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Housing Bubble Burst!

With the never ending boom in housing foreclosures comes the reality of what the biggest players in the bust did wrong or were victim of. Owning a home is the biggest goal of every up and coming generation and the market that served that dream ripped many of those same people off. While the President gave the green light to lenders to have a “Free Market” he also enabled them to run wild without care as to whom would get burned down the road.

Buying a home knows no political philosophy when the lender tells you can afford the mortgage. Provided you do not plan to eat in five or so years. Small print, really small print.

The mortgage industry has become a process the application production line and the ones that have to face the music are the people that were just passed on through the process. Raise your hand if you know five or more people that you for one know should never have qualified for a home loan?

With the enticement of home ownership, the lenders sold the people a bag of goods with a self destruct button on it several years later. Over at MSNBC they have this piece on the victims great loan options for capturing the American dream…

The plain old adjustable-r ate mortgage spells trouble enough. But three high-risk loans are causing most of the trouble:

Teaser ARM. This loan features an alluring initial period of very low interest, around 1% to 2%, which later resets to market rates. About 1.4 million borrowers will be jolted back to reality in the next two to three years as their introductory periods expire. Payments on a $200,000 loan at 2% are about $725 a month; at 7%, they’re $1,340.

Subprime ARM. Nearly half of loans due to reset are aimed at low-income people, minorities and people with bad credit — folks who can’t or just assume they can’t get a bank loan at a reasonable rate. Many are in a shaky financial position to begin with and so are in greater danger of defaulting. Subprime (also called nonprime) ARMs start high — 7% or more — and go higher. And higher. They often feature a fixed, lower-rate introductory period. But when that ends, it’s “just the old-fashione d squeezarooni  ,” Cagan says.

Option ARM. This is the real killer. It gives homeowners the choice each month of paying the principal and interest, just the interest or an even-smaller minimum amount. Every month you pay the minimum, you’re deeper and deeper in the red. And up to 80% of option-ARM buyers pay only the minimum, according to Fitch Ratings. Because the minimum payment doesn’t cover the monthly interest, the deferred interest is added to the loan balance. After the loan balance grows to a certain point, the lender will demand that you start paying the full principal and interest — on your now-bigger loan. - MSNBC

This is not a case of predatory lending by any sense of the word. This is a case of corporate gluttony. Make the quickest amount of cash as fast and furious as you can and let the people holding the loans worry about it later. Well, it seems as if the people holding the bag later is us. How does an economy survive when the fundamental basis of the economy is housing and that goes bust?

You can not by any means blame the borrowers of all of the snake oil options that the lending industry presented to them. Our government looked the other way. Our leaders looked the other way because a dollar was to be made by friends of friends and the checks cleared over at campaign headquarters . Tom Delay and Nancy Pelosi are just as guilty in this crisis because nobody said boo! Neither of them will here your screams for help when you loose your house to the jacked up call of your loans terms.

I’m sure that you have heard or seen the radio commercials where President Bush has authorized the refinancing of your loan if it met certain terms. Think again, if you could not afford the house to begin with, could you afford it now with a refinance?

Isn’t politics wonderful. They cut your throat and make you look forward to cleaning up the blood.


Cross posted at Papamoka Straight Talk

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7 Responses to “Housing Bubble Burst!”

  1. IMO, the loan applicant is responsible for reading the fine print, and for avoiding ARM’s like the plague. After all, it’s their home, a most important necessity, hinging on it. However, the actions of those lenders sound criminal. This last weekend, 300 homes were auctioned off by a single company in the Twin Cities. The paper said it was a fraction of those affected by this mess. A fraction of how many families facing the winter without a home? And what could possibly be the logic behind assisting those greedy lenders at this time, while leaving those losing their homes to do what? Grow shells on their backs for the winter?

  2. In one respect you are right Chell, signing on the dotted line means you own it and it is your home to be lost. These programs in the home lending industry were designed to do only one thing, make the lender money. Lots of money. What happens to the borrower after signing the papers is of no concern to the lender once the check clears.

  3. Mat, the question I have is how has this sub-prime debacle been good for the mortgage companies? If you loan someone money at a low teaser rate, you are not making very much on the interest paid to you. You are counting on making your money in the latter years when the loan resets or adjusts to market rates. Market rates are not much higher now than what they were for a standard 30 yr fixed when these loans were originated. If they default you have the expense of turning the property you reposess which eats into the meager profits you got in the low interest part of any adjustable loan. I suppose they could have been looking at the money made on closing costs but much of that would go to their own operating costs, brokers commissions and overhead. I do not profess to understand the lending business very well but I have been having a problem seeing how this was good them. Perhaps you could shed some light? This is not meant as snark, I really don’t see it. It seems to me that the lendes only win if the mortgagee actually pays the new rate after adjustment and doesn’t default.

  4. Keep in mind guys… the majority of people who got those loans are okay. Many were first time buyers climbing the property ladder. Many couldn’t get the house they wanted so they went cheap on less desirable property and waited the two years to step up to the next house. I think the intent of lot of people was endless prosperity we seemed to see the last 15 years. The Clinton Administrati on saw the greatest period of wealth generation in the history the US. The Bush years actually produced the 4th or 5th greatest of all time. We had two great periods tremendous wealth increase for the middle and upper classes back to back over 15 years versus 231. It is quite amazing of how resilient our economy is despite the bad news around us.

    As far as corporate greed in the lending industry, well there was money to lend for some years. Interest rates were low and are still low historically . Housing values were increasing in some areas at a rate 10-15% a year a few years back. Cash was literally growing on trees. Qualifying for big loans was easy because you did not need the income especially if you were gaining so much value each year.

    The market had to correct… It was due to correct. The problem with this correction though is that real estate is the “any man’s” investment. It isn’t like the stock market or the money market of futures traders. Real Estate is simple… Buy this home and it will increase in value and it’s tangible. You can live in it. Stocks, money markets, commodities… those aren’t things you emotionally attach yourself too. And due to their complexity, your average person can’t get close to them because they can’t understand the risk.

    So when the housing market crashes it seems to effect the average buyer more because of vast number of average joes in the market. If it wasn’t this low teaser mortgage thing, it would be the people who bought in late 2005-early 2006 that would be the one’s noticeably having problems.

    As far as corporate greed by the lenders, the vast wealth being generated allowed them to create those loans. When prices went flat and dropped, that money was gone. You see now the troubles companies like Countrywide are having due to those loans as well. No company wants to write a bad loan for a quick buck. Never… but that’s what these companies did and they are reeling from it. So is the dollar. So are the rest of the markets across the world right now. So yeah, it hurt the little guy but it hurt others just the same.

    To answer Mat’s question… honestly I do not know 5-6 people who are being it with this problem. I know one… and when all were asked we told him not to do it. He did it anyway… Who’s fault is that, the lender?

  5. Matt, if you don’t mind, I’d like to take a crack at Manapp’s question….

    Manapp, there are a couple of financial fundmentals you have to accept to understand why the lenders chose what seems to be such a suicidal strategy:

    1) If there’s any money to be made, someone will make it. This is the most fundamental capitalistic theory. This is why taxation doesn not effect investment, contrary to popular belief. It doesn’t matter if people make more or less money, just that they’re making money.

    2) Fast cash. The fund managers, the lenders, the developers - all of them stood to make fast cash on this risky investments regardless of the final outcome. In the end, all they had to do was bail out.


    All that said, then why should the feds bail out the lenders? Certainly THEY knew the risks, right?


  6. If the gov’nment didn’t bail certain industries out once in a while the economy would collapse. Just ask the airline industry…

    Yeah the lenders knew the risks but I believe they anticipated the people would refinance in a year or two when it was up for a more realistic loan to value ratio. The properties just stopped increasing so much. Yeah there was a lot of greed… But had we really seen real estate appreciate that much, ever?

  7. “If the gov’nment didn’t bail certain industries out once in a while the economy would collapse. Just ask the airline industry…”

    LOL! Yeah, right. Perhaps if the gov’t REGULATYED these industries a little more then they wouldn’t have to bail them out? HUH??? The airlines are a PERFECT example of that.

    Of all people, the real estate industry should have seen this coming. I’ve seen it for several years, and I’m just a regular schmuck.


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