Friday, March 26, 2010

Reinforcing Failure.

Pay way too much for your house?

Convince a lender to front you half a mil for a 2-bedroom cracker box with a beautiful view of the interstate and gang tags on the trash cans, despite an actual work history involving an extensive collection of name tags and hairnets and a string of addresses that makes Kane from Kung Fu look like the Rock of Gibraltar?

Are you a lender who was dumb enough to give millions of dollars to Flippers-watching idiots, or a financial institution who thought that buying jillions of bundled mortgages on shoeboxes only a tremor and a mudslide away from being beachfront property was "secure"?

No fear!

It's still not your fault! Consequences are so mean and un-American that we think you shouldn't have to face them.


Anonymous said...

Hey! Affordable housing is a right, just like good sex, cable T.V. and high-speed internet. Bohic* Obama will just declare that every mortgage is not an adjustable rate loan, but an adjustable balance loan. Problem solved! Your payment adjusts with the market value of your house. Let those rich bankers who make billions and billions of dollars per hour pay for it!

*Bohic - bend over, here it comes

Todd said...

Responsibility takes a holiday...

Anonymous said...

Not always so cut 'n dried...the situation is pretty dire in Fla, and plenty of blame to go around, to wit:

My daughter and her husband, who are fiercely protective of their credit rating and the honorable fulfilling of their obligations, purchased a modest home in New Port Richey, Fla in July '05 for $171,000 with a 100% 5-yr. mortgage and with the (at the time reasonable) expectation that the increase in value would allow them to refinance into a new conventional first mortgage when the 5-yr. note comes due 07/10. They have maintained their payments in full and on-time because that is what they agreed to do.

In today's market, that home would probably sell for about half of the original purchase price...about $80-90,000. What are they to do? If the bank would give them a new 80% fixed-rate mortgage, they would no doubt accept it, continue to live in their home and make the payments on time, because they want to keep their commitment. But of course refinancing will require an appraisal, and the bank will no doubt want to finance 80% of the current value, not the 171K, and they have no way to pay the huge difference, even if they were dumb enough to do so.

I have always advised them on their purchases and finances, and even helped them choose their current mortgage which has a good rate and was within their ability to pay, so it is not as if they were irresponsible in buying more home or taking on more debt than they could afford. They are innocent victims of the boom and bust cycle that was orchestrated by a broken and corrupt system.

It breaks my heart to tell them they should do so, as they have done everything right, and it is so important to them, but I am advising them to place their home on the market as a short sale at the current value as an alternative to allowing the mortgages to fall into default and allowing a foreclosure. Sadly, even a short sale that is accepted by the lenders will have a serious effect on their credit which is so important to them, could result in the banks asking them to pay the shortage, and no doubt will affect their ability to purchase another home in the future.

Why, considering the conditions, is it not reasonable for the banks to reduce the principle on their debt to the amount that the house would sell for today and have them continue to pay their obligation, keep their home, and retain their good credit rating? The banks would get the same amount they will get anyway in a short sale, and save the costs involved with selling and financing the home to someone else.

This is a situation that is beyond any reason, and I'm afraid the effects of it are only beginning, as homeowners who have kept up their payments face the prospect of having no choice but to give up their homes and mortgages as the thousands of sales and mortgages done with short terms come home to roost.


Tam said...

"...purchased a modest home in New Port Richey, Fla in July '05 for $171,000 with a 100% 5-yr. mortgage and with the (at the time reasonable) expectation that the increase in value would allow them to refinance into a new conventional first mortgage when the 5-yr. note comes due 07/10."

What you are describing was a gamble.

It seemed a safe bet, but it was a bet nonetheless. Man'o'War can break a leg, and the bookie won't listen to the fact that he was obviously going to beat that Shetland pony. (This is only easy for me to say because it's not my ass in the sling, of course...)

Anonymous said...


What's preventing them from paying off the loan, or continuing to pay as intended?

Can they make the payment? If they haven't suffered a major economic down-turn, they have an obligation to pay. Just because the value of the home has declined doesn't remove their duty to perform.

When you borrow money to pay for a car, it loses much of its value as soon as you drive it home. Should you not have to make the payments now? Or, is it OK to let the repo man come get it, as it's no longer worth what you paid?

Jon B.

Anonymous said...

In 2001, Roubini called the housing boom a bubble. By 2003/4/5, many others were saying the same. 2005 was the peak. That year, a woman in California realized her dream: A mobile home with a nice view of the Pacific for a mere one mil, 89 thou.

I was just reading this morning that of the re-worked foreclosure deals in Florida, a notable percentage have been re-foreclosed.

31% of one's unemployment insurance income just won't make the payments.

And with the resets of the next two years or so coming due, the whole situation is going to get even worse...


Jake (formerly Riposte3) said...


If the bank offered, of their own free will, to reduce the principle on the loan and eat the loss, or make arrangements to convert it to a more conventional 30-yr loan and make the same profit but over a longer term, that would be one thing. But like Tam said, no matter how "safe" a bet it was, it was still a gamble and they lost.

How is it right for the .gov to force the bank to do that, and force me to cover the cost of their bad bet?

Anonymous said...

If you can't afford it now, it is foolish to count on being able to afford it in the future. The problem was caused by high demand fueled by loans made to buyers who couldn't afford their "modest" $171,000 houses. When that @#$%&*#@! George Bush suggested to the congressional finance committees that the federal loan guarantors should tighten up their standards to avoid a financial collapse, he was told, "This lets more poor people buy houses. That's a good thing."
Now those people are losing their houses and I have to pay for it.

Anonymous said...

Why, considering the conditions, is it not reasonable for your daughter and her husband to admit their mistake and assume responsibility for it.
They might discuss the problem with the bank and live on noodles, work two jobs, not take vacations, and give up cable in order to make the payments on their very overpriced house. I have done all of these, at one time or another. It is possible, but only if you want it bad enough.

Anonymous said...

I don't disagree with most of what has been said, and life in general certainly is a gamble. It's when the deck is stacked by the house and there are cheaters at the table that all bets are off.

Anyone who actually read what I wrote would see that continuing to pay the note as-is is not an option (if it were that's exactly what she would do).

She did not buy at the peak (at least in her part of Fla); professionals like Zillow valued her home at 200K by '07 and prognosticators (probably operating in collusion) led consumers to believe that the "correction" would be modest and temporary. And taxpayers won't pay a dime in this case, btw; her bank is not one that took bailout money, and since they won't refinance what is owed they and their investors will take the loss, because they too made a gamble that didn't pay off.

I said in my first comment that there is blame aplenty in this debacle, from brokers to banks to builders to appraisers to speculators to regulators and certainly homebuyers themselves.

The point was that while many if not most foreclosures may be the result of living wildly beyond means, it ain't always the case; some believed what they were told by people whose function it is (was) to guide them, and are inextricably caught in a Catch 22.

Back to the gambling analogy, as usual it is those who play by the rules and take their legitimate chances that suffer at the hands of the crooked casinos and dishonest hustlers at the table. At which time the thing to do is get up and walk away instead of throwing good money after bad (well, I would probably pull my vestpocket and shoot the evil m'er f'ers in the face, but she is far too gentle for that).


Anonymous said...

OK, if there's no way out without bankruptcy and/or foreclosure, there's no way out.
In the years to come, because of this banking debacle, bankruptcy will not be the stigma it once was.
Next time, be more skeptical.

TJP said...

I can remember the talk-radio financial shows attempting to justify high-risk mortgages (e.g. variable-rate) with fantastically rosy scenarios of future income that only a tiny minority of the population could expect to enjoy, balanced on an economic trend that would never occur. I really should have paid better attention to the sponsors' ads on those shows, because the ultra-high-risk, skyrocketing-rate loan strikes me as a product in search of a market--and that's generally not how things work when left alone.

Obama may have been smoking rolled-up pages of 'Das Kapital' during his Econ courses, but through his advisors he has an idea of what's at stake should state-regulated lending collapse entirely. It's really not a housing "bubble", but a massive tax extraction machine which is currently being starved of oil. All the illegal federal dictates directed at the states (NCLB, Gun-paranoid Schools, Federal School Lunch, and so on) are funded by local property taxes. The people are also complicit because they want government to provide services that personally benefit them, they want their special tax breaks, and they want a lottery-sized retirement income from the sale of a home that was barely maintained.

On one end, banks are arm-twisted to make any type of loan in order to have people in homes, paying taxes. On the other end, municipalities are using the distorted market--where spray-and-pray lending destroys any sort of sane price negotiation because there is so much competition--to justify inflated values, and collect outrageous taxes. Should the Congress start confiscating HMO premiums, unionized state and local government workers will be willing participants, and so the federal government will technically be taking a cut of all local property tax revenue.

I hear the talking heads spout worthless predictions about the housing market going "back to normal", or "back to previous levels". Bullshit. Normal is corrupt, from top to bottom. Normal is a house price that is three or four times the new construction cost. Normal is local governments putting the screws to individual buyers with building codes, zoning rules and permit requirements, but cutting deals with developers, and looking the other way while they violate codes without consequence; building on unstable landfill; building where there is no water; dumping construction waste into watershed; building on top allegedly protected wetlands, so the roads crumble and sink into what was previously a marsh. I've seen all of this happen over the last 30 years.

When you approach it from the angle that it's all corrupt--which it is--it becomes pretty obvious that it doesn't matter whether or not the banks get to collect their imaginary fiat currency. Whatever it takes to keep people paying taxes is what matters. If the banks take a hit, they're "bailed out", so the taxpayer gets it one way or the other.

It's not possible to avoid it using personal responsibility unless you build a cabin in some unincorporated territory in the Maine wilderness.

Anonymous said...

Anonymous #1: Good sex is a right?! I am so using that as a pick-up line at the student pub this evening.

"So you're a Social Justice major? That's cool. Hey, Obama says that good sex is a human right, but Stephen Harper's cock-blocking me by being all right wing and stuff. Buy you a drink?"

Anonymous said...

Yeah, three fundamental rights are good sex, loose shoes, and a warm place to take a crap.
How many get THAT reference? HA!

Tam said...

So, if a licensed broker had advised someone to take a plunge on a sure thing, and they had borrowed money to do it and lost their shirt, the culpable party would be:

A) The broker.
B) The lender.
C) The company.
D) The government.
E) The punter.


So far as I know, under current law the answer is, of course, "E".

Why should it be different for a house than it is for 20 shares of Google?

Tam said...

(I'm not trying to be a smartass here: I'm seriously groping for the philosophical underpinnings of the argument...)

Anonymous said...

You don't have to *try* to be a smart ass, it just comes natural, which is perzactly why I and so many others are here.

The answer to your query is of course: A,B,C,D,and E.

Philosophical underpinnings to follow later this evening when I get home, have a lovely Southern dinner with way too much fat and salt, maybe a glass of wine and some sugar from my Sweetums.


GuardDuck said...

Look, if you buy a house to live in - you buy it with a conventional fixed rate mortgage. End of financial advise for those who want a roof over their head.

If you purchase property utilizing any form of variable rate mortgage, balloon payment or short term loan - you are making a financial investment subject to the risks of the market.

If you have the financial resources to play the market and take the risks - fine. If you don't, you shouldn't be whining when your investment that isn't craps out.

Anonymous said...

Alrighty, then...properly sated, buzzed and sweetened and back to defend a position that based on my own past rants against gov "machinations" would seem hypocritical.

Only not. Force of government in anything other than national defense is poison to everything it touches and anathema to me personally. And today's announcement of another shameless diversionary tactic by Bo in his self-appointed role of CEO of all that he surveys is irrelevant to what I have said here.

I thought I made clear in the comparisons to games of skill and chance where the fix is in that blame for a complete systemic failure has left many fiercely self-reliant and very careful families holding a giant bag of crap that is simply not theirs alone to hold.

But I guess we're switching metaphorical horses midstream to the stock here goes:

cont. below

Anonymous said...

Ma and Pa realize they will need more income for retirement than Pa's pension down at the plant will provide, and they're smart enough to know that the government run Ponzi scheme that is Social Security is anything but secure.

They've heard and read a lot about the stock market but have never invested in it. But their friends have realized significant paper profits in high-tech stocks and they decide to check it out. They contact a broker down BearStearnsSmithBarneyMerrillLynch and are told about a company that has almost overnight developed a virtual lock on the internet search engine market and have announced they are going public with their stock. They do their research and find that the prospects for growth of capital is exponential and the broker's track record is excellent. So they buy up 100 shares at a yard per, investing nearly all of their available assets to do so.

All is well in the short run, with the stock surging as expected and showing a steady increase in value with prospects good for continued growth. So they stay all-in, even borrowing against Pa's pension to increase their stake. They know that they will need to pay back that borrowed equity down the line, but consulting with:

A. their stock broker,
B. their loan officer down at the pension fund,
C. the search engine company's stock prospectus,
D. the government regulators who oversee NASDAQ, and
E. an introspective discussion between themselves, regarding their goals and needs,

they are convinced that the investment is a secure one and that equity growth will more than cover their loan obligations when they come due.

But what Ma and Pa didn't know, couldn't know, is that they were being set up as one of many, many small investors like themselves to line the pockets and conceal corruption of every level of "expert" upon whose advice they had relied.

See, Sergei and Fergei down at the search engine company had discovered a fatal flaw in their technology that spelled the end of their dominant position in the market, and they frantically tried to keep the boat bailed out hoping to fix the flaw, but they sure as hell couldn't come clean to investors because their whole house of cards would come crashing down on them overnight. The broker down at BSSBML had gotten wind of a major problem, but by this point he was making so much money in commissions and had diverted so much of his client portfolio into the search engine company that he would be ruined if word got out. The pension fund managers who made the loan to Ma and Pa were themselves heavily into the stock, and besides, they would never get their money back from all those Ma's and Pa's if the stock went belly-up. And the gov regulators at the stock exchange were much too full of themselves to admit that they had allowed a failure of such proportions to happen on their watch. Finally, Ma and Pa had an uneasy feeling that the whole deal was just too good to be true; deep inside they knew that what goes up must come down, and they kept putting that out of their minds because those profits just looked so good on paper.

So who's culpable when the whole charade comes to light and the stock gets tossed into the penny category, with everybody desperate to sell and nobody willing to buy?

A.,B.,C.,D., and E.

And who should take the loss?

A.,B.,C.,D., and E.

Because whether you're talking about poker-playing, stock-picking, house-buying, or pretty much anything else where money, greed, dishonesty, incompetence, and ignorance are involved...

There is plenty of blame to go around. And no one party should bear the entire burden for the sins of them all.


Anonymous said...

The original "American Dream" was realized on the blood, sweat, and tears of a mobile, renting workforce. The future "American Dream" will be built by another mobile workforce. In growing economies, or even people who lived off the land a thousand years ago, putting roots down meant less opportunity because you weren't moving to where there were the best jobs (or food in the case of our thousand year ago foragers). This whole home ownership thing was eventually doomed to fail once the .gov decided that it was everybody's right to own a home, even if they couldn't possibly afford it.

The new world that will arise from these ashes will have to be mobile once again. Yeah it will be hard to take your 4 cars and 5 TV's and 7 stereos with you, but then again, you won't have to because you'll just have to do without most of it.

We've got a very hard reality facing us, best to start deciding how we're all going to survive it...

TJP said...

Up until last year, you weren't even "allowed" to protect your own hide in a national park with so much as a stone spear. Do you think a government that displays such a despicable disregard for the lives of its people really gives two shits about some "right" to buy a home?

It's all about the best method to motivate people to pay taxes. The possibility of freezing alone in the dark is a strong motivator.

Anonymous said...

Southern California real estate is outrageous but, sadly, a vacant lot in the same neighborhood in Pasadena would probably sell for around $600,000.

Here is vacant residential property in zipcode 91105: 3.3 acres for only $7,850,000.