Is Regulation the problem or the solution?

[ladelfina]

I'm noticing a pattern.

Financially smart and responsible people with good jobs who bought homes in high appreciation areas are reminiscing about how leverage helped them get a big head start.

Just realize that most people are not smart, nor responsible, many dont have good jobs and many buy in low/no appreciation areas.

..not just low-/no-appreciation areas, but low-/no-appreciation eras. I'm glad for the people who reported that lots of leverage worked out ok for them, but it could just as well have gone the other way; not really that different from buying stocks on margin. If the market goes up you look like a genius; if it goes down you look like an idiot.

When things are going up, manuevers like clifp's can certainly work well. Was watching an old Peter Schiff talk to mortgage brokers and he said something that made the recent situation even more absurd: he compared renting to buying in terms of what a person had to come up with at the time.. 3 month's rent/deposit for a rental vs. zero for a house.. credit check and references for a rental vs. essentially waived for a house a couple of years back, not to mention the teaser or neg.am rates that may have made monthly payments less than rent. No wonder renters became buyers; it was made much easier for them in the short term.

 

[Retire Soon]

Lots of people in the Houston area (and other oil patch locations) took out these types of loans and went into foreclosure. I had a tradional 80/20 loan but I narrowly avoided the big B. I don't recall anyone calling on the government to bail us out. It seemed that the general feeling is that we were "irresponsible" and/or "stupid."

This is one aspect of the current financial rescue plan that congress is working on as we write. Some members of congress are adamant that this rescue effort includes help for those who are near foreclosure. I think people should only get help on mortgage payments from church, family, friends, but never, ever taxpayers!

 

[Bestwifeever]

Was PMI not required in the last few years on mortgage loans for more than 80 percent of the value?

 

[cute fuzzy bunny]

They avoided it in many cases by taking a traditional 80/20 loan and then a second mortgage to fill the gap, or by paying more for the house than the offer price and having the residual 'paid back' as a down payment.

The people who bought my wifes old house did that. Paid us an extra 20k over asking price in exchange for a 'rebate' towards their down payment...and higher property taxes for the term of their ownership.

That was a 100% finance deal...they didnt even have an extra $250 to increase their deposit once we accepted their offer. And the house is worth around half of what they paid right now.

But they're still living there, 2.5 years later...

 

[Bestwifeever]

I see, CFB--I only asked because a. we had to carry PMI thirty years ago for a couple of years when we bought our house with less than 20 percent down (still living in there today), and b. PMI would have helped the lenders when the riskier borrowers defaulted, no?

 

[cute fuzzy bunny]

Yep, that would have driven the people who sell PMI to the bailout window.

Some people got pretty creative. The guy I sold my old mcmansion to needed an extra 3 weeks to "arrange his financing". Looked like he took a primary from a local CA mortgage outfit and a second from some oddball company on the east coast.

So people actively avoided the safety mechanisms in place to prevent them from doing something stupid, with apparent complicity from their realtors and mortgage folks. The guy who bought my mcmansion could have figured it out on his own, but the couple who bought my wifes old house probably couldnt have balanced a checkbook without help.

 

[2B]

They avoided it in many cases by taking a traditional 80/20 loan and then a second mortgage to fill the gap, or by paying more for the house than the offer price and having the residual 'paid back' as a down payment.

The people who bought my wifes old house did that. Paid us an extra 20k over asking price in exchange for a 'rebate' towards their down payment...and higher property taxes for the term of their ownership.

That was a 100% finance deal...they didnt even have an extra $250 to increase their deposit once we accepted their offer. And the house is worth around half of what they paid right now.

But they're still living there, 2.5 years later...

If the 80/20 rule was in effect, we would have never seen the real estate bubble explode like it did. Many of the unqualified buyers wouldn't have been there to bid up the prices. Everything would be calm now except for the blatant discrimination our lawmakers hoped to stamp out be making sure unqualified borrowers could buy homes (and flip for big profits) regardless of race, color, creed or national origin.

 

[clifp]

Was PMI not required in the last few years on mortgage loans for more than 80 percent of the value?

AFAIK it still was. But I am sure CFB is right people figured out ways of getting around it fairly easily. My guess (emphasis guess) is that cost of PMI insurance also decreased a lot over the last few decade as relatively few mortgages defaulted.

I have heard a number of talking heads, and even a few people on the forum want to place virtually all the blame on banks and the evil mortgage brokers, but as CFB examples illustrated the borrowers are far from blameless.

The vast majority of real estate transactions I've heard about in California and Hawaii involve some type of deception.

Kickback of cash after close, exaggerations (or out right lies) about income, calling loans for down payments gifts, hiding student loans, 2nds recorded after the first mortgage, claiming owner occupancy when they were actually rentals, false rental income, and I am sure a bunch things I've never heard off.

I remember that the loan broker my ex-girlfriend used want me to state that bridge loan I was providing her was a gift. He seem surprised when I refuse to do so because I complained "It says in big red letters I swear under penalty of perjury that everything on this application is true", I want the house but it worth going to jail for". The lie was completely unnecessary but was clear that it was part of this farce, where everybody involved mortgage broker, lender, real estate agents, knew that mortgage application were works of creative fiction, but nobody cared. At the end of the day the borrowers are the ones who risked perjury prosecution but signed the loan papers anyway. Sure they made not have understood all the details of their option ARM, but even a financial idiot knows the difference between a loan and a gift.

 

[Nords]

He seem surprised when I refuse to do so because I complained "It says in big red letters I swear under penalty of perjury that everything on this application is true", I want the house but it worth going to jail for". The lie was completely unnecessary but was clear that it was part of this farce, where everybody involved mortgage broker, lender, real estate agents, knew that mortgage application were works of creative fiction, but nobody cared. At the end of the day the borrowers are the ones who risked perjury prosecution but signed the loan papers anyway.

We had a similar problem with a local realtor-- Richard Sterman. He was positive that nobody would care, let alone enforce the rules, and he couldn't understand why we were being so unreasonable over a little paperwork that would've left our assets hanging out in a cold breeze. The deal died acrimoniously with all sides pitching hand grenades.

Less than a year later the authorities & banks started enforcing the rules in exactly the situation that he was proposing to set up.

He's still in business but karma has definitely had its way with him.

 

[free4now]

I remember that the loan broker my ex-girlfriend used want me to state that bridge loan I was providing her was a gift. He seem surprised when I refuse to do so because I complained "It says in big red letters I swear under penalty of perjury that everything on this application is true", I want the house but it worth going to jail for".

Smart. I betcha you got the loan repaid before she became your ex-girlfriend. If you had signed a statement that it was really a gift, you might be reporting an unpaid debt on your IRS return.

But seriously, I think the "down payment can't be borrowed" requirement is ridiculous... it's widely and easily flaunted, so why have the rule at all. It mostly penalizes people for telling the truth, getting them used to lying on their application. I'd prefer to just see an explicit requirement that the funds be in your account for X months ahead of time. Rules that are widely disobeyed lead people to disobey the rules.

 

[Finance Dave]

This is a little excessive, IMO. As long as PMI premiums are set to adequately cover risk of nonpayment and foreclosure, it seems to be overkill.

I would imagine that PMI is set to cover risk of nonpayment/foreclosure in a typical time, but this has not been typical. It's kinda like tornado insurance. If in one year you have 20x as many tornados as any of the past 100 years, the tornado insurance companies will be in trouble. I suppose you could jack up PMI rates to cover a worst case scenario, such as what we're in now...but then it would be prohibitively expensive.

 

[clifp]

Smart. I betcha you got the loan repaid before she became your ex-girlfriend. If you had signed a statement that it was really a gift, you might be reporting an unpaid debt on your IRS return.

But seriously, I think the "down payment can't be borrowed" requirement is ridiculous... it's widely and easily flaunted, so why have the rule at all. It mostly penalizes people for telling the truth, getting them used to lying on their application. I'd prefer to just see an explicit requirement that the funds be in your account for X months ahead of time. Rules that are widely disobeyed lead people to disobey the rules.

Yes as soon as she sold her house she repaid me. Or worse yet she could have a walked away with a note saying it was a gift.

I agree we have so many rules that people simply ignore that it sets up a culture we people start breaking other laws. For instance paying sales tax on on-line purchases, AFAIK every state that has a sales tax has law that says that residents are suppose to pay sales tax on anything you purchase on-line, but 99%+ of the population doesn't pay. So why have the law?

 

[Nords]

I agree we have so many rules that people simply ignore that it sets up a culture we people start breaking other laws. For instance paying sales tax on on-line purchases, AFAIK every state that has a sales tax has law that says that residents are suppose to pay sales tax on anything you purchase on-line, but 99%+ of the population doesn't pay. So why have the law?

Making laws is cheap-- it's the enforcement that's expensive!

I think law enforcement would prefer to have as wide as possible a menu to choose from when it comes time to file the charges.