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Norton

Agree. The result of the so called "regulators" being asleep at the wheel.

Texpat

As I've stated, if the mortgage lender violated lending laws, he should be prosecuted. I'm not sure the lion's share of these loans were of this variety. I think most were legit and the falut lies in the laws. If the rules were too wishy-washy, the banks/Fed/mortgage brokers need to add oversight, but it doesn't absolve the borrower from irresponsible behavior in spending beyond his means. Interest only mortgages were popular when I left Los Angeles. People "buying" a house with no concern toward ever paying any principle -- the epitome of irresponsibility. Get rich based solely on skyrocketing property values.

IMO, ten years from now property values in California will be 50% above what they are today. The problem is that many Americans (especially Californians) aren't content to live in a house without upgrading for more than 5 or 7 years.

Spin

news article
Foreclosures to affect 6.5 mln loans by 2012-report | Markets | Bonds News | Reuters

Spin

I'm not sure there were any lending laws!

But seriously, Bank of America do seem to be making the right noises now that they took over countrywide......
BOA

bkkandrew

An interesting metaphore I found on the housing market:

The rises in property prices were not real. They do not exist. Houses do not make money. They just sit there, being houses. A couple of years ago, it almost seemed sane for a home-owner to go to work (doing something productive in the economy) and come home having made a few hundred pounds for their efforts, then think to themselves "My house has gone up in value by a few hundred pounds today. It's made more than I have". The idea is, of course, crazy. The house has not added any value to the economy at all in that time. (It's actually gone down in value slightly each day, as it deteriorates slightly, bringing it ever closer to needing increasingly costly structural maintenance/repairs, or necessitating a new structure being built on the piece of land to replace it).

Anyway, the money was not real. All that happened was the amount of debt available steadily increased, meaning there was more money available to spend on houses, meaning the prices went up. This increase in prices was NOT created by the houses themselves (remember, they are all just pretty much sitting there, being houses), but was created out of the increased amounts being leant. And the more people were able to borrow, the more they were able to spend on houses, so the more the prices went up, so the higher the value of the asset that these loans were secured against.

This is infact the folly of secured borrowing as a principle. If you borrow too much money to overpay for absolutely anything, then at the point of the transaction no 'alarm bells' will ever ring. I could lend you £1m to buy an empty Cola bottle from me, and at the point of the transaction your own personal balance sheet would look pretty healthy. Sure you have £1m of debt, but you also have assets (a Cola bottle) worth £1m, so there is nothing to worry about. We know the Cola bottle to be worth £1m, because it is "marked to market" (i.e. the last price it was sold at), and it has just sold for £1m, so it's WORTH £1m. Not only that, but since it only used to be worth about 2p before you bought it, it means that Cola bottles have now gone up in value from 2p to £1m. So at this point - all is well. There is no problem, and even if there was, you have assets that match the value of your debt, so if it all goes bad you could simply sell the empty Cola bottle for it's "market value" (£1m) and clear the massive debt.

So all looks ok for a while... until - you realise that you cannot service a £1m debt, regardless of the fact you own as asset of the same value (it can't pay for itself). So the Cola bottle has to be sold. And guess what, if no-one else can afford to service a £1m debt either, then you sell your empty Cola bottle for the 2p it was actually worth, and lose £999,999.98 in the process.


Now, in my silly example above. Did the £999,999.98 of gains ever really exist? Of course not. The money was never real. It was just an illusion temporarily created by the over-extension of unservicable debt. It would be completely irrational to, at the point the exuberent supply of credit was withdrawn, to even be speculating on whether it was going to affect the gains. The gains weren't real, and as the credit bubble reverses, all the gains simply evapourate.

Exactly the same thing applies with all the gains in property over the past 5-10 years. The credit bubble giveth, the credit bubble taketh away.

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Milkman

^ You have to put up a link, Andrew. Cool?

bkkandrew

^I do on all published material, but not when quoting from my best sources...

Milkman

^ So, this is your own opinion?

A blog? An article, as it states?

bkkandrew

^A specialist forum...

Butterfly

Growth by debt is what fueled the market boom of the 1920s, and now we have this.

If we think this subprime mess is marginal and will go away by magic, then we will learn the hard way that it wasn't. We got hit by an iceberg, and we are on the Titanic singing Carols and watching the scenery.

Texpat

Decent metaphor Bkkandrew. But the same could be said for cars. Why is a medium-sized family car worth $50,000? That's outrageous. Why is a 4-year college education worth $150,000? Because there's someone else out there willing to pay that much for it. Basic economics.

The US mortgage feeding frenzy is exactly what the Japs experienced in the late 80s. Only about 1/2 as bad.

Witnessed that one first-hand too and fortunately wasn't in that fool's game either.

Spin

18 million empty homes in the US

Bloomberg News

bkkandrew

^And I would estimate 25 million before the year is out...

Spin

As the bourses just keep rising, I have to admit, Im baffled by it. Last year a little bit of bad news sent my port. crashing, These days the market rallies on worse news.
I just dont get it

bkkandrew

^Its actually more complicated than that, but I am going to bed and cannot be arsed to compose a 20 minute post. No disrespects though, remind me tomorrow and I will gather my thoughts!

Bugs

Risk and Reward.

The lenders took the risk to hand out loans to people with questionable means to carry the loan to completion. The reward for years was the lenders making money hand over fist – because the price of housing continued to climb.

The borrowers took the risk to go into loans they did not have the means to carry to completion. The reward for years was borrowers making money hand over fist by flipping or refinancing later – because the price of housing continued to climb.

This was not some ponzi scheme being pulled over the eyes of the lenders or the borrowers. There is a real product and there is a real service. Both parties knew the risks going into the agreement and neither should be protected because they took a risk that did not pan out in their favor - as such they should both suffer the consequences of the market tumble.

__________________
"Religion is an insult to human dignity. With or without it, you'd have good people doing good things and evil people doing evil things. But for good people to do evil things, it takes religion" - Steven Weinberg

raycarey

so where's the risk for the lenders? it's all been pushed down the road, and the fed is there waiting to bail out the brokerages that invented all these investment vehicles.

Texpat

The risk for lenders is millions of dubious high-interest (sub-prime) mortgages given to people who probably should have been living in thier station wagons.

Opened up an entirely new sector of people to sell profitable mortgages to. It all worked well as long as home prices appreciated.

Good post Bugs^^.

raycarey

but where's the risk for the lenders? as far as i can see, it's been socialized.

Bugs