How low will the Market go before Bush acts?

[iplaw]

quote:Originally posted by tim huntzinger

This is interesting, NYTIMES reports '. . .in March, the head of the Federal Deposit Insurance Corporation, a banking regulator, had urged Congress to create standards to protect borrowers with poor credit.'

Huh.  Imagine that.  The FDIC - which protects banks from cash shortfalls - suggested that Congress protect stoopid consoomers.  I count myself in good company.

You should try reading the stories you link to Timmy.  What the source from the FDIC stated, and what you said that he stated are two different things.  By "protecting borrowers" he means NOT LENDING TO THEM, not bailing them out Einstein.  Try reading the story next time.

[tim huntzinger]

Let me be clear, it was my suggestion - not the FDIC - to begin looking at individual cases for relief.  The interesting thing was that many comments in the thread seemed to deride the consumer, but in the end the FDIC sided with the consumer.

It is one thing to troll out on a bulletin board and project one's economic theories, and quite another to be an Administration which promotes home ownership is one of its chief economic goals, point to increased home ownership as vindication of its policies, and then go AWOL when the scheme goes South. (Or in this case go North to Canada to talk about what the US can do to improve their economies).

My new theory is that many of the defaults are not the product of ARMS, anyway, but of illegal residents who are walking away from their homes.

[rwarn17588]

The vast majority of people in America will NOT default on their mortgages.

I'm no fan of the Bush administration, but just because a small percentage of people default on admittedly high-risk mortgages, it does not symbolize a wholesale repudiation of  home-ownership policies.

After this bump, home ownership will continue to rise, if it still isn't. That's because of creativity and competition in the home-lending industry. There's still money to be made, and the number of options for prospective homeowners continues to increase.

So chill, Tim.

(I'd be tempted to call you Chicken Little, except that username is taken, and giving it to you would be an insult to that person, who's decidedly less alarmist than you are.)

[Conan71]

quote:Originally posted by tim huntzinger

Consumers are protected from themselves all the time and corporations whether they be banks or toy manufacturers are not immune from regulations.  I hope stockholders and vanquished homeowners find someone to sue, because someone made money on the deal and that is not right.

In the case of personal bankruptcy reform, the Congress sided with credit card companies, not the consumers.

There's no one to sue in this case.  Homeowner's bought more house than they could afford in inflated markets and used perfectly legal lending instruments to do this.  People with ARMs and interest-only, or baloon arrangements counted on one of two things to happen: their personal income would be increasing with the rise in house payment as the rate went up, or the value of the house would appreciate to the point it could be cashed out for more than the principle balance, or it could be refinanced down the line when they could afford a full P & I payment.

For some of those people, their income eventually did go up, but they also wound up buying new cars to go in those new garages with their new-found borrowing power.  In some cases, I'm sure job situations did change and people wound up making less money.  That's still not the fault of the lender.

People buying a principle place of residence for the most part are creating a long-term savings account.  Viewing it as an aggressive short-term (less than five years) investment is stupid, especially in a hot market, unless that person has good experience in doing quick property flips.  The baloon eventually bursts.  If someone buys, planning on being there for 20 years or more, it's a safe savings haven and will generally weather the ups and downs of housing markets.

Since credit reforms 30 or so years back, the terms of lending agreements are carefully spelled out for the borrower.  If the borrower has not fully read and familiarized themself with the fact that their adjustible rate mortgage payment can go up, then that is not the lender's fault so long as it's noted in the loan documents.  If that person did not maintain a good enough repayment record on the mortgage or other indebtedness which prevented them from re-financing, that is their own fault not that of the lender(s).

I'm guilty as anyone of not reading every last 8-point type word in a multi-page contract when I've signed mortgage docs.  But if I sign and didn't realize there was a certain clause in an agreement which worked against me and it's there in print- that is my fault not that of the lender.

At every loan closing I've ever been a party to, the re-payment terms have been clearly spelled out by the closing representative.

In this case it's not a crappy national economy which has caused this problem.  It was a credit binge which has left a lot of people with a nasty hang-over.

[bokworker]

Hey Timmy, check out this weeks Barron's... seems your "lord and saviour" Jim Cramer's stock picks are not outperforming the market. Maybe you should reconsider his place in your life....

Over long periods of time housing, like the stock market, has proven to be a viable investment. However, over short periods of time housing, like the stock market can be a bit risky. the good part about housing is that, absent an overextension, you get a good bit of utility out of the investment as well. As Conan says, if you are buying a home because of the utility you are fine.... "flipping" houses like "flippping" stocks is not a riskless proposition.

Timing the market is not important.... Time in the market is... Longer time frames do not remove risk but certainly mitigate risk.

[rwarn17588]

To add what bokworker says ...

Index funds are the way to go. Low cost, no hassle, and why try to beat the market when there's a financial instrument that matches it?

[tim huntzinger]

I agree with the idea that homes are long-term investments, which is why I also advocate landlord/rental reform, which is another subject.

There is a deafening silence from the supposed victims of ARMS and others who got upside down on their equity, so the likelihood of some tidal wave of aggreived defaulters rushing the bank with pitchforks is unlikely.  My mythical victim is more the exception, not the rule.

Barney Frank will be leading the Congressional hearings this fall, so stay tuned.  He has owned every opponent I have ever seen him come up against, so I look forward to the political fallout.

Give Cramer's stocks more time, BOK, these things take time.

[iplaw]

quote:There is a deafening silence from the supposed victims of ARMS and others who got upside down on their equity

Could you please define the term "victim" as used in this sentence?

quote:Barney Frank will be leading the Congressional hearings this fall, so stay tuned. He has owned every opponent I have ever seen him come up against

Too...many......jokes....can't.....hold...back....for...much...longer........

[cannon_fodder]

Tim, also look into this:

One of the main reasons so many risky loans were made to low income people was that a few years back (1990's) Congress threatened to interfere if more credit was not made available to low income people.  

Congress wanted more credit to low income people, the banks said it was a bad idea, Congress threatened action, the banks caved to big brother. That worked out well.  

I keep telling you, most of the problems you want government to solve... government created.

[bokworker]

CF.. to whit.... the Community Reinvestment Act is exactly what you speak of. Banks are given a CRA rating that is VERY important to them.

Bottom line, make a certain amount of loans that you kow won't be paid back.

The real turning point for banks and other financial intermediaries came when home mortgage loans became "marketable" and the originating entity did not have to keep the loan on their books. If a loan is going to stay with you then the underwriting process becomes a little more important. If you sell the loan to generate new money to make more loans then all of a sudden it is a volume game. Underwriters that make money on volume aren't necessarily the most careful when it comes to doing what needs to be done to get the deal...

[Conan71]

quote:Originally posted by tim huntzinger

Barney Frank will be leading the Congressional hearings this fall, so stay tuned.  He has owned every opponent I have ever seen him come up against, so I look forward to the political fallout.

Yeah, he also owned a condo in DC that a gay prostitution ring was being run out of.

[cannon_fodder]

quote:Originally posted by bokworker

CF.. to whit.... the Community Reinvestment Act is exactly what you speak of. Banks are given a CRA rating that is VERY important to them.

Bottom line, make a certain amount of loans that you kow won't be paid back.

The real turning point for banks and other financial intermediaries came when home mortgage loans became "marketable" and the originating entity did not have to keep the loan on their books. If a loan is going to stay with you then the underwriting process becomes a little more important. If you sell the loan to generate new money to make more loans then all of a sudden it is a volume game. Underwriters that make money on volume aren't necessarily the most careful when it comes to doing what needs to be done to get the deal...

Thanks for the term BOk.  I couldnt think of the name of the program.

Also, per the loan purchasing, I really have no problem with that.  A mortgage is really just a secured note, so why shouldn't it be bought and sold?  The problem arose when purchasing companies were not insisting upon decently categorized groups.  A bank just said "here are our notes" and they were purchased.

From now on, originators will probably have to sort their loans before they will be purchased.  No hedge fund is going to acquire a block of loans if 25% could be high risk (sub prime) ventures.  As it currently stands, the groups are so large and disorganized that they can not separate the good blocks from the bad.  And THATS why no one is sure how much hedge funds are worth or who has real exposure to this issue.

[bokworker]

Cf, there is no reason that good quality loans should not be marketable. In reality, a lot of a banks' balance sheet is now marketable as there is a secondary market from everything from credit card receivables to car loans. This additional liquidity for a banks' balance sheet allows them, if used properly, to more efficiently match their assets and liabilities as well as to profitably deploy capital.

As with any credit product, it is incumbant on the buyer, which is now the lender, to make sure that the credit process is kosher and that loans are properly documented. In a period though when the real estate market bailed out a lot of bad credit decisions the credit process was not viewed to be as important as it should have been. Now that the market won't bail the lenders out the credit process will become a bit more stringent. Not to get too deep but in the mid-eighties when the Ok. and Texas banking markets were in the toilet the OCC quit even giving banks credit for collateral value and focused almost primarily on income. This shift caused a lot of borrowers to suddenly be classified as "impaired" and banks had to set aside huge amounts of loan loss reserve.... in fact, this change put many a bank in receivorship.

In the end, I am afraid that market participants that are expecting a quick resolution to the housing issue are going to be disappointed as I think there is more pain to be felt. It is not the end of the world but it might not be pretty.

RWARN, in general you are correct. A properly diversified portfolio of low cost index funds should do fine and is certainly more appropriate for your serious money that watching Mad Money every day. I will offer however that there are a few active managers that offer a risk return profile that overcomes their higher fee structures.

[tim huntzinger]

Keep going, BOK, this is good info.  Why is a CRA important? Did the Act mandate a percentage of loans made that were high-risk and were the banks going to be penalized somehow for not meeting some goal? Did the importance change from the amount of a downpayment to income in response to the Act?

What changes can be made so that the goal of increasing home ownership can be met, or is that impossible to do without artificially inflating home prices?

Yeah, ol' Frank is gonna tear 'em up.  If anyone can get to the bottom of things it is him!

[bokworker]

Tim, CRA is important because the OCC (Office of the Comptroller of the Currency, the primary regulatory agency for national banks) looks at this score as one measuring stick of how well a bank is servicing its' market... and whether or not to allow the bank to expand their prescence...i.e. buy another bank. No one will ever say that there is a specific "target" for an amount of loans that have to be made but if a low income area is in your footprint, and EVERY bank has a low income area in its' footprint, then you better be doing some loans in that area. Loaning money is not the only way to get a high CRA score but without doing this there is no way to get a high CRA score. As well, there is no stated "penalty" for a low CRA score but it is understood that you don't want one. All banks are subject to this Act as well. In the beginning, borrowers still had to have a significant down payment to borrow against a home but the income requirements could be relaxed somewhat.

The CRA however was not the source of the problems we had now. In the beginning, the CRA did force banks to make some loans they probably would not have and ended the so called "red-lining" of areas where credit was not offered. Don't get me wrong, I am not saying banks were the bad guys before this.... banks are in business to make money. Loans that don't pay back cause banks to lose money so banks have always tried to manage their risk position. This "risk mamgement" however tended to preclude certain types of borrowers, i.e. low income, and certain areas of towns to not have access to credit. The CRA was an attempt by the banking regulators to get them to step outisde their comfort zones a bit. think Capital One type ads.... Big banks only care about big customer type thing.

The beginning of todays problems started with the financial engineering of Wall Street. That and an extended period of very low rates in which fixed income investors were looking at very low rates.... remember 2% CD's and sub 1% savings rates.... Higher risk investments pay a higher rate of return and all it took was some smart math whizzes.... a ratings agency to bless the process and viola, we had "high quality" fixed income investments that paid a higher rate of return.

Things went along beautifully as the housing market boomed with new demand from new borrowers that could now afford to buy new homes... and hey, to top it off the whole process did not include a silly little requirement of having to actually prove what you made... you could just tell someone what you made. If the house you wanted was a little more expensive than what you could afford well then just tell them you made a little bit more so you could qualify... I mean what the heck, if things got bad then you could just sell the house for more than you paid because everyone knew that houses were going up in value and the guys that made the  most were the ones buying the biggest houses. Volume underwriters were happy to play along because their commission was based on the loan amount and realtors were happy to play along because their commission was based on the sale amount. It was absiolutely the easiest slam dunk deal ever...

That was until the supply of homes began to increase as builders extrapolated this increase in demand far into the future and started building a ton of new homes.... early on, way cool. Remember info-mercials on "pre-construction" purchasing of condos and houses? Good god man, if you weren't doing this you were leaving money on the street. Real estate was the path to easy street and only the stupid were not playing the game. Now the suppply of homes and condo's on the market are at multi-decade highs and lending requirements are becoming more stringent. this change in the supply vs. demand picture does not lead one to think that housing values are going up anytime soon. Take heart in Tulsa though as we did not see the incredible run up that some markets did and as such will not feel the same pain.

In the end Tim, the goal of home ownership has to be a personal goal not a government goal. Is high home ownership reflective of a populace that is doing well and striving to make their collective lives better? You bet. But you and I both know that there is a segment of our population that is not responsible enough to ahndle home ownership.... or handle debt properly. And handing them free money to own a home is not the answer becuase we know there is no such thing as free money. that money comes from responsible tax paying individuals like you and me that have chosen not to make dumb a** decisions and then cry to the government when it goes bad.

Shall I go on??