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Old 12-28-2007, 10:52 PM   #341
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It doesn't suprise me that many people didn't understand the risk they were taking with their options.
The risk was not the AMT, it was the possibility of the shares decreasing in value. If the shares had held steady or increased in value, the dotcom folks would have been richly rewarded for delaying selling the shares through lower taxes. But, the shares fell. A risk they completely understood and accepted.

I share your distain for the AMT. But, in the cases we're discussing, the risk was created by people's greed to lower their tax burden by holding the shares for one year to take advantage of the ISO provision of their options.

But please be clear, while I'm not sympathetic towards those exercising options who got greedy and accepted risk hoping to harvest greater rewards, I'm also not sympathetic towards the head-up-their-butt folks who are in trouble due to assuming ARM loans.
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Old 12-29-2007, 09:04 AM   #342
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I am sure Jay can speak for himself... but I did not see where he said they should go to debtor's prison...

He said if you make bad decision you should pay...

"I'm a firm believer in fiscal responsibility and sound decision-making. If you fail to exercise either, then the repercussions are your own."

Not once mentioning prison, or whipping them with a cane or a whip .... just that someone who does some things wrong financially should pay a price.. and they did..

I can, but many thanks for the support. Part of the issue is that some folks see that people who have lost their homes due to poor financial decisions have suffered enough. Although I sympathize with anyone who has lost the roof over their head (especially where children are involved), no one seems to have focused on the fact that the mortgage holder (lender) is still out the money that was borrowed. Many of us want to consider such lenders to be nameless, faceless, greedy corporations, but where do you think such corporations get their money to make loans?

Ultimately from you and me.

We will end up paying for the folly of people who shouldn't have bought homes in the first place, took out home equity loans to pay for depreciating assets such as cars, vacations, big screen TVs, etc..., or financed the purchase of supposedly profitable businesses. A home is not a piggy bank. If you treat it like one, you run the risk of being in the precarious position that so many defaulting homeowners find themselves today.
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Old 12-29-2007, 12:59 PM   #343
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But the lender also needs to take responsibility for the loans they make. Part of being a lender is exercising good judgement about loans they write. Every lender gets offered bad loans-- it is part of their business to make sure that they are prudent with the money they lend out.

You seem to have more sympathy for the lenders than I think is warrented. If they're so dumb that they are going to lend money to people with no ability to pay it back, and to lend more to them than their house is worth, they deserve to go out of business.

Certainly borrowers that committed fraud to get their loans should be punished, but for the most part, these people were bad risks from the start, and now some of those people are going to default. When you lend money to people on the edge of financial ruin, you can't start crying when some of them fail to pay you back.

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I can, but many thanks for the support. Part of the issue is that some folks see that people who have lost their homes due to poor financial decisions have suffered enough. Although I sympathize with anyone who has lost the roof over their head (especially where children are involved), no one seems to have focused on the fact that the mortgage holder (lender) is still out the money that was borrowed. Many of us want to consider such lenders to be nameless, faceless, greedy corporations, but where do you think such corporations get their money to make loans?

Ultimately from you and me.

We will end up paying for the folly of people who shouldn't have bought homes in the first place, took out home equity loans to pay for depreciating assets such as cars, vacations, big screen TVs, etc..., or financed the purchase of supposedly profitable businesses. A home is not a piggy bank. If you treat it like one, you run the risk of being in the precarious position that so many defaulting homeowners find themselves today.
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Old 12-29-2007, 01:17 PM   #344
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But the lender also needs to take responsibility for the loans they make.
Not quite sure what you're trying to say Hamlet.......

Are you saying that borrowers should be let off the hook gently (no collection agencies, no selling the BMW they purchased with the HELOC money, etc.) and that lenders should eat the losses without trying to collect?
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Old 12-30-2007, 12:47 PM   #345
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The lender should certainly try to collect. But a fairly large percentage of these loans are going to be uncollectable. If a person with no savings owes $300k on a $250k house, and they lose their job, the bank is going to lose money, no matter how hard they try to collect. This is where the phrase "can't get blood from a stone" came from.

A smart bank realizes that they have made a mistake, and accepts a short sale and the moderate loss it intails. A dumb bank insists on full payment, and discovers in January that the borrower has left town and left them an empty house with frozen pipes and a flooded basement.

Part of being a smart bank is not making loans that put you in this position. If you make your borrowers put 20% down, its pretty rare to lose money on a home loan. That is why they've made people do that for decades.

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Not quite sure what you're trying to say Hamlet.......

Are you saying that borrowers should be let off the hook gently (no collection agencies, no selling the BMW they purchased with the HELOC money, etc.) and that lenders should eat the losses without trying to collect?
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Old 12-30-2007, 01:45 PM   #346
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In many cases the bank's only participation was to originate the loan which was quickly sold off, chopped into pieces called tranches(pardon my French) by Wall Street and ultimately bought by "patsies" such as pension funds.

No one really knows who owns a specific loan in some cases.

There is little doubt who will ultimately be the loser and pay the price though.
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Old 12-30-2007, 01:54 PM   #347
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I don't always agree with George Will, but I guess it's true about becoming more conservative with age and with increased netw orth. In any case, I did agree with his column on the subprime mess and its victims.

He noted that:
Paulson has been criticized for saying that some subprime borrowers "will become renters again." But some borrowers put no money down on their houses, or took mortgages with negligible "teaser" rates, or mortgages requiring them at first to pay only interest, not principal. Such borrowers are effectively renters.

The president says: "The homeowners deserve our help." But why "deserve"? The principles of "compassionate conservatism" are opaque, but they might involve liberalism's premise that Americans are so easily victimized they must be regarded as wards of government.
Perhaps Washington's intervention in the subprime problem reveals the tiny tip of an enormous new entitlement: People who voluntarily run a risk, betting that they will escape unscathed, are entitled to government-organized amelioration when they lose their bets. The costs of this entitlement will include new ambiguities in the concepts of contracts and private property.
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Old 12-30-2007, 10:59 PM   #348
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In many cases the bank's only participation was to originate the loan which was quickly sold off, chopped into pieces called tranches(pardon my French) by Wall Street and ultimately bought by "patsies" such as pension funds.

No one really knows who owns a specific loan in some cases.

There is little doubt who will ultimately be the loser and pay the price though.
Actually they know exactly who owns it... it is the trust.... but since you are right in that it is cut up to a lot of different people, it is hard for the trustee to change the rules... because if you do then someone gets more and someone else gets less of the money that comes in....

If you own the IO, then you HOPE that the loan continues forever and you make out great... but if you have the PO, then you might want to have the house foreclosed and then sold off to get as much as you can... because if you let the person pay 'only' interest... then you get nothing and the PV is horrible....

That is one of the big problems with a fix... it does not hit all the 'owners' the same.... and why is the banks getting hit hard? Because they owned the 'residual'... that is the money that would have been left over if everything went perfect and all loans got paid off at the original terms... these are the most volatile tranches... so they can go to zero from a big number quickly...
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Old 12-31-2007, 11:56 AM   #349
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It was learned today in an article in the Wall Street Journal, that Ameriquest Mortgage, one of the nation's largest subprime lenders made over $20 million in political donations and played a key roll in rolling back legislation in Georgia and New Jersey that would have protected consumers during the housing boom. Countrywide, Wells Fargo and Citigroup and the American Mortgage Bankers Association also contributed heavily to lobbying and legislative efforts to defeat or amend laws that would have protected home owners and buyers. Countrywide Financial made gifts to campaigns of over $2 million and spent $6.7 million on lobbying efforts in Washington. President Bush received more than $200,000 for his 2004 reelection campaign. Political organizations that represented the president received $5 million from Ronald Arnall (and his wife, Dawn), the founder of Ameriquest. In 2006, Mr. Arnall was appointed by President Bush as Ambassador of the Netherlands and his wife became chairman of ACC Capital, the parent company of Ameriquest. California governor's, Arnold Schwarzennegger's reelection campaign received $1.4 million and stacks of tickets to a Rolling Stones Concert.

Wright Andrews, a Washington lobbyist and his wife, Lisa were responsible for much of the industry's lobbying and received payments of over $4 million from 2002 to 2006. Mr. Andrews ran 3 different subprime trade groups which included The National Home Equity Mortgage Association, The Coalition for Fair and Affordable Lending and The Responsible Mortgage Lending Coalition. The Coalition for Fair and Affordable Lending spent $6.3 million before it went out of business this year. The other two trade groups are now out of business as well.

Ameriquest was founded in 1979 as Long Beach Savings & Loan by Mr. Arnall. He shed all of the operation in this S&L, with the exception of the retail-mortgage department which became he named Ameriquest. During the refinancing boom of the 90's, the company refinanced many homes at more than their appraised value, at relatively high interest rates.

In 2006, ACC Capital paid $325 million in a settlement with regulators for charging excessively high mortgage rates and for failure to fully disclose loan risks. Some of the state's attorney generals who signed the settlement received received campaign donations from the ACC. Utah Attorney General Mark Shurtleff received $1,000 and Rolling Stones tickets.
State legislators in Georgia, Maryland, Nevada, Oregon, Utah, Washington and California also received Rolling Stones tickets.

At the heart of the legislation in both Georgia an New Jersey was a clause that required that a lender prove that the refinancing of a home owned for less than 5 years have a "tangible net benefit" for the borrower. Later (on separate occasions), Standard & Poor Corp. decided they would not assign credit ratings to mortgage securities containing subprime loans coming from these two states. Without these ratings from S&P, mortgage securities cannot be sold. Additionally, federal banking regulators banned states from applying consumer-protection to federally chartered banks and thrifts so that they would not have an advantage over state-chartered ones. In the meantime, because of pressure from subprime lobbyists, both of the state's laws that protected consumers were changed, making it legal to continue offering subprime loans. In the aftermath of these changes, thousands of New Jersey homeowners took out these high risk subprime loans and many are now in foreclosure.

After the victories for subprime lenders in Georgia and New Jersey, state legislators in Texas considered enacting laws to regulate home appraisers, because of, "overly generous valuations" that were causing serious problems with home loans in that state. In 2006, ACC Capital (Ameriquest's parent company) gave $350,000 to Texas politicians and $100,000 to Governor Rick Perry to successfully defeat any possible new laws to curtail unethical appraisal practices.

It seems ironic that both President Bush and California Governor Arnold Schwarzenegger are now befriending troubled subprime borrowers who face the threat of losing their homes. Pressure on lenders to renegotiate the terms of once sacred written contracts with "teaser freezers" is only a misguided and untimely attempt to shift the blame from their own lack of judgement and ineptitude.

Lender Lobbying Blitz Abetted Mortgage Mess - WSJ.com
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Old 12-31-2007, 01:28 PM   #350
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Actually they know exactly who owns it... it is the trust.... but since you are right in that it is cut up to a lot of different people, it is hard for the trustee to change the rules... because if you do then someone gets more and someone else gets less of the money that comes in....

If you own the IO, then you HOPE that the loan continues forever and you make out great... but if you have the PO, then you might want to have the house foreclosed and then sold off to get as much as you can... because if you let the person pay 'only' interest... then you get nothing and the PV is horrible....

That is one of the big problems with a fix... it does not hit all the 'owners' the same.... and why is the banks getting hit hard? Because they owned the 'residual'... that is the money that would have been left over if everything went perfect and all loans got paid off at the original terms... these are the most volatile tranches... so they can go to zero from a big number quickly...
If anyone is interested in delving further into this phenomenon, here is a place to start.

http://www.securitization.net/public...Zissu_Cpt3.pdf

Also good bedtime reading for those of you with kids. You might want to print out this link and use it for a bedtime story
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Old 12-31-2007, 05:02 PM   #351
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If anyone is interested in delving further into this phenomenon, here is a place to start.

http://www.securitization.net/public...Zissu_Cpt3.pdf

Also good bedtime reading for those of you with kids. You might want to print out this link and use it for a bedtime story
You have weird bedtime reading habits, but it beats a sleeping pill.
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Old 01-02-2008, 08:17 PM   #352
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Money magazine, January 2008, pages 60 - 61, "Retirement Plan Interrupted":

Single person, age 21, makes $77,000 a year as a school psychologist (southern California), purchases a $600,000 duplex.

7.8x her current salary.

For 3% down.

With a 40 year fixed 5.1% loan.

With the first 10 years being interest only.



Her payment now is $3,000 / month. It will go up to $4,000 / month after the interest only portion expires.

Math follows:

With the interest only, her monthy payment is 46.8% of her gross income.

When she starts paying principal (how old-fashioned! ), her monthly payment will be 62.3% of her current gross income! (hmmm, no heart attack emoticon...) Granted, that is ten years in the future.

She is renting out the second unit for $1,100 / month, which changes the percentages to 29.6% and 45.2%. Still not something I'd recommend.


Of course, ten years ago, the general perception (not here, general American society) would have been that she's a freakin' genius. Now, with prices down 3% (oops, equity gone!) and expected to drop 9% next year (oops, NW just went from $83,000 to $29,000!), not so much...
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Old 01-02-2008, 08:52 PM   #353
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Money magazine, January 2008, pages 60 - 61, "Retirement Plan Interrupted":

Single person, age 21, makes $77,000 a year as a school psychologist (southern California), purchases a $600,000 duplex.



For 3% down.

With a 40 year fixed 5.1% loan.

With the first 10 years being interest only.

she's a freakin' genius
That's one sweet mortgage. I'd buy all day long if I was genius enough to get that kind of financing! So in ten years she should have slightly less than $1,000,000 equity(10% appreciation) and rents will be up over $6,000 a year (4%) and if she'd waited 10 years to buy she'd be shelling out and extra $9,000 each and every year to property taxes(thank you Prop 13)!

Yeah, she's a genius now to get that great of a financing deal. In ten years she'll just be rich. In twenty years she'll be freaking annoying at cocktail parties talking about how she has 20 years left on her 5.1% fixed mortgage when 9,10,11% has been market for the last ten years.

That loan has to be a school deal?!
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Old 01-02-2008, 09:03 PM   #354
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Loan was financed in 2006. No details in the article on the loan other than what I already mentioned.

The rate is good, and it's fixed, which is good - it's the first ten years of interest-only and the percent of her income that I think are insane.

10% annualized appreciation? Maybe. Maybe not.

Rent increase of 4% / year. I have no idea how realistic that is.

Maybe she will be a RE millionaire in ten years. But if her roommate moves out and she loses her job, she'll lose the house at loss in a couple of months. Even if she doesn't lose her job but can't rent out the other unit, she's sunk. Too much risk. Leverage is a double-edged sword.

And I have no interest in a tax-payer funded buyout for her.
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