"underwater" mortgages

[classicman]

I can't imagine where you got that impression. How many ads were on at that time in every single format stating just the opposite?

[Shawnee123]

Mr Potter! hahahahaaa!

[TheMercenary]

Originally Posted by glatt

All very true, and pretty obvious when you stop to think about it, but when we went to the bank looking for a loan, it didn't occur to us that we were going to talk to a sales person. Having never taken out a loan before, I thought that it was all serious business where the bank is this stogy old place that wants to protect its money and we would need to beg for the money from old Mr. Potter.

The more I read about it the more I realize there is enough blame to go around at every point in the loan process. But it still pisses me off that we are bailing out the guy down the street who took a chance and tried to flip a $750,000 house, knowing all and well that he could never afforded it for any length of time. That is the guy that gets off his responsibility and we get to pay up the difference for. The system is broken. And by that I mean the whole bail out system. Some of these people just need to move to an apartment for the rest of their lives and get use to the fact that their credit is screwed for the next 15 years.

[xoxoxoBruce]

Originally Posted by Happy Monkey

A con game relies on the target being greedy, ignorant, and/or dishonest. So most people who are conned are, to some extent, to blame.

There was also a (probably small) group of people trying to con the lenders, trying to borrow more than they knew they could handle, looking to make a quick buck on the bubble. They were also dishonest.

[tw]

Originally Posted by classicman

re: glatt - It is extremely rare for any salesperson to not try and upsell the customer.

Once upon a time, the bank got stuck equally if they provided a mortgage the consumer could not afford. The salesmen, once upon a time, also was at risk. In the past decade, a bank no longer had to be responsible. The bank no longer had to consider risk. Lack of regulation enforcement only encouraged that new attitude. Consumers had no idea that the bank was no longer operating responsibly.

That is the only thing that changed.

Now a solution. Difficult is to separate the rare speculator (who was flipping a $750K house) from others who were sold an ‘excessive risk’ mortgage. Many homeowners owe more on a house than the house is worth. And many banks are simply not foreclosing due to no better option. Other banks have massive profits because they sold off bad loans using money games or simply do not foreclose – do not yet admit to the losses. Too many foreclosures would mean admitting that reality on spread sheets. Many banks just cannot afford to do that.

How does someone refinance when a loan is for more than the house is worth? We still do not have an answer other than bankruptcy. Instead, money lenders are hoping that with time this problem will go away. Some programs have been introduced that only chip away at the problem.

Anybody have a better solution?

[DanaC]

One thing that doesn't seem to be taken into account by a lot of people is the element of 'trust'. Bankers used to be people who could be trusted not to loan to someone who couldn't afford the loan. It went against their interests as a lender to lend to someone who may end up defaulting.

I don't know what it's like over there, but over here a bank manager was held in high esteem; very much a respected pillar of the community. When someone wanted a loan, or a mortgage they would go to the bank, and the bank manager would carefully assess their finances and refuse loans and mortgages to those who couldn't afford them. They were the experts. Like doctors.

Since the 80s there's been a shift in the role of banks and lending; and whilst we all know that, the cultural baggage of the previous era left an aura of respectablity and trustworthiness around the people orchestrating new lending practices. If you don't know much about finances and money, then trusting the trustworthy expert may seem a good idea.

If I'd been in a position to buy a property a few years ago, I would have gone and spoken to someone at my bank, and would no doubt have placed a higher level of trust in their advice than I might today.

I'm not a stupid person. But I don't understand money and financial matters. I don't understand it when someone explains it. I could have gone off and read all about mortgages and I still wouldn't understand it. I wuold have had to rely on financial experts, and in my world view they were generally to be found at banks: they were the ones from whom I was used to hearing the word 'no'.

The aura of respectability sprread out to encompass anyone who could lay claim to being a 'financial expert'. Mortgage shops sold the dream of home ownership to people who should have continued to rent. Our government sold home ownership as a concept; like it was the mark of a civilised society, and anyone not on the ladder by the age of 25 was clearly a social and cultural failure. At the same time, this mania for property forced prices up and out of reach of most people under the age of 35.

Alongside this was a barrage, first through the 90s, of Home Improvement shows; then by the turn of the millenium this shifted to Home Buying shows. The cultural message has been rammed down people's throats for a decade or more that houses are a disposable and fluid asset to be flipped more times than a pancake. The allure of the quick money wasn't just down to people's greed and stupidity; it was fostered by their governments and their banking institutions. The people they were still culturally, at a very deep level, inclined to trust on questions of finance. If an entire culture is pushing an activity as normal and desirable, then obviously some people will be swept up in that, who might otherwise act quite differently. Propoganda works.

Shaw has it right. The predators bear most responsibility. And they knew and know damn well, that the responsibility and consequences of their predatory behaviour will be placed firmly at the feet of their victims; hapless or otherwise.

[glatt]

Damn Dana, that's an excellent post.

[DanaC]

Why thankyou, glatt

[classicman]

I agreed with you right up to the end where you said Shaw was right

[jinx]

The predators bear most responsibility.

I disagree. The predator might be morally wrong, but the responsibility lies with the one who will suffer the consequences, and I'm not just talking about mortgages here but pretty much life decisions across the board.

Seriously though, how hard is it to know how much of a mortgage payment you can afford? How much are you paying in rent? Add in any additional expenses not covered by your rent (taxes, hoa fees, trash, whatever) - there's no magic to it. If you don't know for sure you'll be making more money in 5 years, then Mr. Banker sure as hell can't know that either. I don't get it...

[xoxoxoBruce]

The bankers/brokers were telling people they could buy with an ARM, then switch to a conventional mortgage when they wanted to. That was a lie that buried a lot of people, when interest rates soared.

Just because your house is worth less than you paid for it doesn't mean you are in danger of foreclosure... hell, most things you own are worth less than you paid.

The people in trouble are the ones that either lost their income, or had mortgage payments increase more than they could afford.

Originally Posted by DanaC

But I don't understand money and financial matters. I don't understand it when someone explains it. I could have gone off and read all about mortgages and I still wouldn't understand it.

Bullshit, I'm sure you could if you put the time and effort into it. You haven't been in the position to spend hundreds of thousands of dollars (pounds), so you haven't taken more than a cursory glance at how it works.
Sure, it's easier to go to the banker whom you trust, which was your point, by I'm saying you could understand it, if you had a mind to.

[DanaC]

I recently had occasion to seek financial advice (from my usual bank as it happens :P) as to what savings accounts or fixed rate bonds might be appropriate for the money Dad left me. I also read up a little online. My head was spinning with it. I have a real problem with maths; just no head for it at all. Start talking about interest levels and stuff and it's like a little switch goes off in my head.

[Pie]

Originally Posted by xoxoxoBruce

The bankers/brokers were telling people they could buy with an ARM, then switch to a conventional mortgage when they wanted to. That was a lie that buried a lot of people, when interest rates soared.

I take exception to the characterization of bad advice as a 'lie'.

My father was an investment banker. Had 20+ years' experience in the banking system, had passed all the SEC exams, was an Exec. VP of a major US bank. Knew the system inside and out. And, if it's relevant, he had a hellaciously high IQ.

He never saw this bubble coming. He recommended we get a 5/1 ARM; he was absolutely certain that we would be able to re-fi at favorable rates. You can't argue he had an interest in screwing me (his daughter) over -- he helped us with our down payment!

Of course, we were lucky. We did re-fi in 2007, a year before the collapse. And we never had a bad debt-to-income ration (I believe our back-end ratio was never over 18.)

His advice wasn't a lie. It was short-sightedness, optimism, and a willingness to suspend belief in the primacy of gravity.

There are two classes of borrowers in trouble here:

1. Those who took on crazy levels of debt, using exotic instruments to purchase things they never had a prayer of paying for;
2. Those who bought properties with otherwise acceptable DTIs, perhaps using standard mortgages, perhaps slightly 'interesting' mortgages... who have since lost their jobs.

I know who I sympathize with, and who I would choose to 'bail out'. Of course, drawing the exact line is always difficult.

[xoxoxoBruce]

Originally Posted by Pie

His advice wasn't a lie. It was short-sightedness, optimism, and a willingness to suspend belief in the primacy of gravity.

It was a lie, just not personal. He didn't know it was a lie, because it was institutionalized. Bankers may not have seen the bubble was going to burst in such a catastrophic way, after all it was underwritten by institutions too big to fail, but they had to see it couldn't continue the way it had.

[squirell nutkin]

Originally Posted by jinx

I disagree. The predator might be morally wrong, but the responsibility lies with the one who will suffer the consequences, and I'm not just talking about mortgages here but pretty much life decisions across the board.

Seriously though, how hard is it to know how much of a mortgage payment you can afford? How much are you paying in rent? Add in any additional expenses not covered by your rent (taxes, hoa fees, trash, whatever) - there's no magic to it. If you don't know for sure you'll be making more money in 5 years, then Mr. Banker sure as hell can't know that either. I don't get it...

Jinx, I think that considering your level of education and your husband being a finance manager you are probably more aware of money and how it works, but imagine you were undertaking some other endeavor in an area you were not as conversant in. You may decide to trust the credentials of "the expert" you had engaged to perform that service. Perhaps law? It wouldn't be possible for you to educate yourself to the extent that the professional you hired is educated. Perhaps building? Again, you could read and study about your project, but that still isn't the same thing as being a builder for 20 years.

Now, chip away about four years of your schooling and a dozen or so IQ points and maybe even a little emotional maturity and you are among the ranks of the prey.

Of course it is still their fault, but poor parenting, and a culture of mindless, thoughtless consumerism certainly contributes to the problem.