Do you want to pay for the Sub-Prime freeze?

[emilylynn]

That is, until they pass the cost on to the rest of us in the form of higher rates.

 

[Gumby]

Eric Petroff of Investopedia wrote a very objective and concise article entitled, "Who is to Blame for the Subprime Crisis?" Below are some important points that he raised:

1) There is no single entity or person to point the blame at, as anytime something bad happens, blame starts to be assigned.
2) When the dot-com bubble burst in early 2000 and the terrorist attacks followed in 2001, there was a great risk of recession. Central banks around the world tried to stimulate the economy by creating capital liquidity with lower interest rates.
3) Investors wanted higher interest rates than what were available and began to seek higher returns. This demand for higher returns was met with lendors who on took greater risks by approving subprime loans for buyers with bad credit.
4) Fueled by subprime loans, consumers drove the housing bubble to its peak in the summer of 2005 until it began to burst in August, 2006.
5) Mortgage originators (lenders) should shoulder most of the blame, as they were the ones who loaned money to people with poor credit and high risk of default. Conversely, lenders probably saw subprime loans as less of a risk than what they were because rates were low, the economy was healthy and people were making their payments.
6) Home buyers purchased houses they could barely afford, often with no down payment in the form of 2/28 and interest only mortgages. They hoped that prices would continue appreciating and that they would refinance at a later date with lower interest rates and perhaps even take some money out with their new equity.
7) The housing bubble finally burst and prices dropped rapidly.
8) Some lenders may have given the impression that subprime loans presented no risk to the borrowers as the costs were low, however, home buyers simply took loans that they could not afford.
9) The secondary mortgage market added to the problem, as lendors simply sold their loans to these entities, collected their origination fees, which freed up more money to continue the cycle.
10) Much of the demand for these mortgages came from pooling these loans into security, know as "collateralized debt obligations" (CDO's), which were then sold to investors.
11) Rating agencies (such as Moody's) and the underwriters of CDO's can also take part of the blame. There could be a conflict of interest here, because the rating agencies collect fees from the security's creator for assigning a risk rating such as AAA. However, this is the process in which bonds are brought to market.
12) Investors in the CDO's can take blame as well, as they were the ones that bought these securities at "ridiculously low prices over treasury bonds." Investors did not do their homework and merely took the AAA rating at face value and did no further investigation.
13) Hedge funds made the problem even worse by purchasing CDO's on credit, which pushed subprime interest rates lower. As soon as investors recognized that subprime loans were of inferior quality, Many of these hedge funds went out of business.

14) Finally, as you can see there were many participants in the subprime crisis. But, when all is said and done, it was human greed that fueled the crisis, which is what fuels all bubbles.









Who Is To Blame For The Subprime Crisis?

This is an excellent summary. Thanks.

 

[jimhcom]

Eric Petroff of Investopedia wrote a very objective and concise article entitled, "Who is to Blame for the Subprime Crisis?" Below are some important points that he raised:

1) There is no single entity or person to point the blame at, as anytime something bad happens, blame starts to be assigned.
2) When the dot-com bubble burst in early 2000 and the terrorist attacks followed in 2001, there was a great risk of recession. Central banks around the world tried to stimulate the economy by creating capital liquidity with lower interest rates.
3) Investors wanted higher interest rates than what were available and began to seek higher returns. This demand for higher returns was met with lendors who on took greater risks by approving subprime loans for buyers with bad credit.
4) Fueled by subprime loans, consumers drove the housing bubble to its peak in the summer of 2005 until it began to burst in August, 2006.
5) Mortgage originators (lenders) should shoulder most of the blame, as they were the ones who loaned money to people with poor credit and high risk of default. Conversely, lenders probably saw subprime loans as less of a risk than what they were because rates were low, the economy was healthy and people were making their payments.
6) Home buyers purchased houses they could barely afford, often with no down payment in the form of 2/28 and interest only mortgages. They hoped that prices would continue appreciating and that they would refinance at a later date with lower interest rates and perhaps even take some money out with their new equity.
7) The housing bubble finally burst and prices dropped rapidly.
8) Some lenders may have given the impression that subprime loans presented no risk to the borrowers as the costs were low, however, home buyers simply took loans that they could not afford.
9) The secondary mortgage market added to the problem, as lendors simply sold their loans to these entities, collected their origination fees, which freed up more money to continue the cycle.
10) Much of the demand for these mortgages came from pooling these loans into security, know as "collateralized debt obligations" (CDO's), which were then sold to investors.
11) Rating agencies (such as Moody's) and the underwriters of CDO's can also take part of the blame. There could be a conflict of interest here, because the rating agencies collect fees from the security's creator for assigning a risk rating such as AAA. However, this is the process in which bonds are brought to market.
12) Investors in the CDO's can take blame as well, as they were the ones that bought these securities at "ridiculously low prices over treasury bonds." Investors did not do their homework and merely took the AAA rating at face value and did no further investigation.
13) Hedge funds made the problem even worse by purchasing CDO's on credit, which pushed subprime interest rates lower. As soon as investors recognized that subprime loans were of inferior quality, Many of these hedge funds went out of business.

14) Finally, as you can see there were many participants in the subprime crisis. But, when all is said and done, it was human greed that fueled the crisis, which is what fuels all bubbles.



What this senario fails to address is the results of goverment intervention in the 2 previous recessions, and the psychological impact that intervention had on the public. In 1991 the Bush 1 administration intervened in the recession by lowering interest and fueling the speculation in the Tech bubble,many people who should have been wiped out financialy got off the hook and did not pay the price for their speculation. In 2001 the Bush 2 administration intervened in the recession that should have happened as a result of the wild speculation in the Dot Coms. The public took advantage of the low interest rates and simply re-financed, again dodging the bullit, and not really having to pay for their financial irresponsiblity. So now you have a public that has been convinced that borrowing is not only the way out of trouble but the road to getting rich. They lack the disipline that the prior 2 recession should have taught them. Their view of reallity is scewed, in the back of their minds, they believe somehow the Banks and the Goverment will once again bail them out. What they do not understand is this time is different. This time there is too much debt. Nothing will stop this recession. The Banks, the Fed, and the Goverment are in panic mode. Their smoke and mirrors economy is crumbling.They want to postpone the worst of this mess untill they are out of office and hopefully defer some of the blame. They just need to keep the deception going a little longer.

 

[twaddle]

They just need to keep the deception going a little longer.

It's hard to quantify, but slowing things down usually helps a lot. People adapt. It's much harder to adapt to a sudden shock than to a slow hissssss.

 

[tryan]

The Banks, the Fed, and the Goverment are in panic mode. Their smoke and mirrors economy is crumbling.

Weeelll, here's a couple corrections. The president does not set monetary policy ... the federal reserve does. So replace any reference to "Bush" with "Greenspan". Yup, Alan caused the Dot Com bubble by not requiring tighter restrictions on trading margins. And Alan caused the housing bubble by dropping the interest rates nearly to nothing. Yup a recession is coming ... the economy is cyclical, but WHEN is anybody's guess.

 

[emilylynn]

I believe Bush unveils his plan today, no?

 

[Retire Soon]

I believe Bush unveils his plan today, no?

Yes, Bush does unveil his plan today.

Bush to Unveil Aid to Homeowners - WSJ.com

 

[emilylynn]

Well, yes, I expect some of these folks will refinance - they had better! But getting a 5 year teaser rate might significantly delay that refinancing. Audrey

I wouldn't hold out much hope for a significant amount of refinancing. After all, these were folks who were unable to qualify for conventional mortgage loans during a period of time that spawned what may have been the loosest lending standards the industry has ever seen. With the specter of governmental intererence amounting to nothing less than the large-scale abrogation of private contracts, you can bet that nobody in the private sector is going to be lining up to do business with them again. Lenders will be demanding a premium for not only the risk inherent in making loans to this class of borrower, but an additional premium to compensate them for the risk of entering into contracts with a protected class which may receive special legal protections at any time.

Furthermore, after the government gets through stripping the investment community of their legal rights, there will no longer be a private secondary market for mortgage loans. The availability of credit will be drastically reduced--meaning higher rates for everyone, and the standards imposed by lenders (who will be keeping more of these loans on their own balance sheets) will be much more stringent.

As much disdain as I have for the fraudulent practices of the lenders vis-a-vis the mom-and-pop investors who will ultimately take the hit, I do not believe that the subprime borrowers in this picture were the victims of any similar deception. Since the dawn of time it has been the case that a high risk borrower pays a commensurately high price for the extension of credit. And where an already high-risk borrower requires terms that defer the payment of interest. . . Well, there's nothing too surprising about the fact that there's going to be a day of reckoning. No sympathy here.

 

[cute fuzzy bunny]

I doubt they'll be refinancing much either. A lot of folks move within 3-5 years of buying a home due to job or family changes. I suspect a fair number of the folks stuck with this problem will lateral to a rental and we'll see a lot of inexpensive properties with a lot of deferred maintenance hitting the RE market over the next 5 years...

 

[W2R]

I doubt they'll be refinancing much either. A lot of folks move within 3-5 years of buying a home due to job or family changes. I suspect a fair number of the folks stuck with this problem will lateral to a rental and we'll see a lot of inexpensive properties with a lot of deferred maintenance hitting the RE market over the next 5 years...

GREAT! A lot of US will be retiring or retired in five years, and some of us will have plenty of time to catch up on the maintenance of an ER home that we bought for a song!

 

[emilylynn]

I hadn't thought about the deferred maintenance aspect of this. That's a good point. Can you imagine how the holders of the mortgages are feeling knowing that their hands may be tied for five years while the little security that they now have rots away?

 

[tryan]

Last time I rode thru this turbulance it took 12 years for prices to recover (Boston 1987-1999). If anything, it appears we're just shifting the burden to the next administration ... 5 years is nothing.

Yeah, I did VERY LITTLE to maintain the upside down properties. Roof leak ... put a tarp in the attic! Why spend good $$ chasing bad $$.

 

[audreyh1]

I wouldn't hold out much hope for a significant amount of refinancing.

That's what I suspect as well, in which case we are just kidding ourselves. But I suppose just slowing things down a bit has SOME benefit. But that's why I don't understand the long 5 year freeze.

Audrey

 

[twaddle]

Just listened to Paulson's speech. The teaser freezer is toothless. Just guidelines for servicers. The idea was to make the work-out process targeted and consistent, but it sounds like there's still a ton of one-on-one work involved.

 

[audreyh1]

Furthermore, after the government gets through stripping the investment community of their legal rights, there will no longer be a private secondary market for mortgage loans. The availability of credit will be drastically reduced--meaning higher rates for everyone, and the standards imposed by lenders (who will be keeping more of these loans on their own balance sheets) will be much more stringent.

I think this has in fact already occurred, without the government intervention. Just the fact that so many of the securities are now trading at such a severe discount is an indication that the contract is worth little (i.e. that the investors already expect the homeowner NOT to live up to their end of the contract). I don't think there won't be a private secondary market for mortgage loans, I just think it won't be anything like what it was, which was way out of control.

Audrey

 

[Retire Soon]

I wouldn't hold out much hope for a significant amount of refinancing. After all, these were folks who were unable to qualify for conventional mortgage loans during a period of time that spawned what may have been the loosest lending standards the industry has ever seen. With the specter of governmental interference amounting to nothing less than the large-scale abrogation of private contracts, you can bet that nobody in the private sector is going to be lining up to do business with them again. Lenders will be demanding a premium for not only the risk inherent in making loans to this class of borrower, but an additional premium to compensate them for the risk of entering into contracts with a protected class which may receive special legal protections at any time.

Furthermore, after the government gets through stripping the investment community of their legal rights, there will no longer be a private secondary market for mortgage loans. The availability of credit will be drastically reduced--meaning higher rates for everyone, and the standards imposed by lenders (who will be keeping more of these loans on their own balance sheets) will be much more stringent.

As much disdain as I have for the fraudulent practices of the lenders vis-a-vis the mom-and-pop investors who will ultimately take the hit, I do not believe that the subprime borrowers in this picture were the victims of any similar deception. Since the dawn of time it has been the case that a high risk borrower pays a commensurately high price for the extension of credit. And where an already high-risk borrower requires terms that defer the payment of interest. . . Well, there's nothing too surprising about the fact that there's going to be a day of reckoning. No sympathy here.

I agree with Emilylynn. Additionally, I think this "bailout" of subprime borrowers will haunt generations to come. The secondary mortgage market will never be the same again. They'll be overly cautious because of the threat of government intervention. What lesson will the children of subprime borrowers who received a government rescue learn from all of this?

 

[audreyh1]

I think the secondary mortgage market will never be the same again anyway simply because there won't be the same extent of subprime mortgages again, and CDOs, etc. will never be rated the same way again.

This is not necessarily a bad thing.

Audrey

 

[Jay_Gatsby]

I think the secondary mortgage market will never be the same again anyway simply because there won't be the same extent of subprime mortgages again, and CDOs, etc. will never be rated the same way again.

This is not necessarily a bad thing.

Audrey

Agreed. I'm all for tighter controls by the industry for the quality of mortgages written, even if it means I pay a higher rate. Why? Because property values will not shoot up at such a dramatic rate. When I buy a house, I plan on LIVING IN IT, not looking at it as a nest egg investment. True, my house will the be most valuable (and expensive) thing I own, but it's better to have it appreciate at a reasonable level. Otherwise, my property taxes will go through the roof, which is even more money out of my pocket.

 

[jazz4cash]

I think the secondary mortgage market will never be the same again anyway simply because there won't be the same extent of subprime mortgages again, and CDOs, etc. will never be rated the same way again.

This is not necessarily a bad thing.

Audrey

Amen!

 

[Retire Soon]

I think the secondary mortgage market will never be the same again anyway simply because there won't be the same extent of subprime mortgages again, and CDOs, etc. will never be rated the same way again.

This is not necessarily a bad thing.

Audrey

This would have happened anyway, even without government intervention. Everyone will suffer because of subprime loan modification. We'll all be paying higher interest rates and will have fewer loan choices with higher down payments. The consumers who signed up for these loans will never learn a lesson in personal responsibility. Today, our government told them that it was OK for adults to behave like children, because Uncle Sam will always be there to get them out of a fix.

Many of these borrowers being bailed out purchased homes or McMansions that they could never afford, with little or no down payment. If they're somehow fortunate enough to be able to make the payments for five years, there's a good chance that they still won't have any home equity at the end of five years and will lose their homes anyway.

In the future, lenders on all types of loans will be reluctant to loan to people with lower credit scores, because they now know what can happen when they do--big government might step in and rescue them from their contract.

We will all suffer from what happened today. There is no such thing as a free lunch.

 

[emilylynn]

Here is an interesting article that came out today. It explains why the "subprime" situation is just the first inning in a much bigger mortgage meltdown.

Herb Greenberg » Blog Archive » Straight Talk on the Mortgage Mess from an Insider

 

[twaddle]

We will all suffer from what happened today. There is no such thing as a free lunch.

Maybe. But don't forget that we all benefited on the way up. These people went into debt and spent oodles of money. They gave banks record earnings. In fact, the entire market had record earnings. And, of course, they made the values of all of our homes go up.

Like you said -- there's no free lunch. We'll simply be paying for some of that free lunch we got on the way up.

 

[youbet]

We'll all be paying higher interest rates

Absolutely not true. For example, I pay zero interest now and will pay zero interest going forward.

 

[audreyh1]

We will all suffer from what happened today. There is no such thing as a free lunch.

I'm not saying that I agree with the steps taken today - there is a rather perverse reward that favors those with the worst credit history. This is very disturbing. But coming up with a way to give borrowers more time to negotiate alternatives seems like a good idea. When time constraints are relaxed in financial crises it usually helps. Five years seems like too long, but maybe that's quibbling.

I'm just saying that a couple of the arguments against the solution don't hold water:

1. That the government is interfering and breaking a contract, when in fact by defaulting on a loan a borrower will be breaking the contract anyway. The CDOs are already trading as if more contracts will be completely broken than perhaps can be reasonably expected.

2. That this will damage the secondary mortgage market when this market has already been terribly damaged. The banks, brokers, rating agencies, etc. have already had their credibility destroyed.

Audrey

 

[twaddle]

I pay zero interest now and will pay zero interest going forward.

In the spirt of all the moral outrage around here -- I'm outraged! Money makes the world go around. It's your civic duty to spend spend spend!

Remember that boat you've had your eye on? And the Bimmer? Pssst -- the new FNMA tightening doesn't happen till March. Extract a little equity, won't you? Helping the economy is in all of our interests.

FWIW, I think history will view the teaser freezer as too little, too late. But let's see how it goes.