More Views of the Subprime Mess

Steve Chapman of the Minneapolis Star-Tribune offers a different take on the subprime crisis in his column "The First Thing We Do, Let's Blame all the Lenders," which appears to oppose government intervention.  Some excerpts:

Why should someone who has kept the terms of a contract be penalized for the benefit of the party that didn't? A lot of people took a calculated gamble on interest rates and home prices. Had they bet right, they'd be reaping the rewards. Since they bet wrong, they are entitled to bear the consequences.

It's true that if lenders have committed fraud with phony information about their loans, they deserve to be separated from their ill-gotten gains. At the same time, honest ones shouldn't be punished for offering creative terms just because the loans sometimes go bad.

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If the government imposes the punitive option, another problem will arise down the road: Lenders will be far less willing to offer credit to people with flawed credit records.

The consequence of this approach is clear. We'd be robbing tomorrow's subprime borrowers for the benefit of today's. Of course, when it comes to proposed solutions, robbery seems to be the order of the day.

Nick Slade of the Caveat Emptor Blog responds here.

Meanwhile, Times columnist Joe Nocera has a piece on the FDIC's chair Sheila Bair, who conceived what became the Bush administration plan for dealing with the mortgage crisis.  Here are some excerpts on what led up to the crisis:

Particularly troubling to [Ms. Bair] was a series of popular adjustable-rate mortgages — loans with teaser interest rates of, say, 7 percent that would reset within a year or two at much higher interest rates. “That could often bring a payment shock of 30 to 40 percent,” she said.

The truth is, when these loans were made, nobody ever expected that they would be repaid. Instead, the widespread assumption was that they would be refinanced before the reset ever kicked in. “If you look at the 2003 originations,” she pointed out, “they were almost all refinanced instead of reset.” That was possible of course, because housing prices were still rising at a historic pace —and everyone believed they would keep going up forever.

But of course, the rise in housing prices was unsustainable, and by 2007, the housing bubble was over. Suddenly all those new homeowners with adjustable-rate subprime mortgages poised to reset in 2008 and 2009 were stuck.

The article also describes some of the other events leading up to the Bush plan and offers criticism of the plan.  It's worth reading.  Another Times columnist, Floyd Norris, compares the Fed's proposed rules to the movie "It's a Wonderful Life" here.

Then there's the litigation.  The Times reports here on the Illinois Attorney General's investigation of Countrywide and suit against mortgage broker One Source.  An excerpt:

The attorney general’s lawsuit contended that One Source put borrowers into loans with terms they did not understand, especially so-called pay option adjustable-rate mortgages. * * * These Countrywide was One Source’s main provider of pay option loans, documents in that case show.

* * *

Donald Wagner, a professor . . . at North Park University on Chicago’s North Side, is a One Source client who has talked to the attorney general about his troubles with a Countrywide pay option loan. In March 2005, he refinanced his fixed-rate mortgage to help pay for his daughter’s college education. He said the One Source broker did not tell him his low teaser rate — less than 2 percent — would jump after just one month.

“I kept asking them and checking on that,” Mr. Wagner said. “Then it jumped to more than 7 percent and now it’s up to 8 percent plus and it’s going to jump again. I am actually paying out over 60 percent of my monthly income, and it’s only so long that I can do that.”

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One Source also used high-pressure tactics to rush borrowers through their loan closings, according to the suit. Most of the closings took less than 30 minutes, the attorney general said, with some only 10 to 15 minutes. One borrower was told that “it would take two days to explain everything,” and that the closing had to take place before that.

Some borrowers told Illinois investigators that they did not know One Source brokers had inflated their incomes to get them a larger mortgage. One consumer provided pay stubs and tax returns to One Source showing her income to be $2,200 a month, the suit said. Only later did she discover that One Source had listed her monthly income as $9,000.

Is this a case of dueling stories?  It seems more likely that different borrowers had different reasons for taking out their loans. 

What about mediation?  They're trying that in Iowa, as discussed here.

Oh, and want to find out the real cost of mortgages but don't trust (or can't decipher) the TILA and RESPA disclosures?  Try http://www.feedisclosure.com/, as discussed here.

And here is another story on the impact of the crisis and foreclosure on a family.

Comments

[John]

As the raise in house pricing the lender will not expet the repayment, but he expects the refinance or the reset of the loan from the borrower.

[Zakia]

Don't deposit at Countrywide banks and financial centers. Learn more about the national mortgage crisis and Countrywide's role in it. Visit www.dontdepositatcountrywide.info

[V. Marie Moore]

I understand the financial institution's involvement in this sub-prime debacle, but when is anyone going to address the new-home builder's/seller's responsibility in WILDLY INFLATING HOUSE PRICES that would soar anywhere from 1% - 5% EVERY WEEK? These prices would be tempered by offering the "desperate buyer" a ridiculous scheme of one-stop "buy here/pay here" type proposals, where the builder would temporarily "don the hat" of becoming a FINANCIER to offer the buyer "builder financing" from a "dummy corporation" set up by the builders to "temporarily" finance the purchases of these homes. Often, this agreement was made while the desperate buyer would be under a great deal of duress and stress knowing this deal was simply not "comforatable or reasonable" for their particular financial situation.

The builders, themselves knew from the beginning that the buyer would never qualify for conventional lending from a direct reputable source, such as a bank. The caveat: The buyer was REQUIRED to sign a document acknowledging that they knew the builder/seller-financed mortgage would and could be sold at anytime; and it was sold as an "investment bundle" within 3 - 12 months after the closing to the 3rd party financier, who is NOW holding and shouldering ALL the blame or the mortgage debacle! Thus, removing the financial responsibility from the builder for initially orchestrating this deal... The builder has gotten their money and they are GONE!!! I witnessed this first hand and I realized that I nor my income could keep up with these rising prices enough to make a mortgage application through conventional lending methods. I vowed that I would only purchase a home that I could afford through conventional fixed-rate financing, without becoming involved in any third-party financing type schemes.

Further, I haven't read, seen nor heard one thing about the flagrant disparity that exists and (has been widening/growing) between the homes tax assessed value and the "phony baloney" appraiser's value that is falsely created in order to assure the house will be able to "get closed" by appraising at the builder's/seller's asking price vs. the city or county's proposed assessed value. This was kinds tricky, especially wen the builder was building in an area where there were older homes in the nearby neighborhoods. It woud be sold as a win-win to the older neighbrhood, since the older homes would "appreciate in value", while maintaining their existing tax assessed values, but would be able to be sold at a higher price as driven by the prices of the new homes. I have also witnessed how the seller would often slip into panic or worry mode as they knew this could be the very specific time where the deal could actually fall apart and collapse, and their buyer may not be able to complete their elaborate financing scheme.

I say take a look at the NEW HOME BUILDERS and the exhorbiant profits they made in this time period! Afterall, the buyers were looking to be financed at the BUILDER'S ASKING PRICE, not the CITY or COUNTY's ASSESSED value. Perhaps if they were looking to finance just the assessed value, there would be no mortgage crisis/debacle occurring today!