[Winstonm]

pbleighton, on Aug 17 2007, 06:09 AM, said:

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The only reason to use ARMs was to take advantage of proclaimed rising home prices and falling mortgage prices - a gamble that you could buy too much house and then refinance it at a lower rate.

This is simply untrue. I was in the mortgage business for two years (late 96 to late 98), and one of my bridge partners is still in the business. The reason most people choose ARMs is that they don't want to buy interest rate insurance from their lenders, because it is so expensive.

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80/20 loans, interest only ARMs, ARMs - these were all created simply to move the merchandise - the house - allowing the originatiing lender to collect a fee, package the risk into a MBS and sell it, allowing the next guy to collect more fees when he stripped the MBS and created CDOs....and on and on.

This is silly conspiracy theory. What happened was capitalism - people bought new loans they liked.

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To believe the last 2 years of the housing bubble 2005-2006 were about providing homes to poor working families is simply burying one's head in the sand.

Who in these posts has said that it was? I certainly haven't - it's just capitalism.

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The bubble forced home prices to rise to unaffordable levels - new mortgages were needed to get people initially into the homes otherwise the demand would drop and prices would have stabalized.

More conspiracy theory.

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Do you really think the reason car loans were extended from 4 years to 5 years and then to 7 years was because consumer's demanded new loan products? No, it was because automobiles became too expensive for consumer's to afford with 3-4 year financing. New financing arrangements had to be created to keep the iron moving.

I think consumers were given more choices. You seem to object to this.

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Housing was no different. You may not wish to call the ARM exotic, but to a buyer from 20 years ago it would be.

BFD. A laser printer was unheard of 30 years ago, but I have a cheap one sitting on my desk. Deregulated financial markets are a fact of life. IMO they bring more good than bad, but they certainly have a down side.

Winston, I think I've figured out your proble. You want to go back to the fifties

Peter

Well, the fifties weren't bad, Peter.

Let me continue our discussion. First, none of this is conspiracy theory it is simply economics.

Interest rates were dropped and held too low for too long. This created an artificial demand for houses. When demand outstrips supply, prices rise.

People bought new loans they liked? Hard for me to think that you actually believe this to be true on a large scale. Perhaps some had the option to buy any loan they wanted, but as you can see from the incredible amount of foreclosures occuring, most took the only loan that came close to allowing them to buy.

There is a reason for the more exotic mortgages to increase at the end of the bubble - no more worthy buyers so unworthy buyers were brought into the mix via creation of loans allowing them to buy - no doc 80/20 liar loans and the like.

By the way, I am not blaming the mortgage products themselves for the mess. The creation of innovative financing can help over time.

All I am saying is there is no valid reason to bail out the end-of-bubble buyers and mortgage holders simply because the bubble burst.

One principle from the 1950's should still be valid today: fiscal responsibility; however, I'm afraid that concept is passe'.

[Al_U_Card]

This is indeed the difficulty with a zero-sum game when the participants are convinced that it is not zero-sum but that the pie is getting larger with time (no matter how much you eat....) The problem is that the bakers are the ones that are setting the price of the pie and it is far outstripping the "value" of the pie ( real or imagined quantity that is left). When finally, a few unfortunates are the sacrificial lambs and cause the general populace to realize that their dream is just that.....everyone lines up for their crumbs. The problem is that the bakers knew all about this and have stockpiled ingredients for the next "pie". We just keep lining up......

[pbleighton]

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But if the housing bubble bursts, then housing values will drop to effectively zero, as far as the banks are concerned. My folks will find that they have to pay off the entire secured line of credit in 12 months and the interest...$65,000, give or take. They can't come up with that kind of money. I can't come up with that kind of money. Nobody will be offering them a secured loan for the house, because nobody will be sure if the house can sell for more than $50K on short notice. Then, it's foreclosure time.

jt, I just checked with my bridge partner, who is#2 at a decent sized mortgage broker in Connecticut. He says this is absolutely not true, at least in Connecticut, and in most states.

In Connecticut, equity loans are 10+ years. After the draw period, any existing balance is flipped to a 20 year mortgage, fixed or adjustable depending on the agreement. At no point is the loan callable.

Peter

[Winstonm]

JT:

What is the purpose of MEW in your example? It is a silly use of equity. If instead of withdrawing - borrowing more, actually - they would have simply paid the mortgage down to zero, no amount of bubble-bursting would matter.

This is the fallacy of wealth creation by housing. To extract that wealth one must sell the asset - borrowing does not increase wealth but depletes it unless you can gain more on the money than the cost of the loan.

The one thing we seem to have lost in this country is the concept that borrowing assumes a risk; if the bet goes bad, it is the borrower and not the taxpaying system who needs to pay the piper.

I agree that allowing Countrywide to fail is bad; if Countrywide, a Fed primary dealer, were to fail, that would indicate systemic financial crisis.

However, as the Fed cut by 50 basis points today, party on, dude.

[jtfanclub]

pbleighton, on Aug 17 2007, 09:18 AM, said:

jt, I just checked with my bridge partner, who is#2 at a decent sized mortgage broker in Connecticut. He says this is absolutely not true, at least in Connecticut, and in most states.

In Connecticut, equity loans are 10+ years. After the draw period, any existing balance is flipped to a 20 year mortgage, fixed or adjustable depending on the agreement. At no point is the loan callable.

Well, if I'm wrong about Ohio, then we'll ride it out in good shape. I don't claim to know much about these tools, just what I've been told. It would be a relief it they they're that long term.

[jtfanclub]

Winstonm, on Aug 17 2007, 09:19 AM, said:

This is the fallacy of wealth creation by housing. To extract that wealth one must sell the asset - borrowing does not increase wealth but depletes it unless you can gain more on the money than the cost of the loan.

The one thing we seem to have lost in this country is the concept that borrowing assumes a risk; if the bet goes bad, it is the borrower and not the taxpaying system who needs to pay the piper.

It's not that simple. Their intent was to spend the money while they were alive, not to make money. Ideally, rather than live in their house until it was time to sell, and then have all this money but no longer be mobile enough to use it, they would 'pre-spend' some of the money travelling etc. When they were no longer mobile enough enough to live in the house, and needed to move elsewhere, the money they got out of the house would fund that move only.

I feel confident that a majority of baby boomers have the same plan.

[pbleighton]

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Perhaps some had the option to buy any loan they wanted, but as you can see from the incredible amount of foreclosures occuring, most took the only loan that came close to allowing them to buy.

Every single borrower had the option of a fixed loan, and the option of buying a cheaper (smaller, worse neighborhood) home.

These were all invidual decisions. Willing buyer, willing seller.

Peter

[Gerben42]

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But if the housing bubble bursts, then housing values will drop to effectively zero, as far as the banks are concerned. My folks will find that they have to pay off the entire secured line of credit in 12 months and the interest...$65,000, give or take. They can't come up with that kind of money. I can't come up with that kind of money. Nobody will be offering them a secured loan for the house, because nobody will be sure if the house can sell for more than $50K on short notice. Then, it's foreclosure time.

Why would they suddenly have to pay back everything? Sorry but I am clueless about this kind of business. I would not be very happy taking a loan which has the risk of suddenly having to pay everything back. As you say, they would be okay if they could simply pay back the loan according to plan, regardless of the value of the house inbetween.

[Winstonm]

pbleighton, on Aug 17 2007, 09:46 AM, said:

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Perhaps some had the option to buy any loan they wanted, but as you can see from the incredible amount of foreclosures occuring, most took the only loan that came close to allowing them to buy.

Every single borrower had the option of a fixed loan, and the option of buying a cheaper (smaller, worse neighborhood) home.

These were all invidual decisions. Willing buyer, willing seller.

Peter

Yes, Peter, I agree. But you are not factoring in the last 2 critical years of the bubble, when the system broke down with no-document loans, appraisers using inflated values, and mortgage risk being sold so no hazzard was left with the originator - it was all about collecting fees along the way.

It is the same in all speculative bubbles - the Minsky Moment arrives and the Ponzi finamcers get whacked first.

[jtfanclub]

Well, I have been told I'm wrong here, but I understand that it's a revolving line of credit....each month they pay the interest and pay back or take out what they owe. If the wheel were to stop suddenly, they'd get thrown off, because they couldn't pay back the line of credit.

It's easier to imagine in the reverse. Suppose that every month you got a $5,000 5% COD. When each became mature, you just redeposited the money. The bank's happy, because they're paying 5% on $60,000, which they can then loan to other people for more and make a profit. But if you were suddenly decide to stop depositing the money, the bank would have to pay you back your $5K per interest each month...$60K plus interest over a year...and the bank has no say in it. This is pretty ordinary for CODs.

It was my understand that this is how it worked on the revolving line of credit. My folks took out as much as they needed, and paid the interest. They took out additional loans to pay off the principal, just enough to keep the balance even. If the revolving LOC were to stop, then they'd suddenly have to pay the principal off as well as the interest. If that's over 20 years, no problem. If it's over one year, big problem.

[Winstonm]

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It's not that simple. Their intent was to spend the money while they were alive, not to make money.

But JT, it really is that simple. Debt creates risk. For example, say two earners can easily afford a house payment and a second mortgage; however, one of the earners becomes ill and dies; if those two had not purchased life insurance to cover that occurence, then suddenly the debt that was paid easily by two becomes unmanageable for one.

Regardless of how someone wishes to use the equity in his house, the fact is that it is an illiquid asset that requires disposal in order to capture its gains.

Certainly, anyone can chose to obtain a loan against equity, but in so doing must realize that along with the money comes an increase in risk of default.

Simply because monetary inflation targeted housing assets as an expression of pricing inflation does not imply that any real, lasting wealth was created. In asset bubbles, some early winners can make money, but in the end everyone else turns out to be big losers.

[pbleighton]

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Yes, Peter, I agree. But you are not factoring in the last 2 critical years of the bubble, when the system broke down with no-document loans, appraisers using inflated values, and mortgage risk being sold so no hazzard was left with the originator - it was all about collecting fees along the way.

All this stuff was happening 10 years ago, Winston. Trust me, I was there.

Peter

[Winstonm]

pbleighton, on Aug 17 2007, 10:41 AM, said:

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Yes, Peter, I agree. But you are not factoring in the last 2 critical years of the bubble, when the system broke down with no-document loans, appraisers using inflated values, and mortgage risk being sold so no hazzard was left with the originator - it was all about collecting fees along the way.

All this stuff was happening 10 years ago, Winston. Trust me, I was there.

Peter

No disagreement - however, the magnitude of graft expanded with the bubble.

In this chicken of the egg scenario, the answer is quite obvious that it was the dramatic increase in foreclosures that has caused the problem with housing and housing lenders - and there has been no serious economic slowdown with accompanying job loss on which to place the blame.

The blame must fall squarely on both the borrowers for overextending and the lenders who allowed the shell game to get out of hand.

[Al_U_Card]

The context has also changed.....pre-9/11 there were fewer worries and less fear. Sheople needed to be placated and given a pacifier to help them forget about their imminent loss of rights and freedoms. So along with the E! network and its tripe, came home ownership! The suburban dream to get away from all those nasty things.