Does Anyone feel like Bailing

[xoxoxoBruce]

Originally Posted by Sundae Girl

How in the name of all that's holy does a 90 year old woman have a mortgage?!

In 2004, Polk took out a 30-year, 6.375 percent mortgage for $45,620 with a Countrywide Home Loan office in Cuyahoga Falls, Ohio. The same day, she also took out an $11,380 line of credit.

Over the next couple of years, Polk missed payments on the 101-year-old home that she and her late husband purchased in 1970. In 2007, Fannie Mae assumed the mortgage and later filed for foreclosure.

If they bought the house in 1970, the mortgage was probably paid off.
Now in 2004, they gave a then 86 year old woman, $45k plus an $11k line of credit, but she couldn't make the payments?
Something stinks... where'd the money go?

[classicman]

Lemme see if I can do this - It doesn't matter whether it is a defaulted loan or not. The way I understand it is that Bank 1 sells the mortgage to Bank 2 for an amount less than they issued it for, say .5% and, most times, Bank1 keep that for managing/processing it.

The real issue is that the banks cannot take into account the value of the house in 5/10/20 or 30 years as an asset. When they are being judged "creditworthy" under the mark to market system, they can only use the immediate house/mortgage value today. They cannot take into account appreciation of the property or the interest they will earn on the loan.

[SamIam]

Originally Posted by xoxoxoBruce

If they bought the house in 1970, the mortgage was probably paid off.
Now in 2004, they gave a then 86 year old woman, $45k plus an $11k line of credit, but she couldn't make the payments?
Something stinks... where'd the money go?

Maybe it was one of those reverse mortgage things, and she was using the money to pay property taxes, plus eke out a small pension?

[Pico and ME]

Maybe medical bills.

A former neighbor of mine refinanced her house a couple of years ago to re-side and re-roof it. Early this year the payments went up, so she tried to refinance again like they told her she would be able to do because housing prices will keep going up up up...but no dice, nobody would do it. She has had to give up her home because she is retired and doesn't have enough to cover the increased payments. It broke her heart. She's living in a retirement community that takes the rent out of her social security.

[xoxoxoBruce]

Originally Posted by SamIam

Maybe it was one of those reverse mortgage things, and she was using the money to pay property taxes, plus eke out a small pension?

No, not a reverse mortgage, but I did notice it wasn't a bank, it was a loan company. I smell a rat.

[xoxoxoBruce]

Originally Posted by classicman

They cannot take into account appreciation of the property or the interest they will earn on the loan.

Or depreciation, I guess.

[classicman]

exactly xob - but that is typically the exception to the rule - not the norm when referring to a home.

[dar512]

As I discovered this weekend, the mortgage side of the current problem is only half the story. The other part is the practice of credit default swaps. This is a practice that has never been regulated or had oversight -- and should have.

[xoxoxoBruce]

Originally Posted by classicman

exactly xob - but that is typically the exception to the rule - not the norm when referring to a home.

Then they don't consider whether the neighborhood is in decline?

[classicman]

They are not allowed to consider anything other than the immediate value of the property if they had to sell it immediately - today.

[glatt]

Watching the market a little today...

Let's say the stock market drops 25%, but then it bounces back up 25%. You get your money back. Right?

Pretend you have $100 of a stock. It falls 25%, so now you have $75.

So you now have $75, but the market goes back up 25%, so it's all cool, right? 25% of $75 is $18.75. So you bounce back up to $93.75. Nifty how that works, huh? And the fund managers make their % on the way down and on the way back up too.

[BigV]

Originally Posted by dar512

As I discovered this weekend, the mortgage side of the current problem is only half the story. The other part is the practice of credit default swaps. This is a practice that has never been regulated or had oversight -- and should have.

You're right, dar. Let's explore that a bit, shall we?

Credit default swaps, a kind of insurance policy I don't completely understand, were legislated to be free from the shackles of regulation by Phil Gramm. Read this story for details of the jailbreak in 2000.

In the early evening of Friday, December 15, 2000, with Christmas break only hours away, the U.S. Senate rushed to pass an essential, 11,000-page government reauthorization bill. In what one legal textbook would later call “a stunning departure from normal legislative practice,” the Senate tacked on a complex, 262-page amendment at the urging of Texas Sen. Phil Gramm.

There was little debate on the floor. According to the Congressional Record, Gramm promised that the amendment—also known as the Commodity Futures Modernization Act—along with other landmark legislation he had authored, would usher in a new era for the U.S. financial services industry.

“The work of this Congress will be seen as a watershed where we turned away from an outmoded Depression-era approach to financial regulation and adopted a framework that will position our financial services industry to be world leaders into the new century,” Gramm said.

Watershed indeed. With the U.S. economy now battered by a tsunami of mortgage foreclosures, the $30-billion Bear Stearns Companies bailout and spiking food and energy prices, many congressional leaders and Wall Street analysts are questioning the wisdom of the radical deregulation launched by Gramm’s legislative package. Financial wizard Warren Buffett has labeled the risky new investment instruments Gramm unleashed “financial weapons of mass destruction.” They have fed the subprime mortgage crisis like an accelerant. While his distracted peers probably finalized their Christmas gift lists, Gramm created what Wall Street analysts now refer to as the “shadow banking system,” an industry that operates outside any government oversight, but, as witnessed by the Bear Stearns debacle, requiring rescue by taxpayers to avert a national economic catastrophe.

Panzner also believes that Gramm-Leach-Bliley “may have even set the stage for both the collapse and the subsequent ‘rescue’ of Bear Stearns by the Federal Reserve.” The deregulated financial services industries were “encouraged to push the envelope in terms of risk-taking, and were not entirely dissuaded from thinking that the public purse would be available if things went horribly wrong.”

Still others blame Gramm’s Commodity Futures Modernization Act. Prior to its passage, they say, banks underwrote mortgages and were responsible for the risks involved. Now, through the use of credit default swaps—which in theory insure the banks against bad debts—those risks are passed along to insurance companies and other investors.

Maryland law professor Greenberger believes credit default swaps “were a key factor in encouraging lenders to feel they could make loans without knowing the risks or whether the loan would be paid back. The Commodity Futures Modernization Act freed them of federal oversight.”

Before passage of the modernization act, the Commodity Futures Trading Commission was attempting to regulate the swaps market through rule-making. The modernization act, Gramm noted in his remarks on the Senate floor, provided “legal certainty” for the growing swaps market. That was necessary, Greenberger says, because at the time, “banks were doing these trades in direct violation of federal law.”

"legal certainty" == legal immunity.

So Phil Gramm was the father of the unregulation of credit default swaps. What else do we know about Phil Gramm? He's McCain's principle economic advisor. Gulp.

Gramm was always Wall Street's man in the Senate. As chairman of the Senate Banking Committee during the Clinton administration, he consistently underfunded the Securities and Exchange Commission and kept it from stopping accounting firms from auditing corporations with which they had conflicts of interest. Gramm's piece de resistance came on Dec. 15, 2000, when he slipped into an omnibus spending bill a provision called the Commodity Futures Modernization Act (CFMA), which prohibited any governmental regulation of credit default swaps, those insurance policies covering losses on securities in the event they went belly up. As the housing bubble ballooned, the face value of those swaps rose to a tidy $62 trillion. And as the housing bubble burst, those swaps became a massive pile of worthless paper, because no government agency had required the banks to set aside money to back them up.

The CFMA also prohibited government regulation of the energy-trading market, which enabled Enron to nearly bankrupt the state of California before bankrupting itself.

From here.

I'm very unhappy with this pattern of decisions and choices.

[dar512]

Legalized gambling - the house always wins.

[lookout123]

Originally Posted by glatt

Watching the market a little today...

Let's say the stock market drops 25%, but then it bounces back up 25%. You get your money back. Right?

Pretend you have $100 of a stock. It falls 25%, so now you have $75.

So you now have $75, but the market goes back up 25%, so it's all cool, right? 25% of $75 is $18.75. So you bounce back up to $93.75. Nifty how that works, huh? And the fund managers make their % on the way down and on the way back up too.

What you are describing is an illustration for why the sequence of returns is so important in creating portfolios and managing them for risk. Your last statement is kind of a throw away line though. The fund managers are managing investments and risks on the way down and on the way up. They are doing their jobs, why shouldn't they continue being paid?

[Trilby]

Hey, at least Richard Fuld, #11 on Forbes list of highest compensation for CEO's, is safe. Thank god, thank god. But, he got away with only 300 million---somebody-quick!- start a telethon for this man!!

This is vile.