Underwater Borrowers Drowned Themselves with Refinancings

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mathwhiz
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Underwater Borrowers Drowned Themselves with Refinancings

Post by mathwhiz » Tue Jul 28, 2009 7:50 pm

http://blogs.wsj.com/developments/2009/ ... inancings/
Michael LaCour-Little, a finance professor at California State University at Fullerton, looked at 4,000 foreclosures in Southern California from 2006-08. He found that, at least in Southern California, borrowers who defaulted on their mortgages didn’t purchase their homes at the top of the market. Instead, the average acquisition was made in 2002 and many homes lost to foreclosure were bought in the 1990s. More than half of all borrowers who lost their homes had already refinanced at least once, and four out of five had a second mortgage.

The original loan-to-value ratio for these borrowers stood at a reasonable 84%, but second and third liens left homeowners with a combined loan-to-value ratio of about 150% by the time of the foreclosure sale date.

Borrowers, meanwhile, took out around $2 billion in equity from their homes, or nearly eight times the $262 million that they put into their homes. Lenders lost around four times as much as borrowers, seeing $1 billion in losses.

“[W]hile house price declines were important in explaining the incidence of negative equity, its magnitude was more strongly influenced by increased debt usage,” writes Mr. LaCour-Little. “Hence, borrower behavior, rather than housing market forces, is the predominant factor affecting outcomes.”

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Post by Rick Ferri » Tue Jul 28, 2009 8:31 pm

As more information come out about defaults, it is appearing that sub-prime loans were not the problem. What this report and others are saying is that the housing problem was created by homeowners. The homeowners borrowing against equity and then walking away from their obligations when the equity disappeared; not only defaulting on their equity line, but defaulting on their primary mortgage as well.

So, who is REALLY at fault for the housing crisis? The banks? The rating agencies? The CEOs? No, the borrowers. The homeowners are at fault, and they should be held liable for their loans.

Rick Ferri

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Post by rich » Tue Jul 28, 2009 9:31 pm

Rick Ferri wrote: So, who is REALLY at fault for the housing crisis? The banks? The rating agencies? The CEOs? No, the borrowers. The homeowners are at fault, and they should be held liable for their loans.
Perhaps there some exceptions on the individual level but as for the overall crisis I strongly agree with you.
Best regards, | Rich

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Post by fishnskiguy » Tue Jul 28, 2009 9:44 pm

Rick Ferri wrote:As more information come out about defaults, it is appearing that sub-prime loans were not the problem. What this report and others are saying is that the housing problem was created by homeowners. The homeowners borrowing against equity and then walking away from their obligations when the equity disappeared; not only defaulting on their equity line, but defaulting on their primary mortgage as well.

So, who is REALLY at fault for the housing crisis? The banks? The rating agencies? The CEOs? No, the borrowers. The homeowners are at fault, and they should be held liable for their loans.

Rick Ferri
Dang, Rick you nailed the only truly guilty ba$tards in this whole sorry mess. :roll:

And all along I didn't realize that Angelo Mozillo was just a perfect angel. :roll: :roll: :roll:

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Post by baw703916 » Tue Jul 28, 2009 9:48 pm

Come on, Rick. I agree that people should not not borrow money that they can't pay back, barring extreme misfortune. But banks are (or should be) in the business of determining the creditworthiness of loan applicants. Do you really think that the loan officers were doing their jobs in a competent manner? I don't want to invest in a bank that runs their business like that--fortunately most of those banks are no longer around.

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Post by DaveS » Tue Jul 28, 2009 9:55 pm

Rick Ferri wrote: ...it is appearing that sub-prime loans were not the problem....

The homeowners are at fault, and they should be held liable for their loans.....
Rick Ferri
Rick: I don't disagree with you completely. But those second mortgages and other loans that went up to 125% of value ARE sub prime loans. Just because they were the result of refinancing does not change the fact they were sub prime. Conventional firsts were not sub prime. So the professors findings do not exonerate sub prime lenders for what they did to the market.

Any lender that makes stupid loans shares fault. Dave

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Post by Sidney » Tue Jul 28, 2009 10:09 pm

Rick Ferri wrote:As more information come out about defaults, it is appearing that sub-prime loans were not the problem. What this report and others are saying is that the housing problem was created by homeowners. The homeowners borrowing against equity and then walking away from their obligations when the equity disappeared; not only defaulting on their equity line, but defaulting on their primary mortgage as well.

So, who is REALLY at fault for the housing crisis? The banks? The rating agencies? The CEOs? No, the borrowers. The homeowners are at fault, and they should be held liable for their loans.

Rick Ferri
Presumably the mortgage loan documents limit the lenders recourse to foreclosing on the property. Are you suggesting that the courts bypass this document and seize other assets?
I always wanted to be a procrastinator.

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Post by mas » Tue Jul 28, 2009 10:23 pm

Rick Ferri wrote:So, who is REALLY at fault for the housing crisis? The banks? The rating agencies? The CEOs? No, the borrowers. The homeowners are at fault, and they should be held liable for their loans
Clearly each borrower is at fault for their own recklessness. But it took facilitators to create so much simultaneous recklessness in order to make the problem into a crisis that effected parties other than borrower and lender. Those others can remain nameless.

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Post by Charleville » Tue Jul 28, 2009 10:35 pm

So Rick you are basically saying that a drug user is totally at fault and the drug dealer is not at fault. I would be willing to bet you want society to come down hard on drug dealers so then why not come down hard on the banks and wall street too who peddled this stuff on every street corner. The banks have no responsibility to their shareholders?--so the homeowner must bear this responsibility to the bank's shareholders?-- at least the banks got bailed out and could keep all their skimmed off profits while the homeowner just goes back to his life in the apartment or mom's basement with nothing to show for their poor decision but a bad credit score.

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Post by thenextguy » Tue Jul 28, 2009 10:43 pm

Rick Ferri wrote: So, who is REALLY at fault for the housing crisis? The banks? The rating agencies? The CEOs? No, the borrowers. The homeowners are at fault, and they should be held liable for their loans.

Rick Ferri
Nonsense! The banks were writing loans for anyone that could fog a mirror. No income? No problem! Certainly homeowners share some of the blame, but it's lunacy to suggest homeowners are in a class by themselves in deserving blame.

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Post by Wonk » Tue Jul 28, 2009 10:46 pm

I don't have much sympathy for either side. There's a heck of a lot of blame to go around. The Fed, Congress, banks, borrowers, realtors, appraisers, etc. They all had a role to play.

Although I've stayed a renter all this time, I still find it interesting how people pass judgement on borrowers who walk away, but don't blame anyone else. The phrase "moral obligation" usually comes up. What a joke!

If I knew a borrower who was underwater by 50% and they told me they were going to walk away, I wouldn't think any less of them. In fact, I'd think they were finally starting to get smart and probably about to make a good financial decision for a change.

Loaning money is a business. You can't expect to loan 300k to some schmoe with no skin in the game and expect to get paid back. A fool and his money...

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Post by MP173 » Tue Jul 28, 2009 10:50 pm

The banks had absolutely no business writing those loans. If the borrowers were to blame and need to settle the score, then certainly so do the banks who took the risk and wrote the bad loans.

Instead we have bailed out the financial institutions and many of the borrowers.

What will be the next bubble?
ed

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Post by rich » Tue Jul 28, 2009 10:53 pm

Yes there is lots of blame to go around. However, except in cases involving fraudulent lenders forging documents, the homeowner borrowers are the ones that broke the contractual agreement. Hence the borrowers deserve a substantial portion of the blame.
Best regards, | Rich

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Post by thenextguy » Tue Jul 28, 2009 11:18 pm

rich wrote:Yes there is lots of blame to go around. However, except in cases involving fraudulent lenders forging documents, the homeowner borrowers are the ones that broke the contractual agreement.
That's what people do when they can't afford things anymore. Banks used to worry about that.

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Post by market timer » Tue Jul 28, 2009 11:25 pm

MP173 wrote:What will be the next bubble?
The size of the national debt.

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Post by rich » Tue Jul 28, 2009 11:42 pm

thenextguy wrote:
rich wrote:Yes there is lots of blame to go around. However, except in cases involving fraudulent lenders forging documents, the homeowner borrowers are the ones that broke the contractual agreement.
That's what people do when they can't afford things anymore. Banks used to worry about that.
Borrowers used to worry about fulfilling their contractual obligations.
Best regards, | Rich

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Post by FrugalInvestor » Tue Jul 28, 2009 11:53 pm

It's definitely a two-way street. Our country's philosophy on both the extension and use of credit has changed completely over the last generation. Unfortunately I don't see this changing. I predict that as soon as the economy picks up again we will go right back to our free-lending and free-spending ways.

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Post by sscritic » Wed Jul 29, 2009 12:07 am

Many seem to be missing the point. The story is not about banks making bad loans, which they did, but about people who had affordable loans on houses they had bought at prices below current prices. Instead of sticking with the $150,000 mortgage they could afford, they borrowed an additional $300,000 and raised their debt to $450,000. How do you blame that on the bank? The bank could have said no to the loan, but the borrower should never have asked for it.

Is it really the bank's responsibility to keep you from doing something stupid? The bank has a responsibility to its shareholders not to make a stupid loan, but it doesn't have a responsibility to you.

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Post by Adrian Nenu » Wed Jul 29, 2009 12:12 am

Common sense: don't borrow more than you can safely pay back.

For the most part, the ones who defaulted on their mortgages because they took on too much debt lack common sense.

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Post by thenextguy » Wed Jul 29, 2009 12:34 am

sscritic wrote:Many seem to be missing the point. The story is not about banks making bad loans, which they did, but about people who had affordable loans on houses they had bought at prices below current prices. Instead of sticking with the $150,000 mortgage they could afford, they borrowed an additional $300,000 and raised their debt to $450,000.
You don't consider those bad loans?

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Post by manuvns » Wed Jul 29, 2009 1:24 am

refi should have even more strict underwriting standards . may be 30% equity

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Post by Buysider » Wed Jul 29, 2009 5:35 am

market timer answered:
MP173 wrote:
What will be the next bubble?


The size of the national debt.
What? With 20 year treasuries outperforming equities for the past 20+ years? With treasury yields at historic lows? How could the past not predict the future here :wink:

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Post by Deacon Mike » Wed Jul 29, 2009 5:47 am

Rick Ferri wrote:As more information come out about defaults, it is appearing that sub-prime loans were not the problem. What this report and others are saying is that the housing problem was created by homeowners. The homeowners borrowing against equity and then walking away from their obligations when the equity disappeared; not only defaulting on their equity line, but defaulting on their primary mortgage as well.

So, who is REALLY at fault for the housing crisis? The banks? The rating agencies? The CEOs? No, the borrowers. The homeowners are at fault, and they should be held liable for their loans.

Rick Ferri
I think it's quite a leap to draw conclusions on the entire mess based on a study of 4000 foreclosures in SoCal.

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Post by Charles Mahaffey » Wed Jul 29, 2009 6:06 am

I would like to give a little history here. In one of the tax reforms many years ago Congress in their wisdom decided credit card and consumer installment loan interest shouldn't be deductible and did away with the deduction. Prior to this change in the law a second mortgage on a home was fairly uncommon and was considered a sign of financial distress of the borrower. Once people figured out that they could deduct interest on second mortgages, there are limits but they are often ignored by taxpayers and tax preparers, these financial products took off. Borrowers became willing to take the risk that they could lose their home in order to secure an interest deduction on their tax return. I am not saying this situation is all the governments fault but in my opinion it was a contributing factor in this situation. Major changes in tax law have unintended consequences as taxes do influence behavior.

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Post by grayfox » Wed Jul 29, 2009 6:17 am

Two sides of the same coin:
Borrowers: Don't borrow money you can't pay back
Lenders: Don't lend money that will not be paid back.

I say kill them all and let God sort it out.

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Post by 3CT_Paddler » Wed Jul 29, 2009 7:00 am

Rick Ferri wrote:As more information come out about defaults, it is appearing that sub-prime loans were not the problem. What this report and others are saying is that the housing problem was created by homeowners. The homeowners borrowing against equity and then walking away from their obligations when the equity disappeared; not only defaulting on their equity line, but defaulting on their primary mortgage as well.

So, who is REALLY at fault for the housing crisis? The banks? The rating agencies? The CEOs? No, the borrowers. The homeowners are at fault, and they should be held liable for their loans.

Rick Ferri
I agree with your sentiments. I think the other part of the problem was that banks and lenders were able to package these loans to investors and sell them. The ones who were at fault in approving these securities and allowing them to be sold to investors?... The two rating agencies... which are quasi government agencies, and do not compete with other rating agencies because of their preferred status. But I still agree that homeowners are just as much to blame for making a foolish decision, and deciding that somehow home prices can never fall.

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Post by schnoodlemom » Wed Jul 29, 2009 7:37 am

Real life example: My former neighbor from across the street was the original owner on a 4B/2.5Ba, 2600 s.f. traditional home built in 1989. In 2007, he had to relocate due to his job and tried to sell the home before going into foreclosure with an outstanding mortgage of $260k. The house eventually sold short at $180k in late 2008. The fair market value was probably somewhere between the two, although the 2007 SEV valued it at $260k. As original owner, he most likely had an initial mortgage for less than $180k back in 1989. According to another neighbor, the realtor in the deal, he had used his entire home equity to just put 2 kids through college and the relocation came at a bad time. I don't know how the shortfall between mortgage and selling price was handled. In his shoes, I would have to pay it back, but I hope never to be in his shoes. I can't imagine this scenario multiplied many times over nationwide. Our area has been hit hard by job losses and declining home values, although we didn't experience the extreme housing bubble like other areas of the country. It's hard not to feel perturbed and a bit threatened by it all. Amanda

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Post by ResNullius » Wed Jul 29, 2009 8:26 am

America is making a huge mistake bailing out the folks in default. There's been lots of talk about moral hazard, but that's all there's been, just talk. The best way to teach a lesson is to make folks suffer the consequences of their actions, particularly when the consequence doesn't involve personal injury or death. I've know many people who refinanced multiple times, each time spending the money on expensive vacations, bigger cars, or fancier this and that. Well, that's all I wanted to say.

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Post by fishndoc » Wed Jul 29, 2009 9:01 am

The way I look at the mess is:

Winners: homeowners who refinanced and didn't pay it back (some used for good purposes like kid's education, most blew it on unneeded luxury items), the bankers who make big salaries and bonuses for making these bad loans, the real estate agents, contrators, and even construction workers who made money off the over-building. Even the building supply stores, and local gov't who received extra taxes due to inflated home values.

Losers: the Taxpayers, especially taxpayers who own their home and keep their mortgage paid, even though some of them are under-water.

One interesting aspect I have not seen addressed - these people are walking away from their loans because they can't make the payments and are underwater... What would have happened it the bubble hadn't burst? The probably still wouldn't have been able to make their mortgage payment. I guess they could have sold their homes for the mortgage value, but where would they have lived?

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Post by heyyou » Wed Jul 29, 2009 9:15 am

There was too much greed.

From the home buyer or refi homeowner all the way to the stock optioned CEOs of the financial firms and their minions in the legislature that changed the law to allow those practices, they are all at fault. No one stopped feeding from the money trough and said this is not sustainable. They all said, I'll take the money now and worry about the consequences later. Later finally arrived. It always does.

That is why we diversify our investments, because we know that all businesses eventually fail and there are up and down cycles in the economy.

In my little town, there are many real estate sellers or mortgage brokers married to home builders. They sure had some good years of high reward, then the high risk became apparent. If the money is easy, you are not smart, you are luckily at the right place at the right time. It is wise to plan as though "easy" won't last forever.

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Post by sscritic » Wed Jul 29, 2009 9:38 am

thenextguy wrote:
sscritic wrote:Many seem to be missing the point. The story is not about banks making bad loans, which they did, but about people who had affordable loans on houses they had bought at prices below current prices. Instead of sticking with the $150,000 mortgage they could afford, they borrowed an additional $300,000 and raised their debt to $450,000.
You don't consider those bad loans?
Yes, but they were bad because they hurt the shareholders of the bank, not because they hurt the borrower.

When was the last time you heard someone say, "I am so glad the bank turned me down on my loan application. The bank knew I was a deadbeat, even if I didn't realize it myself. I am so glad I can't buy that house that my wife and I have been dreaming about for years."

The borrowers didn't want to be turned down. They wanted to borrow more than they could handle. The bank doesn't have a moral responsibility to tell them that they are crazy to borrow so much money as long as the bank is going to profit. I feel the same way about credit cards; the bank isn't obligated to cut off your credit just because they think you won't be able to make full payment every month. In fact, they want you to carry the debt and pay them interest and fees. The perfect customer is one who carries a high balance, pays late fees every month, but still hangs on making payments without defaulting.

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Post by tfb » Wed Jul 29, 2009 10:16 am

fishndoc wrote:The way I look at the mess is:

Winners: homeowners who refinanced and didn't pay it back (some used for good purposes like kid's education, most blew it on unneeded luxury items), the bankers who make big salaries and bonuses for making these bad loans, the real estate agents, contrators, and even construction workers who made money off the over-building. Even the building supply stores, and local gov't who received extra taxes due to inflated home values.

Losers: the Taxpayers, especially taxpayers who own their home and keep their mortgage paid, even though some of them are under-water.
I agree. A study is long overdue to shine the lights on the rate of return on foreclosures. We are made to believe the foreclosed homeowners lost money while a good number of them made money if you measure from the time of purchase. I wrote about this story I heard on the radio last year. A lady called the radio station and said:
The bank foreclosed my home recently. It was my family home of 35 years. I raised my kids in it. I love it. The bank was WaMu. I begged them to let me keep it but they wouldn't work with me. I had a loan of $745,000. They sold the house for a little over $300,000.
I'm sure she got a decent rate of return from her home of 35 years. It probably beats the stock market, with free rent to boot.
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Post by chubaca » Wed Jul 29, 2009 10:44 am

sscritic wrote:Many seem to be missing the point. The story is not about banks making bad loans, which they did, but about people who had affordable loans on houses they had bought at prices below current prices. Instead of sticking with the $150,000 mortgage they could afford, they borrowed an additional $300,000 and raised their debt to $450,000. How do you blame that on the bank? The bank could have said no to the loan, but the borrower should never have asked for it.

Is it really the bank's responsibility to keep you from doing something stupid? The bank has a responsibility to its shareholders not to make a stupid loan, but it doesn't have a responsibility to you.
During the height of the bubble, the banks and especially subprime lenders had large operations where they would call the borrowers and tease them with all the money they could pull out. The "drug dealer" (aka banks) were directly selling and initiating the refinancings because it appeared to be easy money at the time. The loan officers at Ameriquest (largest subprime lender) were uneducated folks that averaged $100K in pay because all you had to do was start dialing for dollars. I new multiple folks at Ameriquest and it was shocking to see.

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Post by 3CT_Paddler » Wed Jul 29, 2009 11:24 am

chubaca wrote:During the height of the bubble, the banks and especially subprime lenders had large operations where they would call the borrowers and tease them with all the money they could pull out. The "drug dealer" (aka banks) were directly selling and initiating the refinancings because it appeared to be easy money at the time. The loan officers at Ameriquest (largest subprime lender) were uneducated folks that averaged $100K in pay because all you had to do was start dialing for dollars. I new multiple folks at Ameriquest and it was shocking to see.
I don't think most reputable banks realized this stuff was going to turn toxic like it did. Why would they... most of the stuff they securitized was approved by the rating agencies. Maybe places like Ameriquest were more irresponsible in this and they had an inkling. Ultimately it falls on Moody's and S&P who did a very poor job evaluating the risk in the products and allowed banks and other entities to securitize them without abandon. The homeowner also has a part to play in taking responsibility for their actions in constantly refinancing and running up debt.

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Post by digit8 » Wed Jul 29, 2009 12:12 pm

sscritic wrote: Is it really the bank's responsibility to keep you from doing something stupid? The bank has a responsibility to its shareholders not to make a stupid loan, but it doesn't have a responsibility to you.
Aren't the two largely the same in practice? Whether out of fiduciary or shareholder responsiblity, making bad loans is a poor choice for banks.

The article raises some good points, but it does nothing to alter my "no easy answers" point of view. The current market clearly illustrates that banks are fully capable of drawing intelligent lines, fully willing to make reasonable restrictions, and fully conscious of a sense of responsiblity to not just hand over the keys to the kingdom to any fool willing to lie or borrow himself into certain doom: like everyone else, they simply chose not to when the money was easy.

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Post by S&L1940 » Wed Jul 29, 2009 12:23 pm

MP173 wrote:The banks had absolutely no business writing those loans. If the borrowers were to blame and need to settle the score, then certainly so do the banks who took the risk and wrote the bad loans.

Instead we have bailed out the financial institutions and many of the borrowers.

What will be the next bubble?
ed
I bought in '04 in Palm Beach County and had to show the builder where the money was coming from for the down payment and whether there was a reasonable chance the balance would be paid.
in '06 my kids were put through the ringer to qualify for a mortgage in VA and sadly were approved as they now are in a home they can afford yet are saddled with a mortgage that can not be refinanced because they are underwater. to my knowledge not too many borrowers were bailed out - just the too big to fail institutions...

so, I guess that the bankers that did not give a damn and the financial institutions that bundled the trash along with the AAA ratings that were equally trash and then passed them off as worthy investments would seem to bare a major share of the blame. lots of guilt to go around.

as to the next bubble; IMHO both public and private pensions. just wait until the government agency that backs these pensions and is now billions in the red comes to the taxpayers to make good on all those promises...

Rick

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Post by avalpert » Wed Jul 29, 2009 1:29 pm

sscritic wrote:Many seem to be missing the point. The story is not about banks making bad loans, which they did, but about people who had affordable loans on houses they had bought at prices below current prices. Instead of sticking with the $150,000 mortgage they could afford, they borrowed an additional $300,000 and raised their debt to $450,000. How do you blame that on the bank? The bank could have said no to the loan, but the borrower should never have asked for it.

Is it really the bank's responsibility to keep you from doing something stupid? The bank has a responsibility to its shareholders not to make a stupid loan, but it doesn't have a responsibility to you.
Sure, because all these homeowners just came up with the idea to ask banks for the money - they weren't receiving daily mail from lenders begging them to re-finance now and grab the cheap money.

It is the bank's responsibility when they are peddling the bad ideas to you in the first place.

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Post by avalpert » Wed Jul 29, 2009 1:36 pm

3CT_Paddler wrote:Ultimately it falls on Moody's and S&P who did a very poor job evaluating the risk in the products and allowed banks and other entities to securitize them without abandon.
That's right, banks shouldn't be responsible for determining the risk of their loans - rating agencies do that... Any bank that was relying on rating agencies for risk management was abdicating their primary responsibility to investors. The rating agencies were wrong about the risk characteristics of securitization, but that wasn't what allowed bank to do it with abandon - their own recklessness is what did that

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Post by 3CT_Paddler » Wed Jul 29, 2009 1:52 pm

avalpert wrote:
3CT_Paddler wrote:Ultimately it falls on Moody's and S&P who did a very poor job evaluating the risk in the products and allowed banks and other entities to securitize them without abandon.
That's right, banks shouldn't be responsible for determining the risk of their loans - rating agencies do that... Any bank that was relying on rating agencies for risk management was abdicating their primary responsibility to investors. The rating agencies were wrong about the risk characteristics of securitization, but that wasn't what allowed bank to do it with abandon - their own recklessness is what did that
The banks were also responsible for the risk they were taking. I am not saying that banks are abdicated from that responsibility. But without the faulty rating of many of the securities as AAA or AA those banks are not able to sell a lot of those products to investors. If someone tells you a security is rated AAA by Moodys and it is very complex are you going to try and sell it trusting the rating it was given or spend months trying to figure whether the security might really be worse than its rating. Some banks took the rating at face value and some did not... that does not mean that these banks were evil... foolish yes, but not evil.

If you want to read more about it go here: http://www.criticalreview.com/crf/current_issue.html and click on the top paper by Jeffrey Friedman... it is really long so it takes some time to digest it.

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Post by Chas » Wed Jul 29, 2009 2:20 pm

Rick Ferri wrote:As more information come out about defaults, it is appearing that sub-prime loans were not the problem. What this report and others are saying is that the housing problem was created by homeowners. The homeowners borrowing against equity and then walking away from their obligations when the equity disappeared; not only defaulting on their equity line, but defaulting on their primary mortgage as well.

So, who is REALLY at fault for the housing crisis? The banks? The rating agencies? The CEOs? No, the borrowers. The homeowners are at fault, and they should be held liable for their loans.

Rick Ferri
Rick, if the system bares its ass and asked for it I don't see how owners can have but a small responsibility. After all, they are just average people and have no up bringing and/or education to be self reliant, responsible citizens. Today, government is supposed to take care of all that with the legal system. No, the weight of responsibility lies with the people in power that set up the system that allowed this to happen. There are many people who now have the power and responsibility to fix that which is broken in regard to the housing debacle. The problem is that they are the same people that made policies that caused the original problem. Now the fox is going to guard the hen house again, and don't anyone worry, he has learned his lesson he will now do the job right this time around. Oh yeah. :)
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Post by Chas » Wed Jul 29, 2009 2:27 pm

baw703916 wrote:Come on, Rick. I agree that people should not not borrow money that they can't pay back, barring extreme misfortune. But banks are (or should be) in the business of determining the creditworthiness of loan applicants. Do you really think that the loan officers were doing their jobs in a competent manner? I don't want to invest in a bank that runs their business like that--fortunately most of those banks are no longer around.

Brad
It seems that a person would have to have the moral strength of a Boglehead to resist a deal where the system is just begging you to "take the money, Dude! Are you nuts? We all get rich can't you see that!
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Post by Chas » Wed Jul 29, 2009 2:34 pm

sscritic wrote:Many seem to be missing the point. The story is not about banks making bad loans, which they did, but about people who had affordable loans on houses they had bought at prices below current prices. Instead of sticking with the $150,000 mortgage they could afford, they borrowed an additional $300,000 and raised their debt to $450,000. How do you blame that on the bank? The bank could have said no to the loan, but the borrower should never have asked for it.

Is it really the bank's responsibility to keep you from doing something stupid? The bank has a responsibility to its shareholders not to make a stupid loan, but it doesn't have a responsibility to you.
Me, I'd take the money and worry about the bank later, if the government didn't take care of them like it's supposed to.
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Post by Chas » Wed Jul 29, 2009 2:38 pm

Adrian Nenu wrote:Common sense: don't borrow more than you can safely pay back.

For the most part, the ones who defaulted on their mortgages because they took on too much debt lack common sense.

Adrian
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I disagree. Take the money and run. Let the government worry about the problem later. They allowed it, then let them solve it. has anyone heard about the "enabler" theory? Government enables, government pays!
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Underwater Borrowers Drowned Themselves with Refinancings

Post by YDNAL » Wed Jul 29, 2009 3:15 pm

mathwhiz wrote:Underwater Borrowers Drowned Themselves with Refinancings
With all the emotions behind this hot topic, we are losing track of the message in the original post by mathwhiz.

1) The bottom line is that borrowers (in general) who refinanced, took on more debt than they could afford. The real estate bubble was a catalyst that enabled Joe Homeowner access to more money than otherwise would have been available to him. The banks were stupid enough to believe that non-payment could be remedied with the sale of the asset - and we all know what happened.

2) Case in point.....
Chas wrote:I disagree. Take the money and run. Let the government worry about the problem later. They allowed it, then let them solve it. has anyone heard about the "enabler" theory? Government enables, government pays!
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Post by Grt2bOutdoors » Wed Jul 29, 2009 4:20 pm

3CT_Paddler wrote:
avalpert wrote:
3CT_Paddler wrote:Ultimately it falls on Moody's and S&P who did a very poor job evaluating the risk in the products and allowed banks and other entities to securitize them without abandon.
That's right, banks shouldn't be responsible for determining the risk of their loans - rating agencies do that... Any bank that was relying on rating agencies for risk management was abdicating their primary responsibility to investors. The rating agencies were wrong about the risk characteristics of securitization, but that wasn't what allowed bank to do it with abandon - their own recklessness is what did that
The banks were also responsible for the risk they were taking. I am not saying that banks are abdicated from that responsibility. But without the faulty rating of many of the securities as AAA or AA those banks are not able to sell a lot of those products to investors. If someone tells you a security is rated AAA by Moodys and it is very complex are you going to try and sell it trusting the rating it was given or spend months trying to figure whether the security might really be worse than its rating. Some banks took the rating at face value and some did not... that does not mean that these banks were evil... foolish yes, but not evil.

If you want to read more about it go here: http://www.criticalreview.com/crf/current_issue.html and click on the top paper by Jeffrey Friedman... it is really long so it takes some time to digest it.
I believe there is a real misconception in the labeling of the entities who were issuing mortgages, packaging and selling them as securities. The entities such as Ameriquest/Countrywide were mortgage banks - that was their main product. They in turn, used the investment banks to distribute, the pipeline for disseminating this junk on a global basis. Those were the "banks" interested in pushing product out the door. The rating agencies were paid a fee for "lip service" - "yeah, it's mortgages which historically haven't had significant defaults - we assign a AAA rating" - Next!

This is a major problem in this country - not being able to differentiate between a "good" bank and a "bad" bank - now all banks are suspect, courtesy of poor communicaton skills of certain unnamed parties.

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Post by fishndoc » Wed Jul 29, 2009 4:42 pm

I disagree. Take the money and run. Let the government worry about the problem later. They allowed it, then let them solve it. has anyone heard about the "enabler" theory? Government enables, government pays!
Actually, and unfortunately, it will be our children and grandchildren and probably generations after that will be paying. :cry:

Wayne
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Post by ruralavalon » Wed Jul 29, 2009 5:34 pm

grayfox wrote:Borrowers: Don't borrow money you can't pay back
Lenders: Don't lend money that will not be paid back.
Amen!!!

Is it so hard to understand that both borrowers and lenders are to primarily blame? Along with (secondarily) mortgage brokers, rating agencies, investment banks, mortgage buyers, and regulators ("enablers" all) who either encouraged or failed to stop the borrowers and lenders in their folly.

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Post by Jack » Wed Jul 29, 2009 5:39 pm

fishndoc wrote:One interesting aspect I have not seen addressed - these people are walking away from their loans because they can't make the payments and are underwater... What would have happened it the bubble hadn't burst? The probably still wouldn't have been able to make their mortgage payment. I guess they could have sold their homes for the mortgage value, but where would they have lived?
If the bubble hadn't burst, some of them might have been just fine. The way these sub-prime loans were sold is that they downplayed the adjustable reset by telling customers that, with rising prices, in a few years they would have 20% equity and could refinance to a low rate conventional loan. Instead, the bubble popped making it impossible to refinance an underwater loan so their interest rates jumped to 8% or 10%.

It's hard to blame borrowers for thinking prices would always go up when that was exactly the same assumption all of the wizards of wall street making $10 million bonuses thought. It was the same thing all of the PhD quants with the complicated computer models thought. It was what most of the media reporting said. So it is hardly surprising that a lot of borrowers thought the same.

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Post by baw703916 » Wed Jul 29, 2009 6:53 pm

ruralavalon wrote:
grayfox wrote:Borrowers: Don't borrow money you can't pay back
Lenders: Don't lend money that will not be paid back.
Amen!!!

Is it so hard to understand that both borrowers and lenders are to primarily blame? Along with (secondarily) mortgage brokers, rating agencies, investment banks, mortgage buyers, and regulators ("enablers" all) who either encouraged or failed to stop the borrowers and lenders in their folly.
Yes, the third party role was particularly insidious: they were facilitating the lending/borrowing of somebody else's money, so they didn't care whether it was ever going to get paid back--just so long as they collected their commissions now.

Brad
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Post by dumbmoney » Wed Jul 29, 2009 7:39 pm

Everyone profited from the credit boom while it lasted. The money that was borrowed didn't just go into building homes, it went everywhere.

But not to worry. The solution to a credit bust is simple - more credit. Sort of like the solution to heroin withdrawal is more heroin.
I am pleased to report that the invisible forces of destruction have been unmasked, marking a turning point chapter when the fraudulent and speculative winds are cast into the inferno of extinction.

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