patrick.net

I suppose you could argue that had wages seen real increases between 1997 and 2006 the boom would have been much, much worse.

It might have been a bit worse, but not much. The most fearsome aspect of a mania is that it feeds on itself.

There are usually multiple feedback loops in this bubble:

1) psychology and the sense of infallibility
2) collateral pricing and access to credit
3) over-regulation (programs to "improve" affordability)

It’s easy to fault someone that was using their HELOC for living expenses but difficult to grasp just how much of that is due to stagnant wages and incomes?

DinOR
if one is trapped in that situation and the numbers were an order of magnitude smaller, I would be with you all the way. e.g. my son had to have a particular surgery not fully covered by my insurance so I used the HELOC for the $20k differential. This would be capitalism at its best.

However, what I've seen happen is what Patrick describes. People realized their fake equity and instead of taking it and running or just sitting tight, they leveraged half of it into another overpriced shitbox. They used the other half for a German car, remodeling, granite counters and stainless steel appliances. And they have an Option ARM instead of fixed at historically low rates.

my son had to have a particular surgery not fully covered by my insurance so I used the HELOC for the $20k differential. This would be capitalism at its best.

I believe insurance ought to cover catastrophic expenses. It is sad that our society abuses insurance for everyday care, causing the premium to skyrocket, making major medical care unaffordable.

We should promote high-deductible catastrophic insurance and medical saving accounts.

Again, I think alot of this talk about the irresponsible borrowers is mostly old news. The people you are describing have already foreclosed, or are in the process of.

The market has quickly flushed those people out, although congress keeps trying to push them back in.

It is amazing that the media keeps finding complete douchebag idiots to include in what are supposed to be victim stories.

The people you are describing have already foreclosed, or are in the process of.

I don't think so Fuzzy. At least here in Bay Area, even though numbers are up compared to past history, the vast majority has not been foreclosed on. I'm not really sure what's happening but people seem to be floating not sinking. Maybe lower LIBOR is helping out?

If it's the marginal buyer determining the price, perhaps tightening on new loans will reduce prices to a point where nobody can refinance. But it hasn't happened yet I don't think.

vast majority of what? People who took out HELOC's when they couldn't afford their main loan? I'm assuming you're using anecdotal evidence to support that?

I guess we have to ask ourselves, how... would we have paid for that particular surgery, or German car or granite countertop had it not been for easy access to cheap credit?

If you paid half down on a house but the int. rate on your HELOC was 13% would we have been so eager to use it? If homes weren't appreciating at 20%+ a year would there even be that much demand for 2nd mortgages?

"The 'money' she would have been able to use to pay for landscaping, remodeling, and even basic living expenses is gone - at no fault of her own."

Money?? What money?!!
So the pigs at the credit trough are upset now that they've gorged to the very bottom? My heart breaks for them.

DinOR,

nope. We wouldn't have.

On some level, it would be kind of stupid to turn down such cheap credit. Ask the banks who are borrowing from the TAF.

Vast majority of those who increased what they owe (in the last 7 years especially) without commensurate income increase. That would be just about everybody around here.

Welcome back, Kurt!

Fuzzy Math,

Very true. Also at some level borrowing right up to the max amount the bank would possibly loan you against your house must have seemed like a validation in many peoples minds!

"How do I know my house is worth $799,995? Because I bought for $600,000 and my bank loaned me the other $199,950 against it, THAT'S how!"

Which brings up the whole issue of "suitability". Just b/c you have $1 mil. w/ Merrill doesn't mean it's suitable for you to be trading on margin! Sheesh. You're in your 70's with a bum ticker for crissakes! That's what's bummed me out about the whole equity stripping thing. Just b/c your home is worth it doesn't mean it's right for everyone to borrow against it?

so your premise is that everyone who bought in the last 7 years in the Bay Area will foreclose?

DinOR,

it would seem like most of those decisions in the climate we were in were rather justified in my mind. Their houses WERE going up 20% a year, and credit was ridiculously cheap at the same time.

While now those actions are exposed for cleary being irresponsible, at that point in time it's hard for me to judge. We had the chairman of the Fed telling everyone that ARM's were a great idea for christ sake.

You’re in your 70’s with a bum ticker for crissakes!

hey maybe that's the best time to be trading on margin! if you lose you die, if you win your kids will build you a statue 10 ft tall!

Fuzzy,

Oh I absolutely agree! Very much a product of the times we were in. In 2005 the only people that were clearly spooked (were posting here)

Why it was like "having a friend at the Fed!" He prints me up a fresh batch of money pretty much any time I need a little. My house? Oh you mean my bank vault, right...

Greenspan said homeowners "might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade."

He did not "telling everyone that ARM’s were a great idea."

Please read Greenspeaks literally. Every fluff word counts.

BAI,

Well... I think we should worry that the stress of facing margin calls would be the end of you! No..?

It's so obvious (now.. as Fuzzy points out) that clearly a solid majority of these borrowers were out of their depth. Out of their league. I'm sure in a lot of cases what we're seeing is the result of greedy MB's feeding FB's the answers when it came to raises and the potential for increased income.

I really got a kick out of Bill Gross' depiction of the current situation as having "isolated cases of fraud". Pfft, what part of this whole arrangement *wasn't fraud?

Check out this article. For as much hate mail as she probably gets, this was a rather good call considering.

http://biz.yahoo.com/pfg/e03greenspan/

Peter P,

Agreed, agreed. BUT... his sagely eyebrows were clearly raised at the time (lending credibility to the notion that this was what smart money was doing!)

his sagely eyebrows were clearly raised

LOL

so your premise is that everyone who bought in the last 7 years in the Bay Area will foreclose?

no of course not! Just that the less distance between ones last purchase and 2006, the more certain one can't afford that loan were it to be fully amortized. This represents a lot of people. Certainly a lot more than have been foreclosed already (or will be in the future). However, the foreclosures we've seen so far - I believe - only represent the bottom of the barrel. The rest seem to be escaping somehow (so far)

What does it say about Greenspan that he was giving advice inferior to that of a TV personality?

Peter P,

point taken. Regardless, him coming out in 2004 in support of ARM's, and saying housing was looking good, is a bit ridiculous from todays perspective.

Do you expect your average american to take those comments as "we're in the biggest housing bubble ever, get the hell out while you still can?"

While I think your average American was aware that the runup was unsustainable, I don't think they were thinking about what would happen if housing dropped 40% in 2 years time. They weren't thinking that because they weren't even hearing it as a possibility. Not from the media, not from their peers, not from their financial advisors, not even from the man in charge of the entire money supply of the United States.

They didn't even get a warning!

Whille I applaud the patrick.net crew, the people really should have been hearing this stuff from more main stream channels.

"get the hell out while you still can!" LOL

No I can't say as those comments would have been construed in that manner? Fuzzy I'm a huge fan of keeping things in their proper chronoligical perspective. So I hear what you're saying.

The way that "I" took AG's comments was that either he was looking out for the banks best interest, or... he felt there was some mileage left in this thing.

Hey Peter--thanks!
Thought I'd look back in, now that things are starting to really "go south". And, far worse than I would have imagined...sigh.

Anyhow, the reason I bring any of this up is that I feel that the anger on this board towards borrowers gets a tad bit heated sometimes. It seems a favorite pasttime to pull up articles victimizing douchebags and pointing out how ridiculous they are. Fair enough. But for each douchebag FB, there are at least 2 honest families getting hurt from this situation. Grouping all homeowners into crazed FB's serially taking out HELOCs starts sounding a little, shall we say, housist?

I visited a friend in Phoenix not too long ago, who has a newborn. The couple bought 2 years ago with no intention to flip. They have already lost half of their investment. They are not stupid by any means, but I truly believe they had no channel available to them that even made them think that this could happen. Now, embarking on parenthood, they are in huge financial hole they will most likely spend the rest of their careers working out of. It's impossible for me to feel any anger towards them. They didn't even realize that they were gambling, let alone WHAT they were gambling.

Evidence of MSM warning us that AG's advice was crap:

http://www.slate.com/id/2096313/

http://www.suntimes.com/business/savage/31157,cst-fin-terry-236.savagearticle

This was not the media's fault.

Thought I’d look back in, now that things are starting to really “go south”. And, far worse than I would have imagined…sigh.

Perhaps we should get a beer at Marin Brewing Company. :)

Peter P

I believe you are wrong in what you are inferring his lordship meant.

Reading his speech
http://www.federalreserve.gov/boarddocs/speeches/2004/20040223/default.htm

particularly the part titled "Mitigating homeowner payment shocks" and it's obvious he WAS indeed pushing ARMs even using other countries as an example to follow and calling FRM expensive!

American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.

American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.

Fuzzy

the example you bring up of your friends in Phoenix is a fair one (although if i had to guess I would say they didn't buy at traditional loan to income ratios). It is true that many had no idea what was going on. When the professionals are telling you all is well, as long as you can afford the payment you assume you'll be fine. After all you're only buying a home, not investing in an exotic product.

However, it is a lot harder to be so charitable with Bay Area realities because:
1. for every idiot taking on too big a loan, there's an honest family forced to rent or join them in jumping off the financial cliff
2. the absolute numbers around here are so genormous, it's tough to believe people shouldn't have known better. It's one thing to make 80K and buy a 450K house, it's another to make 80K and buy a 900K house.

BAI,

yeah, I would assume they weren't. But I don't know... talking about that stuff all the sudden became impolite. No one likes to talk about how they got gamed.

I guess it takes an event like the one we're in to truly learn the lesson. At least for 50 years or so.

I'm pretty much convinced that the powers that be are going to find a way to take all of my generation's money anyways. Maybe there is no lesson to learn. Those that were irresponsible out here are getting slapped with what? Bad credit for 5 years? Oh no! Like there's going to be any credit to get in the next 5 years anyways. Compare that to the life of the renter/saver the last 6 years, and on into the future where they will continue to knock down the savings with bailouts and inflation.

Perhaps ultimately, in a sick fashion, Greenspan was right when he implied the smart money was in ARMS with his eyebrows.

it’s tough to believe people shouldn’t have known better

Even Isaac Newton lost money in the South Sea bubble. Apparently, he forgot about gravity.

Interesting property game, buy hold and flip houses to buy a mansion....:-)

http://www.channel4.com/4homes/chatvotewin/Mansion-Impossible/mansion.html

Peter P

In my opinion, the words and formulations you highlight are Greenspeak for "should". They're in every speech he makes. When he actually wants to describe uncertainty, he doesn't dedicate an entire speech to the subject. It's either a throw-away line, or not there at all.

I'm certain I can't change your mind, but I'm equally certain that a fair reading of that speech results in an endorsement of ARMs in 2004. In fact when asked to defend it later, he does so, never claiming it was a hypothetical (as you say), but rather that what he described was true in a narrow sense.

http://time-blog.com/curious_capitalist/2007/09/greenspan_what_i_really_meant.html

Fuzzy
I think you're approaching the crux of the matter. Like it or not we're all in this together. With the exception of very "gutsy" and knowledgeable investors like OO, if the idiots are really of a large enough number, we're all screwed due to the resulting policies. It's just a matter of degrees. Just like I can't be a winner if the US loses a war, I also can't be a winner if the US loses a financial "war". I can only hope the loss is smaller than projected.

PeterP may find a way to profit though ;-)

"Perhaps we should get a beer at Marin Brewing Company."

Yeah--that would be cool sometime...maybe we can get Jack "Bob" Ross in on it and revisit the "old bubble days" LOL.

Presently, I'm living in the S.Bay until my relocation plans go through.

Presently, I’m living in the S.Bay until my relocation plans go through.

There is the Los Gatos Brewing Company. :)