You are using the most important investment in your life as a chip to gamble to save a few bucks on that very investment.  And for many it failed miserably.  Shit, I wouldn't put my house on a roulette wheel even if the only way I lost was the wheel landing on 0 or 00 but if I won I would gain 10% of its value in profit.  On paper my pot odds, to use a poker term, are great.  In real life, the risk/reward isn't enough.  Even if you get the reward, you didn't necessarily need it because you were doing fine enough.  And if you fail, then you're completely fucked.  Pot odds only work because the player sits down with a good amount of money in the bank in case the odds don't work for him this time.  I'm going to assume most people don't have a dozen houses so if their risk to make a few bucks by taking the low rate and then refinancing later doesn't work out they're still good to go.

It's the same thing.  There is nothing sacred about a home as compared to any other investment.  The only difference is that most people's biggest asset is a home.   But from an investment perspective, it's all the same: investment opportunities.   

On paper it is all the same, in real life you need a place to sleep. 

I have alot of friends who invest on a scale of 2-3 years in all sorts of financial instruments.   If you think you can make some good money with low risk on real estate, that's no different than a particular stock.  The only relevant thing is the rate of return.    I mean, what do you think day traders try to do?   

I think day traders do their homework very meticulously and don't simply listen to what their broker is telling them, even if he's saying "this price on this stock is simply too good to be true--its like free monies!"

Some blame goes to them, yes.  But there is a reason that the government prohibits loan sharks.  What occurred was a near-equivalent.

It's a matter of the consumer protection principle.  At least in our country, we don't allow businesses to rip people off.  Just because people should learn how to spot fake cars does not mean that we allow fake cars to be sold.

Definitely true.  I split the blame 50/50.  When my cards got stolen at gencon a few years ago, it was equally my fault for being a dumbshit and forgetting them on the table when I packed up my dice and mat, and the person who made off with them.  This is not always the case, as sometimes the consumer really can't know the quality of work being done (how is a regular patient supposed to know if the crown he got put on his back tooth is substandard?)

[JACO]

This is your freaking retirement, people shouldn't play "investment games" with their retirement money with the stock market!!!  

Seriously, that's the worst comparison I've ever seen you make in the years we've been posting on these boards.  The timeline on retirement for most people (measured in decades) allows for the smoothing out of downturns so you can take advantage of the AVERAGE gains and compound interest.  The recent (last 18 months or so) downswing in the stock market has happened plenty of times before and it works itself out.

In the situation you described the timeline for the "investment" was 2-3 years and in an investment like real estate, if you can only afford to hold the investment for 2-3 years (without a refinance) and it takes a downturn in month 26 or so, you won't be able to wait for the upturn.

Whether it's real estate, stocks, bonds, cds, currency, securities, options, or whatever, it's all investing.    It's the same thing.  There is nothing sacred about a home as compared to any other investment.  The only difference is that most people's biggest asset is a home.   But from an investment perspective, it's all the same: investment opportunities. 

I have alot of friends who invest on a scale of 2-3 years in all sorts of financial instruments.   If you think you can make some good money with low risk on real estate, that's no different than a particular stock.  The only relevant thing is the rate of return.    I mean, what do you think day traders try to do?

Steve, I think you just solidified Bill's point for him. Day trading and the stock market are much more liquid and the 'investment period' can actually be 10 minutes or 10 years. With most people the housing market (especially when there's any kind of downturn) is much less liquid, meaning you can't get your money out nearly as fast if there is a problem. Investing in stocks, currency, and housing are much different gambits, and are not close to the same thing.

As ELD briefly alluded to, people who only own one home and are paying off a huge mortgage don't really have an asset, they have a liability. Most people don't realize this, because they don't understand how the banking system works. These people made poor investments, no matter what their intentions were.

My new favorite fact: the previous CEO of WaMu was actually named 'Killinger.'

My new favorite fact: Henry Paulson's previous job was Chairman and CEO of Goldman Sachs. There's a pretty strong conflict of interest which absolutely no one in the mainstream media is bringing up. When his $700 billion 'bail out' plan goes through, all of his buddies stand to recoup quite a bit of money they would have otherwise lost.


In related news, it appears members of Congress have formally agreed on a plan, and will be voting on it Monday. It's formal name is the "Emergency Economic Stabilization Act of 2008," and the full text of the 110 page bill can be found here, courtesy of the New York Times.

[vintagethug01]

Something interesting I read off CNN about the proposed Bill that's going to be voted on Today:

http://money.cnn.com/2008/09/28/news/economy/Sunday_talks_bailout/index.htm?cnn=yes

Limiting executive pay: Curbs would be placed on the compensation of executives at companies that sell mortgage assets to Treasury. Among them, companies that participate will not be able to deduct the salary they pay to executives above $500,000.

They also will not be allowed to write new contracts that allow for "golden parachutes" for their top 5 executives if they are fired or the company goes belly up. But the executives' current contracts, which may include golden parachutes, would still stand.

Almost seems fair but it seems to me that all these original executives will be getting off scot-free. They need to limit the use of golden parachutes period.

[bluemage55]

Definitely true.  I split the blame 50/50.  When my cards got stolen at gencon a few years ago, it was equally my fault for being a dumbshit and forgetting them on the table when I packed up my dice and mat, and the person who made off with them.  This is not always the case, as sometimes the consumer really can't know the quality of work being done (how is a regular patient supposed to know if the crown he got put on his back tooth is substandard?)

I would make the argument that many people were tricked into accepting subprime mortgates. 

Just like regular people should not be expected if they get substandard dental crowns, neither should regular people be expected to know the truth when their bank is telling them they'll be able to refinance later (and everybody else is doing the same with no problem).

That's why it's been called predatory lending.

Almost seems fair but it seems to me that all these original executives will be getting off scot-free. They need to limit the use of golden parachutes period.

They can't do that without invalidating already negotiated contracts.  Ex post facto laws are frowned upon..

[ELD]

The only difference is that most people's biggest asset is a home.

This was the point of my earlier post.  Your home is not an asset.  Your home is a liability.  The gross misunderstanding of what an asset is keeps the middle class and poor in their place, and allows the rich to keep getting richer.  Those who think their home is their biggest asset have no assets.

An asset is something that makes you money.  Your home does not make you money.  It costs you money.  It is a liability.  A rental property with income greater than expenses is an asset.  If you have total assets which generate more liquid per month than your monthly expenses - congratulations, you've gone infinite.  You're rich! 

Jobs are not assets, they are jobs.  Owning a profitable business is an asset.  Being self employed is not. 

Your car is not an asset.  A lot more middle class people grasp this concept, and I'm not sure why.  Perhaps because they keep getting new cars, and have nothing to show for it at the end of each car.  It's the same idea as your house though.  You need a car.  Renting one is more expensive than buying one.  The money you "saved" is not money earned.  You can sell your car, but then you still need a car.  Same with your house. If you sell it, now you need a place to live. 

Ignorance on this subject, on a widespread scale, clearly impacts the choices people make about their homes.  This is concept is nearly as widely misunderstood as the erroneous myth that "war is good for an economy!"  Luckily, the internet allows anyone who wants to figure out how the world and money actually work to access that information.  I say it all the time - the real battle here is one against ignorance.  The government can legislate, tax us to oblivion, and do whatever they want, at the end of the day, it's the ignorance of the masses that caused this and cure is fixing that.  I know our public school systems do a horrifyingly pathetic job with showing how money works.  That seems like a good place to start for me for real systematic change. 

Returning power to the local level makes that possible.  I know I'll be very involved in my child's education.  With enough people taking an active part and making sure these concepts are learned, we will turn the tide.  Knowledge does spread once it's unleashed.  People see what works, and they want it.  While the problems we face are larger than any in the history of the world, we have technology that makes it possible to organize and spread information like never before.  It is a tough battle though.  I have no doubt that atleast 99% of people mistakenly think their home is an investment. 

[JACO]

As I write this, I am watching a live vote on CSPAN for the first time. The House of Representatives just voted on 'H.R. 3997 - Financial Markets Bill,' and after the Yeas winning for the first few minutes of the vote, the end was marked by a huge swing the other way, and with the Nays eventually surging ahead and winning in the last 2 minutes of voting (largely on the back of the Republican vote), defeating the passage of the bill 228-205.

PS. For anyone interested in watching CSPAN from your computer, you can stream it live for free from their website here.

EDIT: Now it appears they are holding the vote open past the standard 15 minutes, and trying to get people to change or hold their respective votes. So far 1 Republican and 1 Democrat have changed their votes to Yea, changing the total to 207 Yea to 226 Nay. As commentators on CNN have pointed out, majority leaders have held votes open as long as 3 hours in the past, trying to get people to change votes. We'll see what happens.

EDIT 2: It looks like they closed the voting after 40 minutes and the bill was defeated. They are probably going to vote to reconsider later.

[Smmenen]

First of all, I have already explained this multiple times, but many of the people who are being foreclosed upon DID NOT by houses they couldn't afford.   Instead, they were buying houses they could afford, with the assumption that they would refinance before the adjustable rate set in. 

Let me explain.   You buy a house that is worth $200,000 with a subprime loan.   After three years the rate will adjust, likely upward.    That's what makes it unaffordable.  However, your broker tells you that you will be able to refinance before the new rate kicks in.   You won't be paying down on the principal during the three years, you'll just be paying a low monthly payment mostly on interest.  However, if your home appreciates in value, you'll be able to refinance in 3 years on a home now woth $230,000.  You'll then have $30,000 in equity.
 

You took a deal that you couldn't afford, with the intention of hoping things work out so you will be able to afford it. 

This sentence demonstrates that you have no, or very little, comprehension of what I was talking about. 

[DarkfnTemplar]

Moxlotus isn't too far off here.
The general reason why we are in this crisis is very simple (I apologize for the redundancy.)
 Much like this forum, important economic decisions were made by those who pretend to know economics. Fortunately, it seems that many of the people who do know economics are in the house.
 Should we call those who failed stupid? Not all of them. I think a lot of it has to do with a herd mentality and therefore fallacy of composition.
 Also, we cannot blame the ignorant being hounded by flashy tv commercials, anxious "investors", and a seemingly stable trend.
However, if we would go under, it would be from the same "pretenders."

[Smmenen]

Moxlotus isn't too far off here.
The general reason why we are in this crisis is very simple (I apologize for the redundancy.)
 Much like this forum, important economic decisions were made by those who pretend to know economics. Fortunately, it seems that many of the people who do know economics are in the house.

Lol: I actually have both a degree in Economics and a degree in Law.  MoxLotus is VERY far off here.  And I doubt he has one in either. 

[Demonic Attorney]

I was really happy to see how much useful information was contributed to this thread in the earlier pages, and how dispassionate and mature everyone was being.  I started to think that I was right when I said that TMD could handle political topics in the Community Forum.  Please don't prove me wrong.

This is everyone's first and only reminder about avoiding spam, aggressiveness, interpersonal attacks, and Ad Hominem arguments before this thread is closed.

[Juggernaut GO]

dow -770

ouch.  Now the blame game begins, wonder how this will reflect on John "the great republican uniter" mccain. 

Today reminds me of the end of fight club where project mayhem blows up every credit card company.

[Scott_Limoges]

Eric is directly citing the book "Rich Dad, Poor Dad" for anyone interested.


Partically related, everyone should get ready to buy low stock!

[Meddling Mike]

The only difference is that most people's biggest asset is a home.

This was the point of my earlier post.  Your home is not an asset.  Your home is a liability.  The gross misunderstanding of what an asset is keeps the middle class and poor in their place, and allows the rich to keep getting richer.  Those who think their home is their biggest asset have no assets.

An asset is something that makes you money....etc etc etc

Just coming from a technical perspective regarding the meaning of the word asset, that's just not true.

as·set        /ˈæsɛt/
–noun
1.   a useful and desirable thing or quality: Organizational ability is an asset.
2.   a single item of ownership having exchange value.
3.   assets,
a.   items of ownership convertible into cash; total resources of a person or business, as cash, notes and accounts receivable, securities, inventories, goodwill, fixtures, machinery, or real estate (opposed to liabilities).
b.   Accounting. the items detailed on a balance sheet, esp. in relation to liabilities and capital.
c.   all property available for the payment of debts, esp. of a bankrupt or insolvent firm or person.
d.   Law. property in the hands of an heir, executor, or administrator, that is sufficient to pay the debts or legacies of a deceased person.

li·a·bil·i·ty        /ˌlaɪəˈbɪlɪti/
–noun, plural -ties.
1.   liabilities,
a.   moneys owed; debts or pecuniary obligations (opposed to assets).
b.   Accounting. liabilities as detailed on a balance sheet, esp. in relation to assets and capital.
2.   something disadvantageous: His lack of education is his biggest liability.
3.   Also, li·a·ble·ness. the state or quality of being liable: liability to disease.

I suppose you could make the case that a mortgage payment constitutes a pecuniary obligation, but I think that depends mostly on how you view building equity in your home. I think a home that has been paid off can be viewed only as an asset, as it fits under just about every single definition for the word asset. I'd say a home for which a mortgage is still being paid can be seen as both an asset and a liability at the same time. The mortgage payment is a pecuniary obligation related to the home, but the home itself still has exchange value.

[Godder]

Eric is directly citing the book "Rich Dad, Poor Dad" for anyone interested.

Partially related, everyone should get ready to buy low stock!

And some cheap houses/properties... I have read Rich Dad, Poor Dad, and it just doesn't work the same in New Zealand as it does in the USA. I definitely recognised ELD's comment, but I feel that while it's true from an accounting sense, it's not true from an economic sense, because the opportunity cost must be factored into such decisions. Likewise, while it may be true from a business and investment sense, capital gains is still a legitimate investment tool, as long as you have a plan to liquidate said asset in order to realise the capital gains.

[DarkfnTemplar]

Moxlotus isn't too far off here.
The general reason why we are in this crisis is very simple (I apologize for the redundancy.)
 Much like this forum, important economic decisions were made by those who pretend to know economics. Fortunately, it seems that many of the people who do know economics are in the house.

Lol: I actually have both a degree in Economics and a degree in Law.  MoxLotus is VERY far off here.  And I doubt he has one in either. 

Steve, I wasn't targeting this at you.
However, you have to agree that people made mistakes and poor decisions. Otherwise we wouldn't have a problem. The debate is whether they should be accountable or not. Moxlotus says yes. You are saying no for the sake of the overall economic health. Am I correct?

[unknown.root]

I invest in can food/MREs, ammo, guns, and First Aid supplies. My investments are fine.

I always look at the bright side of it, at least I'm making money in the Repo business now.

[TracerBullet]

http://www.msnbc.msn.com/id/3683270/


Shit, this is Mr. Fan; Fan, Mr. Shit.

[Moxlotus]

Moxlotus isn't too far off here.
The general reason why we are in this crisis is very simple (I apologize for the redundancy.)
 Much like this forum, important economic decisions were made by those who pretend to know economics. Fortunately, it seems that many of the people who do know economics are in the house.

Lol: I actually have both a degree in Economics and a degree in Law.  MoxLotus is VERY far off here.  And I doubt he has one in either. 

I do not believe I am far off at all.  The deal they initially took, ignoring future plans, is a deal they could not afford.  Is that fact wrong?  Ignore their future plans.  When they signed their name on their mortgage, could they afford it?  The question I am asking is very simple and clear cut.  Yes or no.  Not 18 paragraphs of lawyer speak, a simple yes or no.  I don't have a degree in economics--I have one in biochemistry and we ask questions in direct ways and give succinct answers.  That's why I may have simplified things to the smallest piece of the entire fiasco--the individual making a single action, in this case signing their name.

Instead, they were buying houses they could afford, with the assumption that they would refinance before the adjustable rate set in.  

They deal they signed they couldn't afford.  They were hoping things would work out (housing values would continue to rise) and then they could afford it (by refinancing later).  Where did my comprehension of the situation fall apart?  It is very possible that I am missing something, but I do not see it.  Care to explain what I missed in my breakdown?

Or is it possible that I broke the situation down to a different degree than you and therefore came to a different conclusion?  I guess the next time I hear someone say "smoking causes cancer" I could act all superior and pretentious and tell them "no, you are wrong, I have a biochem degree and you have no idea wtf you're talking about" or I could see if there are different ways to interpret the statement.

(I'd say they are wrong because I interpret the phrase as an absolute, so if there is a single example of a 30 year smoker not developing cancer then the statement is false.  Difference of interpretation leads to radically different conclusions)

Eric is directly citing the book "Rich Dad, Poor Dad" for anyone interested.

I have only heard good things about this book.  It is on my list of books to read.

edit:
I am exiting this thread.  It is quite clear that there is someone on here with radically different political views than myself and radically different means of interpretation.  And one of us devolved the discussion with pettiness and the other followed.  To prevent this from happening more and to keep the thread from becoming a flamefest, I will take my leave.

[Smmenen]

Moxlotus, let me try another tack to explain how I see the problem. 

I wrote this on my work's blog on April 8 of this year:

Tuesday, April 8, 2008
Fair Housing For All

By Stephen Menendian

As we pay tribute to the life of MLK Jr. [it was the anniversary of MLK's assassination] and celebrate the anniversary of the Fair Housing Act, it is fitting to reflect on a new housing crisis that is affecting our cities and urban neighborhoods. A wave of foreclosures threatens not just the lives of Americans who are black or poor, but entire regions. The short-term profit making of financial institutions, mortgage brokers, and securities dealers now threatens the health of the entire economy.

Deregulation in the 1980s and a rise in real estate values led investment bankers, hungry for mortgage backed securities to sell to investors, to promote asset-based lending rather than income-based lending, a practice that fueled the subprime market. This phenomenon took off in 1994 when $10 billion worth of subprime home equity loans were securitized. By the end of 2005, the volume of securitized loans leaped to $507 billion. This arrangement let mortgage companies specialize in home equity lending and make a lot more money. They could make loans and quickly resell the loan into the secondary market. Mortgage brokers were acting like direct salesmen rather than agents of the homeowner, marketing subprime loans to would-be homeowners who might not be able to afford a home under a prime mortgage arrangement and even those who qualified for prime mortgages.

This ponzi scheme may have made sense if property values kept on rising. You could purchase a home with very low, interest-only, monthly mortgage payments and refinance a few years later with tens of thousands of dollars of equity due to home value appreciation.

The mortgage broker earned an origination fee, typically $2500, and then made that money again when the homeowner refinanced. The investment bank had already made their money selling these securities to investors. The originating mortgage lender had already sold the mortgages to the investment banks. In short, the banks and mortgage brokers set people up in loans they knew they would not be able to afford and passed the risk off to investors and to the home-buyer.

About 46% of Hispanics and 55% of blacks who obtained mortgages in 2005 got higher-cost loans compared with about 17% of whites and Asians, according to Federal Reserve data. Other studies indicate they would have qualified for lower-rate loans. The most recent estimate is that African American and Latino homeowners will lose a quarter of a trillion dollars in home equity in the next two years as a result of the crisis—the largest loss of home equity ever experienced in US history among African American and Latino homeowners.

It’s not too late to do something about it, but it won’t be easy. The servicers, the companies hired by the mortgage holders to manage the mortgage payments, are not particularly interested in the well being of the homeowner or the investors either. They make more money when the homeowner is saddled with late payments and other ancillary fees. Forbearance agreements are onerous and tend to accelerate foreclosure rather than stave it off.

The final result is foreclosure. The homeowner loses their house. The investors lose their collateral asset. Foreclosures lead to abandoned and vacant homes. This causes neighborhoods, especially ones already struggling, to decline rapidly by reducing the value of property of nearby homes. (A Fannie Mae study using Chicago found that every foreclosure is responsible for an average decline of 1% in the value of each single-family home within a quarter mile). This in turn results in lost tax revenue from property taxes, which makes it more difficult for the city to borrow funds because the value of the property tax base is used to qualify for loans. Communities lose property tax values with cities and states suffering. Schools lose revenue. Services have to be cut back. In Baltimore, for example, the total estimated costs for the city are about $34,199 per foreclosure.

The subprime implosion is fueling a cycle of foreclosures and economic loss that is as vicious as it is pernicious. I only hope that it is not too late to intervene, but the solution will not come by saving Bear Sterns, by corporate tax breaks, or by rescuing investors from bad investments. It will come by empowering homeowners to renegotiate the basic terms of predatory mortgages to reflect the real value of the home and a realistic ability to repay.

I wrote, then, that I hoped it was not too late to intervene.  I still have that hope, although that hope dims by the day.   

Moxlotus isn't too far off here.
The general reason why we are in this crisis is very simple (I apologize for the redundancy.)
 Much like this forum, important economic decisions were made by those who pretend to know economics. Fortunately, it seems that many of the people who do know economics are in the house.

Lol: I actually have both a degree in Economics and a degree in Law.  MoxLotus is VERY far off here.  And I doubt he has one in either. 

I do not believe I am far off at all.  The deal they initially took, ignoring future plans, is a deal they could not afford.  Is that fact wrong?  Ignore their future plans.  When they signed their name on their mortgage, could they afford it?  The question I am asking is very simple and clear cut.  Yes or no.  Not 18 paragraphs of lawyer speak, a simple yes or no.  I don't have a degree in economics--I have one in biochemistry and we ask questions in direct ways and give succinct answers.  That's why I may have simplified things to the smallest piece of the entire fiasco--the individual making a single action, in this case signing their name.

Were there people who signed mortgages they couldn't afford AFTER the rates reset?   Absolutely.   But I think your mistake is concluding they were stupid.  Were some stupid?  Probably.   There are always going to be stupid people making stupid decisions.  Seniors are duped out of life savings on a regular basis.   

My point was that many of these people who got into houses they could not afford in the long run was NOT stupid, however.   If there is a very good chance that you'll have thousands of dollars in equity within a few years for a nominal investment, and very little risk, that's a smart investment.  The fact that it is house makes no difference. 

It's really simple.  If housing values go up, they own thousands of dollars in equity and can refinance with plenty of equity and then make thousands of dollars by selling the home.   If the housing values don't go up, then they can just walk away.  They will lose their home, but they weren't paying down on the principal anyway.  It would be no different than if they had just been paying rent for the last couple of years.   Bank's never go after homeowners for indemnity.

It's basically a risk free investment! 

Now, we can continue to focus on how "stupid" people made bad decisions, but 'moral hazard' argument misses the fact that the real stupidity wasn't the homeowners, it was the banks and financiers.   They made these loans without regard to whether people could pay or WOULD pay.    Focusing in irresponsible homeowners is a narrative that only arouses public resentment and does little to address the crisis. The flipside of this debate emphasizes lenders’ seductive techniques to lure borrowers into loans with “too-good-to-be-true” credit lines and incomprehensible mortgage offers.

edit:
I am exiting this thread.  It is quite clear that there is someone on here with radically different political views than myself and radically different means of interpretation.  And one of us devolved the discussion with pettiness and the other followed.  To prevent this from happening more and to keep the thread from becoming a flamefest, I will take my leave.

I take responsibility for my actions, and will try to avoid personal attacks, etc.   This is a major issue, and I only see things getting worse.    That was some of my frustration bubbling over.   

[bluemage55]

However, you have to agree that people made mistakes and poor decisions. Otherwise we wouldn't have a problem. The debate is whether they should be accountable or not. Moxlotus says yes. You are saying no for the sake of the overall economic health. Am I correct?

You are oversimplifiying the problem.

No one is arguing that certain people should not be held accountable.  Although we may disagree on who is at fault (for example, you seem to hold the opinion that homebuyers are, whereas others such as myself have advanced the argument that they are merely the victims of predatory lending practicies), holding people accountable to prevent a repeat in the future is not something anyone disagrees with.

The problem is that right now, we have a more urgent problem to address.  We need to patch up the economy first, then we can start putting heads on the chopping block.

[Dante]

This is your freaking retirement, people shouldn't play "investment games" with their retirement money with the stock market!!!  

Seriously, that's the worst comparison I've ever seen you make in the years we've been posting on these boards.  The timeline on retirement for most people (measured in decades) allows for the smoothing out of downturns so you can take advantage of the AVERAGE gains and compound interest.  The recent (last 18 months or so) downswing in the stock market has happened plenty of times before and it works itself out.

In the situation you described the timeline for the "investment" was 2-3 years and in an investment like real estate, if you can only afford to hold the investment for 2-3 years (without a refinance) and it takes a downturn in month 26 or so, you won't be able to wait for the upturn.

Give me a break on the hyperbole. 

Whether it's real estate, stocks, bonds, cds, currency, securities, options, or whatever, it's all investing.    It's the same thing.  There is nothing sacred about a home as compared to any other investment.  The only difference is that most people's biggest asset is a home.   But from an investment perspective, it's all the same: investment opportunities. 

I have alot of friends who invest on a scale of 2-3 years in all sorts of financial instruments.   If you think you can make some good money with low risk on real estate, that's no different than a particular stock.  The only relevant thing is the rate of return.    I mean, what do you think day traders try to do? 

Steve - yes, they are all types of investments but you were comparing two different timelines and saying that by my logic, people shouldn't invest their retirement in the stock market because of the fluctuations.  I was simply pointing out that by comparing a 2-3 year investment in something that is not liquid (e.g. a house) vs something that is a 30-40 year liquid investment like a stock or mutual fund, it was comparing apples to oranges when drawing similarities.

The risk of 2-3 year investment in real estate (and I don't mean people who fix up houses to flip, they're putting actual work and value into a house by improving and upgrading it, I'm talking about people who buy, hold for 2-3 years, then sell hoping to make a profit [and there's nothing wrong with that mind you]) is FAR greater than the risk of buying an index mutual fund and holding it for 30-40 years.  Take any 40 year period in the modern era and if you bought the equivalent of an index fund and held it you'd get a good return over that 30-40 years, even weathering downturns and recessions worse than what we've seen the last 18 months .  However - there's a reason that as you near the end game - when you're approaching the time where you're going to start eating into the principle of the investment as you retire - that people move into a higher ratio of bonds-to-stocks: to protect against short-term fluctuations.

The problem with comparing housing to a stock holding is

1. if the market turns, you can't just sell a house by offering it on an electronic index where thousands or millions of people will buy the stock/fund.  You have to find an individual (for the most part) who has to come out and view your house, inspect your house, get their own financing, etc.  For the most part, whoever buys your house, it's going to be a major decision for them.  Even if you have $250,000 in stocks or mutual funds, selling on the open market isn't going to be a major decision for anyone, since more than likely hundreds or thousands of different people will buy the stocks.

2. There's a sociological impact with losing your house that isn't the same as losing a stock fund or savings account.  You literally have no place to live.  For the most part this would now mean relocating, probably in a different area or town altogether which means uprooting from families, pulling children out of schools away from their friends and their non-family networks, etc.  Nothing is as psychologically devastating as having to pack up all your shit and move out.

But in terms of the average person being able to define an asset/wealth properly, no doubt, most people are morons.  It's only an asset if it generates more money than you put into it OR if you can readily sell it to someone for more than you owe on it in total.

that's why for most people, their vehicle is the biggest financial waste they will ever have and they don't even know it.  Your car can never be an asset (minus some collectible type items) over the life of the vehicle outside of some weird circumstances - the goal should be to identify a feature set you want vs a budget range and then mercilessly drive the total cost down over the life of the vehicle.  A vehicle is about minimizing loss as it will always be a liability over total life of the vehicle, but the fact is, most people need a vehicle to live their life.

It's the same with a house - unlike a simple financial investment, the house serves a basic life animal need of shelter (and somewhat security) out of the 3 basics (shelter, food, security) that a living being needs before they can move up the intellectual food chain.

Yes, I realize that was somewhat all over the place.

[JACO]

Tuesday, April 8, 2008
Fair Housing For All

By Stephen Menendian

...

While your essay looks at the lenders' role in the situation, it ignores the fact that people took loans they ultimately could not afford, and made a poor investment. It was entirely their decision, and that is the crux of Phil's argument. No one forced them to take a loan at whatever rate they qualified for, based on the color of their skin, their credit history, or anything else. They chose to take the initiative to make a poor decision, and a poor investment. In addition to the fact that they wouldn't have the money to pay for a loan in 3 years after an ARM adjusts, many of them didn't have money in the event that they lost their job, suffered a debilitating injury, or many other circumstances that could lead them to miss payments for 3 months in a row or longer.

It boils down to the fact that they were the ones who took loans, and this ignores the fact that more often than not they made poor investment decisions by buying at high prices. The market was due for a correction to real estate, which even Alan Greenspan predicted 3+ years ago, and anybody buying at peak prices is bound to lose money. Markets have tended to be cyclical, and the real estate boom(s) are no different. Should someone who invested in WaMu stock 14 months ago be bailed out because the stock lost 98% of it's value recently, even though their portfolio adviser said that financial stocks tend to trend upwards in the long run? Absolutely not. They made a poor investment.

Now, we can continue to focus on how "stupid" people made bad decisions, but 'moral hazard' argument misses the fact that the real stupidity wasn't the homeowners, it was the banks and financiers.   They made these loans without regard to whether people could pay or WOULD pay.

THIS IS NOT THE JOB OF A MORTGAGE COMPANY. Most privately run businesses exist to make a profit, not to worry about if their customers made a good decision. By your logic Mars Inc. should be concerned every time a customer purchases a pack of Starburst to consume, because it could potentially do damage to their teeth or health in the long run. Their core business is not caring about people; it's about trying to make a profit.

[Lexor]

I am a Real Estate Broker in Maryland I have a degree in Economics and Political Science from Loyola, and I also work for a company of home builders for the past four years.

I’ll put in my two cents in what I can remember of the past events that lead us to this in simple terms. If any of you are mortgage brokers maybe you can help me out with more specifics.

The roots of this ‘crisis’ can be traced back to the Clinton administration. As the economy turned and prospered during and after the tech boom, there was a conscious push to get more people into home ownership. Government entities like FHA and VA had strict rules on the income to debt ratio in which qualifies you for the maximum amount you can afford a loan at. Fannie Mae and Freddie Mac entities that buy loans from mortgage brokers also had strict guidelines in which loans had to conform to. The main idea was that in order to buy a house you had to have 20% of your own money in the transaction and could not spend more than 30% of your monthly income on your mortgage and could not be spending more than 60% of your monthly income on all debt. There was a big push from Democrats and the Clinton administration to increase homeownership for minorities and people that could not normally afford loans.  They directly asked Fannie Mae to change their guidelines for loans specifically the debt to income ratios, the mandate also told them to create new products to help low income people to buy houses.

When that institution changed the ratio it eventually changed the rules for everyone suddenly everyone could qualify for loans that were close to 60% then 80% of your monthly income on the mortgage. Since almost everyone needs a loan to buy a house this changed the demand for housing since there is far more money in the real estate market. In the 90’s your typical townhouse would cost around $90-100k in the Baltimore County market through 2000-2006 those prices jumped to close to $300-350k. As housing prices rose to this level most people could no longer afford to put 20% of the total value of your home of their own money into the transaction. So another innovation in mortages came along and allowed investors to cover the other 20% of your houses value on a second mortgage typically at a higher rate. So now people could buy a house with little of their own money. New products came out to attract different type of buyers but the rules were not strictly enforced so poor people ended up getting loan products made for businesses, you could kind of call this predatory lending but it isn’t really. In order to get some people qualified for a loan some brokers would use these fancy products like tease rates, arms, and balloon payments to get people into the house. If they made their payments they could build their credit and refinance in a year or two for a 30 year fixed at lower rates because well rates were falling, and house values were raising at amazing rates. Well people got into their houses and if they had problems they never refinanced or got credit cards and got deeper and deeper into debt. Remember some people are paying upwards of 80% of their income on their mortgage payments. Who can really live on only 20% of their monthly income I will never know. As teaser and arms expired and balloons rose people started to get into trouble and foreclosure started to be a real possibility.

Congress then created what is called mortgage backed securities. You can think of these as similar to stocks and bonds. They are packages of different loans that were purchased on the secondary market and bundled together based on many different kinds of risk and marked for their return on investment. The “bad paper” that you hear about are typically bundles of these second mortgages.  If someone defaults on their loan and goes to foreclosure the bank has to sell the house taxes get paid then the primary loan holder gets paid followed by the secondary loan holder. If on average a bank has to sell the house they foreclose on for 80% of its market value after costs then the secondary loan holder gets nothing. Investors and investment banks own all this paper that could be worthless if people stopped payment on their loans.

[bluemage55]

THIS IS NOT THE JOB OF A MORTGAGE COMPANY. Most privately run businesses exist to make a profit, not to worry about if their customers made a good decision. By your logic Mars Inc. should be concerned every time a customer purchases a pack of Starburst to consume, because it could potentially do damage to their teeth or health in the long run. Their core business is not caring about people; it's about trying to make a profit.

You're wrong.  Your pro-business biases aside, the United States has always held businesses accountable for their practices, at least to a reasonable extent.

Trying to make a profit is fine; predatory practices are not (e.g. loan sharks are illegal).

The subprime mortgages were functionally allowing banks to be loan sharks by offering loans that many customers could not possibly pay.

Given this, it's not unreasonable at all to argue that the customers were victims.

[Dante]

THIS IS NOT THE JOB OF A MORTGAGE COMPANY. Most privately run businesses exist to make a profit, not to worry about if their customers made a good decision. By your logic Mars Inc. should be concerned every time a customer purchases a pack of Starburst to consume, because it could potentially do damage to their teeth or health in the long run. Their core business is not caring about people; it's about trying to make a profit.

You're wrong.  Your pro-business biases aside, the United States has always held businesses accountable for their practices, at least to a reasonable extent.

Trying to make a profit is fine; predatory practices are not (e.g. loan sharks are illegal).

The subprime mortgages were functionally allowing banks to be loan sharks by offering loans that many customers could not possibly pay.

Given this, it's not unreasonable at all to argue that the customers were victims.

Loan sharks are illegal because there are laws in place that don't allow you to loan money/charge interest unless you do things X,Y,Z, which the loan sharks don't do.  Subprime mortgages were legal.  There are specific regulations for income to debt ratios.  All the mortgages sold that fell under those regulations (assuming proper income reporting - more on that below) were legal.  The issue is that the income to debt ratios were out of whack (because people felt that "owning a home is good, even if you can't afford it in the traditional sense" - see the post above for more info)

You can't expect a business to act morally or ethically - it's going to do what's allowed by law and regulations to make money.  If the majority feels something is unethical or immoral, then it's up to legislature or regulators to change the laws/regulations.  To expect a for-profit business to take anyone but itself into consideration is just not realistic.  That doesn't mean that all business owners are looking to squeeze every penny out of every brick and every minute out of every employee, but if something is legal, then it's a valid way to make money.

For example, although I'm a business owner, I think executive pay at public companies is way out of whack.  but it's the board of directors of those companies, not Congress, that I feel need to get their act in gear and serve their companies a little better.  That being said, I have no problem attaching strings such as limitations on exec compensation to firms that accept the bailout money.

It's when a business is deceptive and/or lies that it's illegal and predatory (and obviously if they just straight-forwardly break the law).  Also illegal is knowingly allowing the applicants to lie about their income or help them lie/overstate their income - obviously that is illegal they should all be prosecuted fully.

In summary - it's up to the government(s) to set the rules and then for businesses to play by those rules.  I'll bet 95%+ of the mortgages that are in trouble were completely legal (not smart or wise, but legal).

[bluemage55]

Loan sharks are illegal because there are laws in place that don't allow you to loan money/charge interest unless you do things X,Y,Z, which the loan sharks don't do.  Subprime mortgages were legal.  There are specific regulations for income to debt ratios.  All the mortgages sold that fell under those regulations (assuming proper income reporting - more on that below) were legal.  The issue is that the income to debt ratios were out of whack (because people felt that "owning a home is good, even if you can't afford it in the traditional sense" - see the post above for more info)

I didn't say that they were illegal.  But they were effectively legitimized forms of loan sharking - offering loans people cannot reasonably expect to pay back.

You can't expect a business to act morally or ethically - it's going to do what's allowed by law and regulations to make money.  If the majority feels something is unethical or immoral, then it's up to legislature or regulators to change the laws/regulations.  To expect a for-profit business to take anyone but itself into consideration is just not realistic.  That doesn't mean that all business owners are looking to squeeze every penny out of every brick and every minute out of every employee, but if something is legal, then it's a valid way to make money.

I don't.  But it's fairly clear here the laws were flawed to allow it.

It's when a business is deceptive and/or lies that it's illegal and predatory (and obviously if they just straight-forwardly break the law).  Also illegal is knowingly allowing the applicants to lie about their income or help them lie/overstate their income - obviously that is illegal they should all be prosecuted fully.

In summary - it's up to the government(s) to set the rules and then for businesses to play by those rules.  I'll bet 95%+ of the mortgages that are in trouble were completely legal (not smart or wise, but legal).

The whole point is that the government didn't set proper rules.

As Smemmen argued above, many of those mortages were not legal.  But even if they were, they were examples of predatory lending.  And if the question is who is as fault, I'd assign quite a bit of the blame to government regulation and to the banks, and less to the consumers.  Regardless, the people who are going to suffer as a result (initially firms that invested in those bundled loans, and secondarily the nation as a whole) are less responsible.  Given this, a government bailout is not completely out of order.

[Grand Inquisitor]

In summary - it's up to the government(s) to set the rules and then for businesses to play by those rules.

This summarizes the last couple pages of this thread.  And in fact, the 2nd clause isn't even necessary.  Enforcement of law is legislated as well.

People respond to incentives, and the government has a monopoly on setting them.  I guess we could start talking about the chicken-egg issue of how corporate lobbying affects congress, but we start to get pretty far afield of the original intent of this thread.

[Smmenen]

I just received this in my inbox:


>     Dear American:
>
>     I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.
>
>     I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.
>
>     I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.
>
>     This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.
>
>     Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.
>
>     Yours Faithfully
>
>     Minister of Treasury Paulson