Union of Soviet Socialist Republics

[Gator]

ConnerVT,

An excellent explanation coming from someone in the lending business.

We both agree that there were  trillions of dollars available to lend at low interest rates.  That's the Fed's fault for making chocolate cake so cheap.  However, this house of cards was 25 stories high with many culprits.

My explanation takes it another level, showing how the housing downturn impacted the global economy.  My mortgage is almost paid off, about 20% of my house value so that does not bother me.  What upsets me is how this changed my 401k to a 201k.  And the downward momentum increases.  And with this comes social engineering legislation.

[Faux Pas]

Yes, but the housing market was always a very long-term investment. At best, the prices of houses would go up at best just slightly more than the inflation rate, and in 20 or 30 or 40 years you had paid off your house and could sell it. In effect, your house had been a forced savings program. Other investments would have produced better results, but most people chose to buy a house for reasons other than making a quick buck. The last decade produced an aberration and now prices are returning to what they should have been (i.e. if the prices of houses had followed a normal growth curve).

I agree. Long term for the end user but not the mortgage brokers and investment firms. They shuffle them around like yesterdays news.

[ConnerVT]

ConnerVT,

An excellent explanation coming from someone in the lending business.

My explanation takes it another level, showing how the housing downturn impacted the global economy. My mortgage is almost paid off, about 20% of my house value so that does not bother me.  What upsets me is how this changed my 401k to a 201k.  And the downward momentum increases.  And with this comes social engineering legislation.

Thank you.  I wanted to address SANDRO's question, as well as build a little foundation to how the housing bubble was born.  It burst is what has created the rest of the mess we are currently in.

Real estate assets are the foundation of most lenders.  By law, banks can only lend a certain percentage of the assets they hold.  As real assets fall in value, they now have less to lend (or maybe too much already outstanding).

The banks knew that this was coming.  To rid themselves from this bad paper, they created financial instruments (securities) to sell off this problem debt.  Most of this was handled by the big name brokerages on Wall Street(and brokerage arms of the big banks).  The next domino in the chain to fall.

Now this starts getting closer to home for the Wall Street stock brokers.  The bears come out roaring.  Markets don't like uncertainty.  The folks handling peoples retirement funds all have some of the mortgage securities in their portfolios.  The only thing at the time that is growing in value?  Oil and energy.  Let's follow that bubble for awhile.  Back at $45 now, no one knows where to put (what is left) of their money.

Once people begin to realize that it was all fiat money to begin with, will be the start of a recovery.

[SANDRO43]

-- The relaxing of lending guidelines was pushed onto the banking industry.  It wasn't decreed by law, per se, but implemented by the technocrats from the Federal Reserve and other government agencies. The original purpose was to prevent "redlining", to prevent lenders from not making loans in economically depressed areas.  Typically, people who try to purchase loans in these neighborhoods are hard pressed to meet established good lending guidelines.Banks in the US require a constant infusion of borrowed $$$ from the Federal Reserve.  Mortgage lenders were pressured to relax their lending guidelines, or else their lines for credit would be cut off by the Fed.

They were not required to make the loans but they were required to underwrite a percentage of their assets in these high risk loans mandated by law.

Thanks both, that clarifies the process involved somewhat.

[GoodOlBoy]

Once people begin to realize that it was all fiat money to begin with, will be the start of a recovery.

ConnerVT you may be right...As long as we are not attacked again on our own soil (e.g. 9/11).

I fear the worse though.

Obama is busy releasing hardened fanatic criminal's from GITMO and the next thing you know...Blam....We have a Nuclear Powerplant sabotaged/attacked or our water supply poisoned or whatever.

I am not a Bush hugger, BUT...I slept a little better at night knowing he was around, than I do with the current administration.

We are seen as weak by our enemies (Muslims) and we are absolutely ripe for a Homeland attack right now.

JMO, But....With the recent mindset of Americans, if God forbid we are attacked, I don't believe we would fare to well.


GOB

[SANDRO43]

Obama is busy releasing hardened fanatic criminal's from GITMO and the next thing you know...Blam....We have a Nuclear Powerplant sabotaged/attacked or our water supply poisoned or whatever.

If I'd been detained 5+ years without a shred of due process -  and in many cases evidence, too - I'd seriously consider the option . You reap what you sow.

[BC]

IIRC, the value of the dollar was kept low over quite a number of years.. first in an attempt to increase US exports to combat the horrendous trade deficit, second a 'cheap' dollar with low interest rates also applies a cheap interest for the government itself when borrowing.

I see the trade deficit and especially the national debt as a large part of the overall problem.

Back to RU, although hit pretty hard, they are at least a net exporter (petro) with maybe even a surplus overall.  Would this not give them a bit more 'buffer' as far as their economy goes vs the west?  Their main woe seem to be lower overseas oil demands which cools off their domestic economy that was probably growing too fast to begin with.

In any case it took quite a few years to bungle this so why is everyone expecting Obama to fix it in a few months?

I really doubt it will get fixed at all in the next decade and that the best thing would have been to let the banks bust, try to keep everyone fed for a while then pickup the pieces..  any recovery plan pushed for by Dems or Reps seem to be just methods of extending misery.  There are probably bigger hurdles ahead anyway.. might as well bring them on and get it over with.

What would have been the consequences of doing nothing at all and who would fare better?

[Blues Fairy]

BC, you seem really into all those "what if" and "would have been" constructions.  History does not like conditional clauses.  Look closely at the past events and you'll see clearly than all the previous economic recessions were dealt with by tax cuts, which is exactly what the Republicans currently propose.  It's a fix that works quickly and it's a shame that Obama is doing exactly the opposite. 

[Misha]

Back to RU, although hit pretty hard, they are at least a net exporter (petro) with maybe even a surplus overall.  

They were, but it is unlikely they will remain a net exporter for long given the falling prices for oil and soon natural gas.

[Faux Pas]

In any case it took quite a few years to bungle this so why is everyone expecting Obama to fix it in a few months?

I really doubt it will get fixed at all in the next decade and that the best thing would have been to let the banks bust, try to keep everyone fed for a while then pickup the pieces..  any recovery plan pushed for by Dems or Reps seem to be just methods of extending misery.  There are probably bigger hurdles ahead anyway.. might as well bring them on and get it over with.

What would have been the consequences of doing nothing at all and who would fare better?

I stated to anyone who would listen back during the presidential election that whomever won, will go down as the worse president in history. Worse than George W is really saying something. I still believe it. The winner of that election was destined for failure. Nobody can fix this in a few months and it won't be fixed when Obama's term is up.

What Obama and our government is doing is interfering with the capitialist system. Their motivations is still very murky and completely unclear. The bailouts and the stimulus packages are designed to "save jobs". Am I the only one noticing that no jobs are being saved? IMO the stimulus and bail outs are only prolonging the collapse and bankruptcy of those industries and institutions.

To answer your last question, something surely needed to be done but not starting up the printing presses and passing out trillions of dollars like it's candy to avoid bankruptcy by certain entities. I feel nothing being done would have been better than what we will face because of it. IMHO

[BC]

BC, you seem really into all those "what if" and "would have been" constructions.  History does not like conditional clauses.  Look closely at the past events and you'll see clearly than all the previous economic recessions were dealt with by tax cuts, which is exactly what the Republicans currently propose.  It's a fix that works quickly and it's a shame that Obama is doing exactly the opposite. 

Yes, I do enjoy 'what if' discussions, after all just look at the title of this thread.

Take a look at the graph that was posted above:

http://www.russianwomendiscussion.com/index.php?action=dlattach;topic=9166.0;attach=18119;image

Look at where the peak started.. this the work of Democrats?  Was there not any intervention on the side of Republicans to correct the mistakes made?  Were three terms not enough to turn around what the Dem's f*cked up?  

I guess one could say that what we see today is the result of 12 years of tax cuts?  

Maybe the Republicans just let it happen.. so that they might have to endure only one Obama term.
 

Jeez..

Anything new with Putin these days?  How are folks in RU reacting to his/their economic policy..  nevermind what that other guys name is..
 

[ConnerVT]

I really doubt it will get fixed at all in the next decade and that the best thing would have been to let the banks bust, try to keep everyone fed for a while then pickup the pieces..  any recovery plan pushed for by Dems or Reps seem to be just methods of extending misery.  There are probably bigger hurdles ahead anyway.. might as well bring them on and get it over with.

What would have been the consequences of doing nothing at all and who would fare better?

Exactly what Hoover and FDR found out in the 1930's and 40's.  The more they tried to manipulate and control the economy, the worse things became.  (The Law of Holes applies here - "When you find yourself in a hole, stop digging.")  Price controls, 100% tax rates on all income over a certain level, job creation programs, none of it worked as planned.  The New Deal was more about experimenting with the same socialist reforms that were taking place in Russia at the time, than it was about curing the American economy.

I recently read Amity Shlaes' The Forgotton Man, a fairly unbiased, academic study of The Great Depression.  I highly recommend it, even if it is a bit of a dry read.  http://www.amazon.com/Forgotten-Man-History-Great-Depression/dp/0066211700

What would happen if we left it alone?  Most likely, the economy, and its related industries, would adjust.  Strong businesses, with good practices, would survive.  Weak ones would fail.  Just as is taught in Capitalism 101.

GM is a good example.  It would go bankrupt.  It likely wouldn't liquidate, but rather, would be forced to restructure.  Every contract would be renegotiated - labor, materials, distribution, debt, everything.  In the end, it would be more competitive in the marketplace, and return to solvency and growth.

Yes, everyone down the line associated with the company would have a period of short term suffering.  But in the end, all could begin to rebuild and grow.  In the current condition, the lingering suffering can go on for quite a long time.

People (and families) are also a business, although most of us don't see it that way.  We sell labor, make goods, and have expenses, just as many businesses do.  Those who have been taking care of our personal business should do OK.  It has been said that during the Great Depression, life wasn't so bad if you had a job.  If government has any role in this, it should be in the area of job creation, or more specifically, job retention. 

Taxing business, and those who create jobs, won't help.  In the end, it will mean fewer jobs, and an increase in inflation due to higher prices.

[Diplomacy]

Conner:

I really enjoyed your outlines and theory.  Politics is also a business, and not a very sound one.  We will see what happens on the hill, but now I think more Americans are watching.

We simply must make them accountable, and the government needs to stop throwing good money after bad.  Some of this, has to do with the mindsets of the last 2 generations. 

I believe a lot of the Americans from 2 generations ago, thought and acted much different.  We simply took the quick and easy way out as the majority.  Core, family, fiscal, and business values changed.

Businesses are now more accounting driven, and not driven by management that actually knows the industry and consumer.  Everything in a budget, had to fit into an excel sheet.  I do not think, many of the budgets are set with sound business decisions.  GAP, is the end all be all.

[2tallbill]

I keep hearing this over and over.. Exactly who has business borrowing money for a house ? .. I mean other than the homeless, doesn't everyone have a monthly expense for the place they live in ?.. Should renters be forced in perpetuity to be renters ?


To quote Homer Simpson.. "Kids, you tried your best.. and things didn't work out.. The lesson is.. Never try."

First lets look at the primary criteria lenders look for.
1. Down payment 20% preferred
2. Good credit history, a history of making other payments on time
3. Reliable documented income and employment for at least the last 2 years
4. Stability, lived in the same place at least two years

5. Payment in line with income. This means that the payment was less than
30% of income.

Who has no business buying a house?
People with out a down payment, with unsteady employment history and
unable to document their income. People asking for loans exceeding 60%
of their income especially when the interest rate is artificially low (teaser rates) and going to go up for absolutely sure.

Another group is those who are buying too much house for their income.
Maybe this person is trying to buy an $800K 5500 square foot house, when
they would only qualify for maybe a third of that. This person had no business
being granted a $800k loan.

The Homer comment was funny !

[Shadow]

First lets look at the primary criteria lenders look for.
1. Down payment 20% preferred
2. Good credit history, a history of making other payments on time
3. Reliable documented income and employment for at least the last 2 years
4. Stability, lived in the same place at least two years

5. Payment in line with income. This means that the payment was less than
30% of income.

Who has no business buying a house?
People with out a down payment, with unsteady employment history and
unable to document their income. People asking for loans exceeding 60%
of their income especially when the interest rate is artificially low (teaser rates) and going to go up for absolutely sure.

Another group is those who are buying too much house for their income.
Maybe this person is trying to buy an $800K 5500 square foot house, when
they would only qualify for maybe a third of that. This person had no business
being granted a $800k loan.

The Homer comment was funny !

1. In a market where the value of the object has decreased by 50% the 20% downpayment is no longr guarantee to recover the loan.
2. Credit history is usually based on small amounts. If a persone never needed credit, there is no history which might actually be preferred.
3. Employment where ? GM ? A bank ? For self-emplyed people the bar goes up to 10 years.
4. Lived all his life in a trailer park is stable...
5. As soon as the job is lost, payment and income will be out of line.

The values you show are great in times of a sure and stable market. At this time you will find that people are much more nervous...

[GoodOlBoy]

.... Lived all his life in a trailer park is stable...

Hey...GoodOlBoy says, don't be to quick to put the "Bad Mouth" on trailer park people.

At least they "own" their homes (not many foreclosures). 

Besides, where would Jerry Springer be without them?  :evil:


GOB

[Misha]

1. In a market where the value of the object has decreased by 50% the 20% downpayment is no longr guarantee to recover the loan.

Yes, because the bubble is still deflating. When prices return to historical norms (or more likely will go below, at some point bottom out and then start SLOWLY rising again by a few percent per year), then the "normal" standards or lending money to people to buy houses will return.

[ConnerVT]

Conner:

I really enjoyed your outlines and theory.  Politics is also a business, and not a very sound one. 

Politics may be a business, but in the end, it rarely produces much of anything.  

I understand what both 2tallbill and Shadow are getting at.  Credit reporting (and evaluation) is certainly not perfect.  But then, the only people trustworthy enough to lend money to are those who don't need the money in the first place.  But they have been dissecting enough data over the years to determine who has a better (or worse) propensity to repay their debts.  Just as the insurance companies have done for years, determining if someone is more or less likely to die before cancelling their life insurance policy.

In the (not so distant) past, between the slow (~5% annually) increase in home prices, a 20% down payment, and the collected principle and interest paid into a home, a mortgage was a fairly safe bet for a lender.  In addition, people are more driven to stay current on their home debt, unlike their personal ties to other consumer debt (such as autos, toys, and credit cards).  The low number of foreclosed homes were certainly covered in expense by the far greater income and assets of current mortgages.

The drop (and continued drop) of home values has made lenders much more critical to whom they will lend to.  I haven't seen the numbers, but I imagine that, even with the current high number of loan applications, that the number of closed loans hasn't increased much since the bust.  Many of the people who have been applying are likely people who are already in trouble - and wouldn't be looking for a mortgage if they weren't.  Other than those purchasing a home due to family reasons - relocation, empty nest downsizing, new families, most of the buyers are on the sidelines right now, waiting for prices to hit bottom.  Most people don't want to pay the lowest price they can get right now.  They wish to pay the lowest price the property will reach.

[BC]

IIRC, and yes it was long ago, the way things worked was that a couple would save a few bucks down payment, buy a starter type house with a mortgage, pay it off, sell and move up a notch into the next bracket of homes.. usually with well over 20% down payment etc etc..

Is (or was) this concept still valid?  Will the bank support a couple walking in that only need to spend 10% of their income to cover the mortgage?

Appreciate your enlightened discourse in this thread ConnerVT!

[Diplomacy]

Gob:

I am pretty sure that a trailer is mobile, therefor does not qualify for a conventional mortgage.  They do not count in statistics.  They depreciate in value.  I do not know what the default percentage is on them.   

[Blues Fairy]

Take a look at the graph that was posted above:

http://www.russianwomendiscussion.com/index.php?action=dlattach;topic=9166.0;attach=18119;image

Look at where the peak started.. this the work of Democrats?  Was there not any intervention on the side of Republicans to correct the mistakes made?  Were three terms not enough to turn around what the Dem's f*cked up?

What do the soaring home prices have to do with Bush tax cuts?
The buying frenzy was triggered by the Democrats and their encouragement of lending to minority households regardless of their creditworthiness.  Yes, the Republicans tried to intervene and yes, they were trampled by the Democratic front.  See the videos posted above.

As for the tax cuts, the beginning of Bush's first term was a decline, almost recession (end of the dotcom boom) but his policies quickly led to the steady increase of GDP and consumer spending - and that despite two major national emergencies, 9/11 and Katrina, each of which was enough to completely ruin anyone's first term as President.

[GoodOlBoy]

Gob:

I am pretty sure that a trailer is mobile, therefor does not qualify for a conventional mortgage.  They do not count in statistics.  They depreciate in value.  I do not know what the default percentage is on them.   

And what about one of those "fancy" doublewide trailers? 

They don't come cheap!


GOB

[ConnerVT]

The 10% down is a relatively recent development in mortgage lending.

If you go back to the 1940's (George Bailey in It's A Wonderful Life), a home mortgage was a short term loan, with a large balloon payment due after 3-10 years.

In the early 1950's (the start of the baby boom in the US) is when the 20% down, 30 year fixed mortgage became the common mortgage instrument.

It is only when the housing market heated up when second mortgages (applied for at the same time as the first, as 80/10/10 and 80/15/5 combos), no/low money down, SISA or NINA (Stated Income/Stated Assets or No Income/No Asset) loans, interest only, 7/23 reset ARMS, etc. became anything but what had been a fractional percentage of the home mortgages issued.  Most of these types of loans where original developed for business acquisition of real property (where businesses had more than enough capital to warrant them).

It is many of these loans that the speculators (home "flippers", if you will) got burned on.  Though a number of families also got caught up in it.  The news reporters would like you to think that it was predominantly mortgage loan predators who pushed them on unsuspecting folks.  But who is responsible?  The same thing happens in the car dealership, where you drive off in more of a car than you originally went in for.  I had many clients who only cared that I find them a way to purchase the house they had their mind set on buying.  I explain the risk, but it is their responsibility to do what is best for them.

Personal story:  Not all of the "funny" loans I listed above are bad.  I used a NINA to buy the home I'm sitting in right now.  I had been laid off from my job, and had started a new one in the mortgage business.  I was a 1099 employee (self-employed).  Fairly good (not exceptional) credit scores.  And my landlord wanted to move into the rental I was living in (not with me, of course).

I needed a home.  I was able to buy this one with 5% down, without having to report my income or assets.  My mortgage rate at the time was 8.875% (going rate at the time was 5.5% on a 30 year fixed).  In 18 months, the place gained enough equity that I refinanced (with 20% down) into a 5/1 ARM at 3.875%.  It adjusted last year, and I'm now at 4.375% (still lower than I could get a 30 Yr fixed).  Fortunately, home values here in VT haven't dropped much, if at all.  So not all of those funny loans are bad.  But one needs to handle their personal business as it was as important as their professional business.

[BC]

What do the soaring home prices have to do with Bush tax cuts?
The buying frenzy was triggered by the Democrats and their encouragement of lending to minority households regardless of their creditworthiness.  Yes, the Republicans tried to intervene and yes, they were trampled by the Democratic front.  See the videos posted above.

Sorry Blues, I'm having a hard time chewing on that.. Sure, the dem's may have instigated the idea, but who didn't do a darn thing to stop it for so many years?  

Obama spent a day or two before starting to tear down anything that Bush built.. were the Rep's powerless to do anything at all except ride a wave and blame it on him when he came round?

I just don't buy it.. not one little crumb.

As for the tax cuts, the beginning of Bush's first term was a decline, almost recession (end of the dotcom boom) but his policies quickly led to the steady increase of GDP and consumer spending - and that despite two major national emergencies, 9/11 and Katrina, each of which was enough to completely ruin anyone's first term as President.

The dot com boom/bust ended up with a modest government surplus..  How much will this one cost the taxpayer?

The tax cuts did more for those that put their additional 'bonus' into the banking industry by the billions.. just adding more potential for risk taking.  There was a money glut and no one likes sitting around holding greenbacks.  Sure GDP and consumer spending topped out!.. there was so much money running round that it was literally thrown in the street for anyone to pick up.

Disasters, yes.. If all this is 9/11's fault then we can say unequivocally that Bin Laden more than met his goals.. in fact landed a hole in one with an old cane.

Katrina?  oh boy, a perfect storm indeed.

[BC]

And what about one of those "fancy" doublewide trailers? 

They don't come cheap!


GOB

When you going to get a decent lawn mower GOB?