Walking away from a mortgage, This cannot be good.

[dumpster56]

I am just happy to have been able to sell my bag of potatoes in East San Diego County in July 2006.

Boy ain't that the truth! We sold ours out in NJ in May of 06 and today I saw a resale that sold for 150K less than what we got for the same model on my old street last week.

 

[clifp]

To be fair most new business ventures involve equity investing, not loans, and the high risk factors are constantly factored in. If they are not, shame on the investors. The vast majority of entreprenuers have plenty of their own sweat, money and reputation in the game, and tend to hang in until the last gasp of air is taken, before walking away. Even with megacorps many careers are on the line with a new venture. Very different from a low downpayment no income check loan on a property you might have barely seen 8 weeks earlier provided by a lender who doesn't know you from Adam.

Exactly, in the 30 or so business ventures pitches I've seen my investment club, exactly two had any bank loans (not counting the credit card debt run up by the founders.) In every case the entrepeneur had lots of sweat equity, and often their own money, and including their house wrapped in the business.

There is no comparison to the no or 5% down folks with interest only loans.

 

[al_bundy]

Boy ain't that the truth! We sold ours out in NJ in May of 06 and today I saw a resale that sold for 150K less than what we got for the same model on my old street last week.

another 30% drop and homes in NJ will be affordable

 

[HFWR]

another 30% drop and homes in NJ will be affordable

Assuming you'd want to move there...

God Bless

 

[honobob]

We'll tell you when.......

Just a curiousity question on this......

Will the people who said there was not a real estate bubble come out now and say you were wrong

or the ones who kept saying house prices were not going down concede?

Just curious if you will admit when you are wrong...

Hawaii market heats up for global investors - Pacific Business News (Honolulu):

Still no Bubble in Hawaii or San Francisco. Any slowdown from the credit crisis is quickly being picked up by foreign investors. As you read Realtors are learning to speak Canadian.

Now in Texas.......

Lucky if you invested in Diamond Head recently.

 

[armor99]

Armor, I wouldn't have expected this from you. Why would you favor introducing the government into this issue? Hey, if a deadbeat finds somebody stupid enough to lend them money again, why is that the government's business? The lender made a bet (that they lendee would pay the loan back) and that bet did not pay off. Let the marketplace sort this out--nothing will force discipline into the system faster than a few lenders getting burned. Maybe they'll start screening applicants. And, when applicants learn that folks lenders are tightening up, they'll think longer before mailing back the keys.

And, just to extend the point--why should there be an arbitrary limit for how long a foreclosure or bankruptcy stays on a credit report? Credit reports are produced by private companies, they should be free to put whatever (valid) information they want on that report, and keep it there as long as they choose.

The problem starts when the government takes money from responsible taxpayers in order to bail out those who took a risk and lost.

Samclem: A wise man once told me.... that your friends are the ones who point out to you when you have made a mistake.... after re-reading what I posted, and thinking about what you said.... I must admit.... I was off... and you were correct. The only excuse I can give is that sometimes (even for me) passion can sometimes rule reason. The real problem here is of course the govt intervention in the first place. Adding MORE govt regulations (even with the best of intentions) will only make it worse. I guess the day after day witnessing of the responsible paying for the irresponsible, has left me somewhat bitter about it.
I need to focus on the more positive aspects of it. With the economy in a bit of a slowdown now, those that DO have a bit of money to spend have lots of bargains to find.

 

[Gumby]

While we're getting the government out of the housing finance market, why don't we go ahead and eliminate the mortgage interest deduction, which acts as a hidden government subsidy (cue anguished screams).

Seriously, many of the problems we are facing came from the practice of selling and securitizing mortgages. If you are the initial lender (or "originator" in the parlance) you have no incentive to have very strict underwriting guidelines and not much incentive to rigidly enforce the guidelines you do have, because you will immediately sell the loan to an investment bank who will put together a pool and issue RMBS's (residential mortgage backed securities). The investment bank doesn't have that much incentive to scrutinize the deals either, because the economic risk of default is being passed on to the RMBS investors. By contrast, in the days prior to widespread securitization, "Podunk Building & Loan" would keep that loan on its books until final payment. Under those conditions, Podunk had every incentive to set and maintain strict underwriting standards. The government could help to set the current system aright by passing laws to eliminate mortgage securitization, or at least to reign in some of the worst practices. Samclem is right that when the economic loss falls on the person who was sloppy, that person will clean up his act. However, the current separation of the origination process from the economic loss prevents this type of market driven self correction.

 

[Texas Proud]

Gumby...

The problem is that the trust were set up by the Merrill Lynch's of the world and told the investors they were 'good' loans..

I did MBS about a decade ago... and these were the ones that the housing authorities issued with tax exempt debt... the file on one loan was usually 1/2 to 1 inch thick with all the docs.. and there were very strict rules about being a first time home buyer, and income etc... but even with all that good review, the recession hit home prices and jobs hard in Texas and many defaulted... so yes, better underwriting would have 'helped', but maybe not as much as some would think... as some are saying, there are many who CAN pay planning on walking because of the big drop in their value... kind of a different play... If I win, I keep it, if I lose, YOU keep it..

 

[Gumby]

Forcing people to put 20% down has the very salutary effect of making it more difficult for them to walk away. The practice of allowing simultaneous second mortgages for amounts sometime exceeding 100% LTV, at debt to income ratios exceeding 50%, with adjustable rates, and to people with mediocre FICO scores and no documentation of income or assets virtually guarantees the results we are seeing now. As I once told a bank client who had made a similarly stupid loan many years ago "You deserve to lose your money".

 

[jazz4cash]

While we're getting the government out of the housing finance market, why don't we go ahead and eliminate the mortgage interest deduction, which acts as a hidden government subsidy (cue anguished screams).

Seriously, many of the problems we are facing came from the practice of selling and securitizing mortgages. If you are the initial lender (or "originator" in the parlance) you have no incentive to have very strict underwriting guidelines and not much incentive to rigidly enforce the guidelines you do have, because you will immediately sell the loan to an investment bank who will put together a pool and issue RMBS's (residential mortgage backed securities). The investment bank doesn't have that much incentive to scrutinize the deals either, because the economic risk of default is being passed on to the RMBS investors. By contrast, in the days prior to widespread securitization, "Podunk Building & Loan" would keep that loan on its books until final payment. Under those conditions, Podunk had every incentive to set and maintain strict underwriting standards. The government could help to set the current system aright by passing laws to eliminate mortgage securitization, or at least to reign in some of the worst practices. Samclem is right that when the economic loss falls on the person who was sloppy, that person will clean up his act. However, the current separation of the origination process from the economic loss prevents this type of market driven self correction.

OK, I'm have a real difficult time connecting your premise (mortage interest deduction) with paragragh two describing the securitization [-]scam[/-] [-]scheme[/-] process. They bundle the loans to reduce risk and then slice them up to increase yield, but somehow, magically the risk is isolated. So it was just a game of hot potato?

 

[jazz4cash]

The problem is that it eventually becomes everybody's problem.

Yes!

 

[Salaryman]

Forcing people to put 20% down has the very salutary effect of making it more difficult for them to walk away. The practice of allowing simultaneous second mortgages for amounts sometime exceeding 100% LTV, at debt to income ratios exceeding 50%, with adjustable rates, and to people with mediocre FICO scores and no documentation of income or assets virtually guarantees the results we are seeing now. As I once told a bank client who had made a similarly stupid loan many years ago "You deserve to lose your money".

Warren Buffett agrees with you:

Buffett: Bank woes are poetic justice | Reuters

 

[youbet]

While we're getting the government out of the housing finance market, why don't we go ahead and eliminate the mortgage interest deduction, which acts as a hidden government subsidy (cue anguished screams).

.

Excellent idea and I'm all for it. The folks who benefit from this government charity are undeserving.

 

[Texas Proud]

Forcing people to put 20% down has the very salutary effect of making it more difficult for them to walk away. The practice of allowing simultaneous second mortgages for amounts sometime exceeding 100% LTV, at debt to income ratios exceeding 50%, with adjustable rates, and to people with mediocre FICO scores and no documentation of income or assets virtually guarantees the results we are seeing now. As I once told a bank client who had made a similarly stupid loan many years ago "You deserve to lose your money".

True.... but again... the people had to put 10% down and got PMI... but the house prices dropped up to 50%... so walking was still the 'best option'...

It is just 'more' today with all the people who had no skin in the game... and I agree it is the investors that should take the hit... and if the CMO stated that the underwriting was as bad as it was, then they should take the hit also... if it said something else and the 'seller' did not follow what they said they would..... THEY should take the hit for the whole CMO... we will see when all the lawsuits are over years from now...

 

[Texas Proud]

OK, I'm have a real difficult time connecting your premise (mortage interest deduction) with paragragh two describing the securitization [-]scam[/-] [-]scheme[/-] process. They bundle the loans to reduce risk and then slice them up to increase yield, but somehow, magically the risk is isolated. So it was just a game of hot potato?

Bundle to reduce risk in 'total' is correct...

But you can not slice them up to 'increase yield'.... you only have whatever the interest rate is on the loans to work with... you slice it up to have some safe slices at low yield and some 'risky' slice at higher yields... but overall yield has not changed...

 

[Gumby]

OK, I'm have a real difficult time connecting your premise (mortage interest deduction) with paragragh two describing the securitization [-]scam[/-] [-]scheme[/-] process. They bundle the loans to reduce risk and then slice them up to increase yield, but somehow, magically the risk is isolated. So it was just a game of hot potato?

There is no connection. The first paragraph is just a wry observation that most of us hate government interference except when it benefits us personally.

 

[Gumby]

Bundle to reduce risk in 'total' is correct...

But you can not slice them up to 'increase yield'.... you only have whatever the interest rate is on the loans to work with... you slice it up to have some safe slices at low yield and some 'risky' slice at higher yields... but overall yield has not changed...

Actually, the overall yield of the combined RMBS tranches should be lower than the overall yield of the mortgages in the pool, so that you can have an excess yield spread to serve as credit enhancement.

The alchemy of securitization is that it transmutes large chunks of subprime mortgage debt into AAA rated paper. And, in fact, the AAA rated tranches will still get paid in our current environment. It is the B rated tranches that are getting killed. But then, they receive the larger yields to compensate for that risk.

 

[Texas Proud]

Actually, the overall yield of the combined RMBS tranches should be lower than the overall yield of the mortgages in the pool, so that you can have an excess yield spread to serve as credit enhancement.

The alchemy of securitization is that it transmutes large chunks of subprime mortgage debt into AAA rated paper. And, in fact, the AAA rated tranches will still get paid in our current environment. It is the B rated tranches that are getting killed. But then, they receive the larger yields to compensate for that risk.

And to pay the trustee!!! And the servicer etc. etc..

But, they were also over collateralized by a few %.... I had one insurance trust that was over 5%... but the Z bond got any 'excess'... this (I assume) is what Merrill wrote down as worthless....

 

[ERD50]

While we're getting the government out of the housing finance market, why don't we go ahead and eliminate the mortgage interest deduction, which acts as a hidden government subsidy (cue anguished screams).

No anguished scream from me, even though I supposedly 'benefit' from it.

Just make it revenue neutral, and while you are at it, cut out 100,000 other tax shell-games and complex rules which lead to 'loopholes'.

-ERD50

 

[Retire Soon]

In another section of the forum, RockOn pointed out a graph that shows the history of mortgages that have been securitized.

Historical ABX Graphs

 

[Independent]

..... The government could help to set the current system aright by passing laws to eliminate mortgage securitization, or at least to reign in some of the worst practices. Samclem is right that when the economic loss falls on the person who was sloppy, that person will clean up his act. However, the current separation of the origination process from the economic loss prevents this type of market driven self correction.

I don't see why the market can't self-correct on its own. There were a number of "sloppy" players, but the ultimate "investors" who bought the securities certainly deserve that adjective.

The normal market correction goes like this: If you do something stupid, you don't do it again. If you see someone else do something stupid, you don't copy them.

I don't see why we need the gov't telling them that they can't do it again.

 

[Independent]

No anguished scream from me, even though I supposedly 'benefit' from it.

Just make it revenue neutral, and while you are at it, cut out 100,000 other tax shell-games and complex rules which lead to 'loopholes'.

-ERD50

It's nice to see that I'm not the only person who thinks like this.
Unfortunately, I think we are in an extremely small minority. Even the people who post here probably prefer lots of "loopholes".

 

[Texas Proud]

It's nice to see that I'm not the only person who thinks like this.
Unfortunately, I think we are in an extremely small minority. Even the people who post here probably prefer lots of "loopholes".

Actually.... no.... I would benefit if loopholes were eliminated...

Just did my taxes and pay WAY to much... but my percent has gone down from a high of 25.3% a few years back to 22.8% the last few years to only 18.5% this last year... now if I could only get my extra 7% back...

 

[free4now]

The case for government regulation in most areas of business is when one entity is much more powerful than the entities they deal with, and therefore needs to be restrained from taking unfair advantage. That is why we have predatory lending laws, lots of insurance regulations, investor rights, etc.

In the case of the mortgage fiasco, a powerful party who took advantage was the big financial group that packaged the substandard mortgages as A rated debt. They took advantage of the fact that even the institutional buyers didn't have the resources to really understand what they were getting themselves into.

Buffet constantly makes the point that when things get so complex that nobody can understand what they are getting into (e.g. derivatives), that's a bad thing not only for those involved but everyone else who gets whipsawed when they fall.

In this sense I think the government has an interest in either making sure the mortgage backed securities are as good as they look, or outlawing them altogether if they can't be made transparent enough.

This is not to say there isn't blame all around... there are plenty of small players who acted greedily. Regulations like the tax forgiveness and California's "buyer not responsible for foreclosure debt" laws are only making the problem worse.

 

[jazz4cash]

The government could help to set the current system aright by passing laws to eliminate mortgage securitization, or at least to reign in some of the worst practices. Samclem is right that when the economic loss falls on the person who was sloppy, that person will clean up his act. However, the current separation of the origination process from the economic loss prevents this type of market driven self correction.

Throwing the baby out with the bathwater? Conforming loans were all securitized and have not had nearly the problems because as most have highligted the undewriting requires downpayments, ratios, good credit, etc,etc. The exotic loans were exactly that....they were only suitable for a tiny percentage of the population and when they were mainstreamed it was unsustainable and many were ultra-exotic not suitable for anything other than prolonging a bubble.