patrick.net

OT, but here's a NYT article about the subprime mess that's surprisingly bearish, considering how much of a REIC cheerleader the rag usually is. A few of interesting issues raised in the article:

- The Clinton administration deserves a fair amount of the blame for initiating loose lending standards in a misguided attempt to increase homeownership rates. (As I believed all along, it comes down to the misguided and poorly thought out liberal do-good mentality, yet again).

- As I've brought up before, a big part of the grease that kept this wheel turning was that with ever-increasing appraisal values, rolling the refi fees into the refi costs was no big deal to the FB, as they still got a good bit of cash out with the refi. Now, those fees are a big chunk to swallow when the appraisal comes in flat. (Of course, depreciating appraisals are a whole other problem).

- The article nicely ends with a trashing of the subprime bailout idea.

Sorry about the long post - a login is otherwise required, and I thought this was a pretty good read.

*********************

Home Loans: A Nightmare Grows Darker

By GRETCHEN MORGENSON
Published: April 8, 2007

SNAZZY and newfangled mortgage loans, like those with low initial rates of interest or extended terms of 40 or 50 years, helped to drive homeownership rates in the United States from around 64 percent two decades ago to a peak of almost 70 percent in recent years. Called “affordability loans,” these new kinds of mortgages have gone mostly to first-time home buyers and borrowers with tarnished credit or spotty employment histories.

Even though these subprime mortgages account for only one-eighth of total mortgages outstanding, they represent 60 percent of foreclosures, according to the Center for Responsible Lending, a nonprofit and nonpartisan research organization in Durham, N.C. This is not surprising, since the features common to subprime mortgages actually increase the risk of foreclosure, mortgage experts say.

“The subprime market should be an additional and welcome opening of the credit markets for borrowers who have previously been shut out,” said Michael D. Calhoun, president of the center. “But it has been allowed and even encouraged to develop in a way that we think will result in a net loss of homeownership.”

For years, the homeownership rate in the United States ranged from 60 to 65 percent of the total population. But in 1995, President Bill Clinton directed Henry G. Cisneros, then the secretary of the Department of Housing and Urban Development, to work with the housing industry, nonprofit groups and other government officials to develop the National Homeownership Strategy, “an unprecedented public-private partnership to increase homeownership to a record-high level over the next six years,” as described in an Urban Policy Brief in August of that year.

Citing studies showing that high rates of homeownership generate financial wealth for borrowers, reduce crime and stimulate economic growth, the group agreed to a list of initiatives. One was to make financing arrangements for borrowers more affordable and flexible.

Lenders were off to the races. They created slick new mortgage products with low “teaser” interest rates that ratcheted up significantly after two years or so. They devised loans that required only the payment of interest, not principal as well. They extended mortgages to 50-year terms to reduce monthly payments.

The partnership succeeded. In 2004, the homeownership rate reached 69.2 percent, a record.

As recently as January, even as delinquencies among subprime mortgages had risen, the Mortgage Bankers Association, a lobbying group, praised the role that the loans played in bolstering homeownership. “The availability of nontraditional mortgage products is a positive development because these products increase the financing choices available to borrowers,” the group said in a report.

But according to experts on lending practices, the products devised to propel homeownership did so only as long as housing prices kept rising. Now that prices have started to fall, these products look instead like a transfer of wealth to mortgage lenders from those who can least afford it: subprime borrowers.

“It’s not good to put somebody into a home if they can only afford it when home prices go up,” said Thomas A. Lawler, founder of Lawler Economic and Housing Consulting Daily, a newsletter. “Now that prices are falling, the folks who made enormous amounts of money lending in 2003, 2004 and 2005 are giving some of it back. But they aren’t giving it back to the poor borrowers.”

Comparing prime and subprime loans shows how different the two types can be, Mr. Lawler said.

Loans made to borrowers with good credit histories, for example, rarely generate prepayment penalties when the loans are refinanced. But 70 percent of subprime loans have such penalties, he said. And they are hefty — typically involving six months’ worth of interest.

On a $250,000 loan with a current interest rate of around 8 percent, a prepayment penalty would be $10,000. Because many subprime borrowers do not have that kind of money lying around, lenders typically offer to roll the amount into the new loan offered in a refinancing. Tacking on such penalties to new loans makes it even harder for borrowers to pay them off.

Another characteristic of subprime loans, Mr. Lawler said, is that they rarely have escrow accounts. These accounts are established to collect money over long periods to cover real estate taxes and insurance.

CRITICS point to two possible reasons: without property taxes added to the mix, the mortgage payments look lower than they otherwise would. In addition, the absence of an escrow account in a subprime loan often means a big tax bill that cannot be paid unless the borrower undergoes another expensive financing, with all those fees attached.

Finally, subprime loans with low initial rates that reset at much higher rates almost force refinancings, generating fees for lenders but often putting borrowers in a hole. Now, for instance, subprime loans that reset after two years have interest rates based on the London Interbank Offered Rate of interest, or Libor, which now stands at about 5 percent, plus 6 percentage points.

It is almost impossible for subprime borrowers to get lower rates on their mortgages given such reset rates, Mr. Lawler said. “A subprime A.R.M. borrower,” he said, one with an adjustable-rate mortgage “with an initial rate of 8 percent for the first two years would face an upward adjustment on her mortgage unless the Fed cut its short-term rate target to 2 percent.

“These loans are designed to make borrowers refinance and keep the loan production mill churning,” Mr. Lawler said.

Mr. Calhoun of the Center for Responsible Lending said that few borrowers, subprime or not, would be able to survive a reset shock that increased their monthly payments by as much as 50 percent. Ditto for serial refinancing deals that generate fees of 6 to 10 percent of the total loan value each time.

“Probably the majority of homeowners who have been in their house for a while could not afford payments on those loans,” he said.

While subprime borrowers try to climb out of the holes they fell into, those who sold and packaged the loans are laughing all the way to the bank. “Folks who ran these companies are going to walk away not just unscathed but extraordinarily well rewarded,” Mr. Calhoun said.

Josh Rosner, a managing director at Graham Fisher, an investment research firm in New York and an expert on mortgage securities, says he has watched with interest and exasperation as the same groups of people who pushed for higher homeownership rates now recommend ill-conceived bailouts. He also believes that the current system creates incentives for people to strip equity from their homes rather than use their mortgages as a forced savings device.

“If you’re trying to do social engineering, it should be to put people in homes so they can build up equity as a cushion for economic shock,” Mr. Rosner said. “But unless they have significant equity, they are not homeowners; they are renters. We’ve created a society where we love the term homeownership, yet we can’t allow people to understand that they are being taken advantage of by the term.”

skibum Says:

(As I believed all along, it comes down to the misguided and poorly thought out liberal do-good mentality, yet again).

As compared with the well thought out liberal do-good mentality, espoused by such notable liberals as me. Problems occur if your policy is to enable dodgy market solutions to dodgy market problems...

The policy dislocation between these two paragraphs is your problem, right there:

"Citing studies showing that high rates of homeownership generate financial wealth for borrowers, reduce crime and stimulate economic growth, the group agreed to a list of initiatives. One was to make financing arrangements for borrowers more affordable and flexible.

Lenders were off to the races. They created slick new mortgage products with low “teaser” interest rates that ratcheted up significantly after two years or so. They devised loans that required only the payment of interest, not principal as well. They extended mortgages to 50-year terms to reduce monthly payments."

Apart from the fact that similar banking products have been offered around the world throughout the boom without National Homeownership Strategies. I doubt whether policy apparatchiks in the Clinton administration would have premised their strategy on a belief that it will always go up. The NYT seems to have blurred quite a few things together to try to smear the Clinton policy platform as a discrete agenda. Does NYT generally lean right?

"The “boomerang” kids that move back home in their 20’s are bad but anyone that moves back home in their 30’s is truly pathetic… "

I left my parents home at 18.5 yrs and never looked back. In fact have not been in contact since. And loving every minute of it since.

Astrid
Hmmm, that wasn’t my impression but I’m not an engineer. My sense is that an engineer would not make as much as a marketing person of equal general ability, etc. I certainly felt my boyfriend was underpaid for his level of responsibility at his previous job.

Engineers don't seem to understand that they are a commodity and even though they have a very technical talent it is easily replaced especially in a slowing economy. A marketing person is paid on the results the can generate especially with a track record. They are very different in terms of creativity which is why some make minimum wage, and others make millions.

Does anyone know if Lucy’s Tea House (mountain view) has reopened in a different location? It closed a few years ago, I really loved that place.

I don't know. But we love Lisa's Tea Treasure. They have one in Menlo Park.

http://www.lisasteatreasures.com/

DifSean
Malcolm Says:
Post 1
Baby Boomers - I guess that’s what I mean when I call them hypocrites. […]they just became incredibly selfish and materialistic. They are the first generation to literally make sure that their heirs don’t have an inheritance to build on. Only a baby boomer would come up with the concept of a reverse mortgage.
Post 2
I have a 99 Boxster

Ha, it may appear to be a contradiction. Let me just say that is basically my only tangible indulgence. My other one is jetting off to a different place every few months. To be clear it is a gorgeous car but I only paid $20K for it on Ebay when it was 4 years old. That is less than most people pay for a brand new car, and unlike a baby boomer, I actually paid cash.

DS,

What you're saying makes little sense. My read is that the Clinton admin. turned on the green lights for the mortgage industry to come up with "creative" ways of letting more people with less income "afford" homes. Noble idea, horrible execution.

Besides, their underlying assumption was that the correlation between high homeownership rate neighborhoods and low crime, economic growth, etc. implied causation - increasing homeownership rates among "the poor(er)" would decrease crime, stimulate economic growth, etc. This argument is specious at best. Allowing folks with marginal jobs, poor social networks, poor financial skills to "buy" a home was just asking for trouble.

Also, you must be kidding about the NYT. To most of this country, the NYT is the bastion of the "left wing media." It's also a paper that's lost most of their quality and integrity in the past 10 years or so.

Engineers don’t seem to understand that they are a commodity and even though they have a very technical talent it is easily replaced especially in a slowing economy.

Very true. They may just as well have an Engineer futures contract on th Board.

“The “boomerang” kids that move back home in their 20’s are bad but anyone that moves back home in their 30’s is truly pathetic… ”

I hate to be that judgmental although it is funny to see balding men living at home. In some cultures people routinely live at home into their 20's and different people live different ways. As long as everyone is happy then I can't pass judgement.

BTW, Lisa's tea Treasure has real cream, which is all important. Their tea is excellent. Prices are reasonable.

skibum,

I wouldn't say NYT has lost the most integrity. All major American papers are pretty irrelevant at this point. The Washington Post news coverage is at least as bad.

Malcolm,

If an engineer succeeds, something concrete is created. If they fail, bad things happen.

If a marketing person succeeds, a bunch more kids are now hooked onto a high fructose corn syrup doused breakfast cereal.

I have a very low opinion of marketing/business development people, even though I'm contemplating heading in that direction.

On the other hand, people living at home really maximizes resource usage. Environmentalists should encourage people to live with parents for life or live in group homes.

If an engineer succeeds, something concrete is created.

Yeah, software is so concrete. :)

Astrid, of course you are right. No one said it was right or fair, in my opinion it represents a free market failure but that's life.

I also agree about the environmental impact of extended families sharing resources.

Software engineers used to make 80K per year, now they jump at 50K per year. A planner (my training) now exceeds a software engineer, and I know of very experienced engineers in other fields that are easily below the 60K mark.

Then again the biggest snots I have come across are technical people from Europe where their socialist systems cause them to be worshipped. They then come over here for a little bit more money to find themselves ridiculed for their atitude towards others and then find themselves treated like peaons. I guess the free market has some merit.

awaiting moderation?

Malcolm, the word "sociali$t" will automatically put you in moderation.

I guess the free market has some merit.

Only some?

Malcolm,

True. Though in back in 1970s and 80s China, they didn't make much more than experienced factory workers (the system reminds me of Detroit...I wonder why? :))

Good description, Jon.

1) They are at least as tech-savvy as Gen-x, probably more-so across the board. Some Gen-x are very tech savvy while others are entirely clueless, like their parents.

I was much more tech-savvy in high school than now. Perhaps Gen-Y will learn to hate technology as they age.

hymie,

Yeah, that "article" is ridiculous - no mention of the stupid FB as part of the problem. It's just another example of our victimhood society coming through.

New thread: What is considered subprime territory in the Bay Area?

My daughters are 19 and 22 so they're probably too young to be considered Gen-y? They're awfully tech savvy but are very selective about just exactly what technolgy they allow to intrude into their lives.

On Saturday "the Old Guys" came over to help "the kids" put up their fence. They had the local "classic rock" station on I suppose to please us but I listen to the Jazz Station (KMHD 89.1) almost exclusively on Saturday. "Rock Blocks" of three consecutive Leonard Skynard on Saturday morning is a little rough when your stomach is still a tad "queasy" from Friday night.

In spite of on again/off again weather and a set of Stevie Nicks and Fleetwood Mac (I didn't even like her in the 70's) we managed to get the fence up. It was great to see them tackle the project themselves and I had to remind myself that this was "their" house. (So keep your comments to yourself!) Looks great!

Huh? Maybe your employer should offer that as a fringe benefit.

I used to make "tea trays" in college, but we focused on rice krispy treats, french donut, chocolate dipped strawberries and such.

I would find it very hard to relax if I was paying $22 for the same thing

Not the same thing. The decor is much better and the service is good. It is not as cheap as Lucy's though.

I used to get dinner at Lucy's for under $8.

Maybe your employer should offer that as a fringe benefit.

Huh?

I love my employer because they offer all-you-can-drink sparkling water.

Ooh, jam!

Ooh, jam!

Peter P,
Have you had the Frog Hollow preserves? Tasty stuff.

I will try. Thanks!

- The Clinton administration deserves a fair amount of the blame for initiating loose lending standards in a misguided attempt to increase homeownership rates. (As I believed all along, it comes down to the misguided and poorly thought out liberal do-good mentality, yet again).

What about the Bush Administration, who did nothing about this for seven years and even trumpeted "The Ownership Society" in his 2004 campaign?

Both Administrations are to blame, it seems to me. And people who call the NYT "The Left Wing Media" are considered kooks by most of the country, not the other way around.

Selfish boomers are setting records for philanthropy. However, W Bush make me ashamed of that generation.

Gen Y-ers are not so lame. They are very "together", hard working and perform well under pressure. I am around a lot of them, as a returning student. I am impressed with what I see.

What the hell does left wing even mean in this day and age, when the "center" appears to be right in the middle of the Spanish Inquisition?

yes

“The “boomerang” kids that move back home in their 20’s are bad but anyone that moves back home in their 30’s is truly pathetic… ”

desperate times call for desperate measures... people living like Italians! :O cats living with dogs... etc...

Malcolm Says:

Then again the biggest snots I have come across are technical people from Europe where their socia1ist systems cause them to be worshipped. They then come over here for a little bit more money to find themselves ridiculed for their attitude towards others and then find themselves treated like peaons. I guess the free market has some merit.

Maybe they're just snotty cultures (no names). Maybe they also have a free market orientation back home, but more social protections than in the US. I thought there was a good deal of pretension and stratification in US society also... Remember places like France were highly stratified before the Rev'n, and old habits die hard...

No one said it was right or fair, in my opinion it represents a free market failure but that’s life.

Doesn't that fatalistic position negate the entire purpose of this site?

skibum Says:

Noble idea, horrible execution.

That's my point. Assuming it was even executes int hat fashion by the admin, which is still moot, depending on the spin factor of that particular journalist at that paper that day.

DS,
What you’re saying makes little sense. My read is that the Clinton admin. turned on the green lights for the mortgage industry to come up with “creative” ways of letting more people with less income “afford” homes.

It worried me a little when MDs set themselves up purely as 'technical professionals' working in a sociological void. There are connections between the social and the medical completely overlooked in medical training, meaning there is a narrow technical focus only, similar to engineers. The last person I would look to for advice or insight on govt policy or social reform is an engineer, for instance. It's just rebuttable on so many layers I don't know where to begin.