Remember the subprime mortgages? 2008?

"Washington’s new favorite subprime lender is none other than Uncle Sam. In a little noticed report last week—make that not noticed at all—the Congressional Budget Office estimated that the feds will lose $65.2 billion on risky loans and other “credit assistance” in the next fiscal year." Wall St. Journal editorial board.

This can be figured 2 ways. One is the Federal Credit Reform Act of 1990 (FCRA), and the other is based on a measure of fair value. "Using FCRA procedures—the standard way in which costs of credit programs are measured in the federal budget—CBO estimates that new loans and loan guarantees issued in 2025 would cost the federal government $2.4 billion over their lifetime. Using the fair-value approach, which measures the market value of the government’s obligations by accounting for market risk, CBO estimates that those loans and guarantees would have a lifetime cost of $65.2 billion. (Market risk is the component of financial risk that remains even with a well-diversified portfolio; it arises from shifts in macroeconomic conditions, such as productivity and employment, and from changes in expectations about future macroeconomic conditions.)"

https://www.cbo.gov/publication/60682?

Softball article on BOA and ACORN in WSJ

Isn't that just so sweet. James R. Hagerty wrote, Bank of America, "a corporate partner of ACORN" is going to end its relationship. I'm not diminishing the seriousness of the video'd prostitution sting at the ACORN offices, but really, these ACORN guys at the top of the chain were high class hookers long ago selling mortgages to people who can't pay for them. Clinton knew it; Bush knew it; Obama says he's clueless and clean. Sex just got the public's attention. Go to American Spectator to see how this works using Greenlining as an example. Greenlining is another nonprofit partner which you can see on this long list.

The requirements for an ACORN-assisted mortgage is still on their web page--it looks pretty loosey goosey to me. And we wonder why CRA contributed to the housing crash?

• 2003 and 2004 year tax returns and W2s [what's wrong with 2007 and 2008?]
  
• One month of current paystubs
  
• 3 most recent bank account statements
  
• $20 in check or money order for a credit report
  
• Rental history for the last 12 months: cancelled checks, receipts, landlord letter, etc.

Banks were being forced to lend to non-credit worthy applicants, to set aside all the known principles of sound financing to reduce the possibility of default. Take a look at what minorities were borrowing, as compared to whites, and guess who was pushing them there--certainly not the banks! Immigrant homeowners were actually failing less than native born minorities--probably had traditional resources backing them.

From Winter 2000 City Journal:

"The Clinton administration's get-tough regulatory regime mattered so crucially because bank deregulation had set off a wave of mega-mergers, including the acquisition of the Bank of America by NationsBank, BankBoston by Fleet Financial, and Bankers Trust by Deutsche Bank. Regulatory approval of such mergers depended, in part, on positive CRA ratings. "To avoid the possibility of a denied or delayed application," advises the NCRC in its deadpan tone, "lending institutions have an incentive to make formal agreements with community organizations." By intervening—even just threatening to intervene—in the CRA review process, left-wing nonprofit groups have been able to gain control over eye-popping pools of bank capital, which they in turn parcel out to individual low-income mortgage seekers. A radical group called ACORN Housing has a $760 million commitment from the Bank of New York; the Boston-based Neighborhood Assistance Corporation of America has a $3-billion agreement with the Bank of America; a coalition of groups headed by New Jersey Citizen Action has a five-year, $13-billion agreement with First Union Corporation. Similar deals operate in almost every major U.S. city. Observes Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance, which has $220 million in bank mortgage money to parcel out, "CRA is the backbone of everything we do."

Now ACORN is back in the swim, getting federal dollars to run foreclosure workshops. Sweet deal. You get the homeowner in the mess, charge a fee and get a kick back from the bank; then get government funds to run workshops, collect fees, to get them out of the mess you made for them.

NeighborhoodWorks America is just another branch of ACORN, as are others on this list. ACORN has so many tentacles interwoven with state, local, federal and church agencies, we may never get it figured out.

Where was the investigative reporting three years ago?

The Wall Street Journal top notch investigative reporters, who could find every flaw and mispronounced word in a George Bush speech or each supposedly murky thought of Karl Rove, couldn't see this one coming. A 47% increase in Hispanic home ownership fueled through a combination of congressional misdeeds, a collection of myths about red lining by banks and realtors, pressure from low income housing groups taking money hand over fist from federal agencies, and a coalition of groups pushing subprime mortgages--all of which ignored sound credit practices. And to think we criticize other countries for lack of a free press. Maybe if they'd spent less time lionizing and chasing every speech of the man from Kenya, they'd have seen what was under their noses.

How they destroyed our economy

Remember how we all chuckled at the "community organizer" jokes at the Republican Convention? Oh, how little we knew. Now, some did, because they'd been writing, and speaking and sounding the alarm for years, but we didn't listen. The media didn't notice, they were all ga-ga over o-ba-ma and neither did the talk shows. Just a few conservative and libertarian publications and think tanks.

Remember when we thought the community organization gig was ACORN and just some voter fraud--hadn't we seen that in both parties? Gosh, in Illinois, it doesn't matter if you vote at all "down state"--Chicago will take care of it and they have enough dead people and dogs to vote in your place. JFK might have lived a long life as a Massachusetts senator if his party hadn't stolen the Illinois vote in 1960 from Richard Nixon.

Turns out it was a much bigger cancer behind the subprime loans. Here's an article from 1995, describing guerilla warfare by the community groups which eventually brought down the wealthiest country and most powerful government in the world--without firing a shot.

After a raucous Senate Banking Committee hearing exploring Fleet Financial Group's record on lending to minority communities, the Federal Reserve Board governors agreed to consider taking action against the New England banking giant. Among the community activists present at that February 1993 meeting with the governors was Bruce Marks, Director of the Boston-based Union Neighborhood Assistance Corporation (UNAC) known for waging guerrilla warfare against banks that fail to meet fair lending standards. When Marks and company returned six weeks later, only to be informed that the governors had decided not to act on the matter, the group took action of their own by rushing the front steps of the Reserve and blocking the entrance.

As the group of roughly 60 stood at the front door, a limousine pulled up, and out stepped a man resembling Federal Reserve Chairman Alan Greenspan. The protesters naturally seized upon the opportunity to make their case with the head of the Fed. They ran over and surrounded the car, overwhelming the secret service agents and the Greenspan look-alike. The man turned out to be not Greenspan but Italy's minister of finance. Although the group would have preferred a face-to-face meeting with Greenspan, mistakenly accosting the Italian finance minister was only a minor embarrassment for Marks, who regularly uses high-pressure tactics in his crusade against redlining banks.

Marks had attended the Senate Banking Committee hearing with 400 angry residents from various states, many armed with tales of injustice wrought by Fleet. The protesters, who included gospel singers and Baptist ministers, sang and chanted as they paraded in wearing bright yellow T-shirts depicting a loan shark.

"It was like a gospel revival meeting," Marks said. "I don't know if ever there's been a committee meeting where 400 people just took it over." National Housing Institute

And then skip ahead to the Winter 2000 issue of City Journal, probably written in late 1999.

There is no more important player in the CRA-inspired mortgage industry than the Boston-based Neighborhood Assistance Corporation of America. Chief executive Bruce Marks has set out to become the Wal-Mart of home mortgages for lower-income households. Using churches and radio advertising to reach borrowers, he has made NACA a brand name nationwide, with offices in 21 states, and he plans to double that number within a year. With "delegated underwriting authority" from the banks, NACA itself—not the banks—determines whether a mortgage applicant is qualified, and it closes sales right in its own offices. It expects to close 5,000 mortgages next year, earning a $2,000 origination fee on each. Its annual budget exceeds $10 million.

Marks, a Scarsdale native, NYU MBA, and former Federal Reserve employee, unabashedly calls himself a "bank terrorist"—his public relations spokesman laughingly refers to him as "the shark, the predator," and the NACA newspaper is named the Avenger. They're not kidding: bankers so fear the tactically brilliant Marks for his ability to disrupt annual meetings and even target bank executives' homes that they often call him to make deals before they announce any plans that will put them in CRA's crosshairs. A $3 billion loan commitment by Nationsbank, for instance, well in advance of its announced merger with Bank of America, "was a preventive strike," says one NACA spokesman.

And here's Marks putting himself in a positive light at a "world citizenship, global humanist" blog. I wonder Mr. Marks, where are those poor and low income people you put in houses today? Do they have jobs? Do they have pensions? Where are the multitudes of employees sopping up government grants to the non-profits for paper pushers and fee takers, and hastily hammered together housing corporations to rebuild communities? Do you even care, or were they always just your route to destroy the United States economy?

Marks’ role as an aggressive crusader for reform of the powerful banking and lending industry has its representatives up in arms. On May 5, 1999 from the Senate floor, Senator Phil Gramm (R-TX), head of the Senate Banking Committee, attempted to portray banks as victims of Bruce Marks. Gramm described Marks as, “… someone who graduates from college, goes to graduate school, and goes to work for the Federal Reserve in acquisitions and mergers, quits and goes into business, spends four years harassing banks and bank presidents, and finally the bank (Fleet Bank) caves and gives them $1.4 million, gives them $200,000 to set up their organization; they now have twenty offices, lending $3.5 billion…” Senator Gramm continued, “There is a CRA protester who calls himself an “urban terrorist” who used those charges against a bank, harassed them for four years, went to a speech of the president of the bank (Fleet Bank CEO Terrence Murray) at Harvard University, disrupted the speech, made this man’s life miserable for four long years.” Bruce Marks wears this personal attack as a badge of honor.

Under Marks’ leadership, NACA has garnered commitments of over $6.7 Billion for the best mortgage product in America. NACA now has 31 offices throughout the country and will double in size within the next 12 to 18 months. NACA has become the largest housing services organization in the United States.

Community Reinvestment Act Harmful legacy

For a lefty hissy fit on the conservatives waking up to the CRA's mistakes, see here, so don't say I don't provide an alternative view, which the left never does.

More wrong headlines

Greenspan admits errors
Now maybe the Democrats can take the stand and admit their errors? Don't hold your breath. The most breathtaking statement in this article by Kara Scannel in WSJ (Kara, don't you realize your job too is going down the tubes?)

"Greenspan dodged and weaved."

The finest weavers in the country first tied us in knots and now sit unraveling our economy in Congress. Barney Frank. Chris Dodd. Barack Obama. John Kerry. Ted Kennedy. The fraternity of fixers.

Forecasting, Kara, is not the problem. There clearly was time 18 months ago to stop this blood bath. Many Republicans tried to save the sinking ship, including John McCain and George Bush, and they were blocked by accusations of racism and defeating the dreams of the poor. And you guys who write that puerile, journalism school 101 nonsense as the "news" for WSJ, NYT, WaPo and USAToday just went along, and along and along. You never dug deep, never ask questions, but if the truth did peep through, you buried it somewhere beyond paragraph 15.

For edification, Kara, please read, "Would the last honest reporter please turn out the lights"

Bailing with a hole in the bucket

Guest blogger Murray says:

I know that you know it is not too comforting knowing that the same people who allowed this country's subprime mortgage crisis to happen are the ones that our government put in charge of fixing it. I also know that you know that they really don't have the slightest knowledge how to fix it. I also know that you know that this is really a bailout to the Wall Street high flyers and the sleazy investment banking business. Now they are adding the very bankers that caused the stink to the team assigned to fix the problem. It seems that once you're in bed with them you can't get rid of them. Kinda like bedbugs.

Since it's the subprime mortgages that are the basis of the problem I would think the first thing they would do is put a stop to making these ridiculous loans. They have not done this. Banks and mortgage companies are still creating such loans. You can go to google and ask for "low price no money down mortgages" and you'll find all kinds of ads for these kinds of loans. It's pretty obvious to me that if we don't stop loaning with no money down and bad credit the "bailout" will go on forever.You can even apply on line. Here are a couple of examples:

http://www.mortgage-helper.com/zerodown.html

http://www.forthebestrate.com/no-money-down-mortgage.aspx

OK, the damage has been done. Our astute legislators are throwing billions of our hard earned tax dollars all over the place. They say not to worry cause the are going to sell these worthless mortgage packages and they will get the money back. Why... they say we might even make a profit!! Well, let me tell you. IF THEY DO FIND SOMEONE DUMB ENOUGH TO BUY THESE WORTHLESS PACKAGES JUST WHAT DO YOU THINK THEY WILL DO WITH THE MONEY? Pay it towards the national debt? No, No, NO..... They will do the same thing they always do. THEY WILL SPEND IT. Folks, once they voted to spend that 700 billion, that money was spent never to return. That money can only be returned by you and I. The tax man cometh. If OBAMA gets elected it will come immediately. Find a way to protect yourself. Your first attempt would be to vote for McCain as feeble as that may be.

MURRAY

Sub-prime, from the archives

I wrote this April 25, 2007, complaining about the way the topic was written up in USAToday. It began with the obligatory sob story, and it wasn't until the middle of the article you found what was going down. Even so, I gleaned these facts from the article (perhaps the reporter figured the editor wouldn't read that far). I haven't changed a word of it, so all this was well known 18 months ago long before we knew this meltdown was going to happen. The only words missing are CRA and ACORN. It was reported in the news, discussed on talk radio and cable panels, and commented on in the blogosphere. And still people are falling for Obama's ridiculous lies.

A closer look at the middle paragraphs:

• Minority home buyers helped fuel the housing boom--49% of the increase between 1995-2005. [Note that this trend of "empowering" minorities by burdening them with impossible debt began under Clinton, and any attempt to reverse it has brought condemnation on Bush.]
• 73% of high income ($92,000-$152,000) blacks and 70% of high income Hispanics had subprime loans, compared to 17% whites.
• Lenders were supported by politicians and "community leaders" eager to promote minority home ownership.
• When Illinois (Cook Co.) tried to establish credit counseling programs for new minority buyers by targeting ZIP codes, the program was pulled as being "racist".
• Access became a buzz word at the expense of sound lending policies.
• Buyers/borrowers with poor credit or low salaries who wanted a cheap deal is a large part of the problem.
• Investigation by a counseling group found 9% of those in trouble were victims of fraud; the rest was poor judgement and poor financial skills.
• Rather than focus on the borrowers' poor financial skills, it appears that new regulations and programs will pounce on predatory lenders.
• Government investigations of charges even before the current problem came to light showed a "good chunk" [not my term] of higher loan cost is attributed to borrower's income, not to race or ethnicity.

But this is America, where nothing happens if it isn't about poverty, race, gender or disability.

If the builders knew why didn't Barry and Barney?

"Approximately $216 billion in subprime and Alt-A mortgages will reset for the first time this year, which could ultimately push 3 percent of all outstanding mortgage debt into default. As a result, a large number of households will return to the renter pool throughout 2008. To compensate, builders are expected to expand existing apartment inventory by 1.1 percent, or more than 100,000 new market-rate units." Buildings, Annual Industry Forecast, 2008

A bank regulator tells his side

John Corby on 610 a.m. in Columbus offers a call-in show with topics from uses for bacon (yesterday) to what's the dumbest trick you pulled as a teen-ager. Today, the subject seems to be a bit more serious--the government bailout. As I walked in the door (I was outside picking up branches from the storm 2 weeks ago) I heard

--a bank regulator saying the banks were forced into the Community Reinvestment Act (CRA) and each bank had to have a plan and a department. Bank field examiners spent over 50% of their time enforcing the Act, which took away from the enforcement of safety and soundness of the investments. Every bank in the nation, under the CRA, had to reinvest part of its own capital in the community, i.e. lending to borrowers, primarily minorities, who were not qualified for loans. This participation (which was forced) showed the banks were supporting the community. The caller said he and other bank employees who realized what was going on would have never been able to speak up for fear of losing their jobs, and that those who oversaw the CRA at his bank were the most liberal and militant in the organization. Then the banks were blamed for all the subprime loans they were forced to write. From the horse's mouth

Before we taxpayers fund the bailout, we need to dump the CRA which started the downward plunge and abandon this crazy idea that everyone needs "the American dream." And that includes its slush fund, Housing Trust Fund, which goes to the states for local organizations to put poor people in housing (which usually no one else would buy) including my own church. It's a nightmare for many. There needs to be good, sound, affordable housing stock. But it doesn't mean that every welfare mother who's taken a training program in computer programming and found a decent job should be shoehorned into "affordable" housing with a mortgage which will be a burden to her and her children. I'm sure this was all done with the best intentions, but the consequences have resulted in a national crisis. These same people in a good rental or subsidized housing with an adequate investment vehicle on the side would have been far better off and not experienced one more failure in their lives.

"The CRA forces lenders to spend money, time, and resources on documentation, PR, and other compliance costs. Moreover, the examination process to determine the level at which a bank is meeting its CRA obligations can sometimes take several months. This has become a major point of leverage—and source of funding—for “community” activist groups. Lending institutions, rather than face the increased expense of a slowed deposit facility application due to a CRA challenge, have committed over $7 billion to such groups and $23 billion to community development lending projects since 1977. Some companies seek to mitigate the threat by funding activist groups’ projects, instead of reforming their overall approach to community reinvestment, according to Jonathan Macey of Yale Law School.

Groups like the Association of Community Organizations for Reform Now (ACORN), aware that even small delays in approval can result in substantial losses of money for financial institutions, have been exploiting such a strategy for years. For example, Chase Manhattan and J.P. Morgan donated hundred of thousands of dollars to ACORN around the time that they applied for permission to merge." The Community Reinvestment Act's Harmful Legacy March 20, 2008

John Kerry unhinged

Watched him on Fox last night. A scary dude. So glad he was defeated in Ohio in 2004 which kept him out of the White House.

It's very clear the Democrats have dropped the bailout ball--going all the way back to President Carter in the 1970s when this social engineering of the poor began with the "American dream" of home ownership and expanded under Clinton in 1993. Did the rich get richer? You bet. Oh, and the agencies, lobbyists, and foundations that mushroomed to help the poor. How many jobs did they produce for recent idealist college grads? The rich usually benefit in these social engineering programs, particularly the people putting them in place with the regulations and loop-holes, blocking reform. The Chris Dodd and Barney Frank dog and pony show--wonder how much richer these guys were in 2007 compared to 2004? Well, guys, it's probably gone now, at least on paper--but the people in Congress don't seem to suffer that much, do they? Fewer rich people for Obama to tax. And you know what that means, don't you? The tax man cometh for you.

I don't always recommend a Wiki, but I'm in a hurry to get to my volunteer job today--if you're a Democrat or Marxist, there will be plenty of sources pointing the other way, but you'll have to find them on your own:

"In early 1993 President Bill Clinton ordered new regulations for the CRA which would increase access to mortgage credit for inner city and distressed rural communities.[7] The new rules went into effect on January 31, 1995 and featured: requiring strictly numerical assessments to get a satisfactory CRA rating; using federal home-loan data broken down by neighborhood, income group, and race; encouraging community groups to complain when banks were not loaning enough to specified neighborhood, income group, and race; allowing community groups that marketed loans to targeted groups to collect a fee from the banks.[4][6]

The new rules, during a time when many banks were merging and needed to pass the CRA review process to do so, substantially increased the number and aggregate amount of loans to low- and moderate-income borrowers for home loans, some of which were "risky mortgages." " Community Reinvestment Act

The bad news, the good news

Burning down the house.



The bad news is that Obama will probably be our next president; the good news is the Democrats have screwed him with the subprime crisis. He probably won't have any money to spend--but then, neither will we!

Looking back at the mortgage mess

I wrote this in April 2007. The mortgage and credit mess has expanded and spread. But this is all still true. Particularly note the problem the "access" mentality and "gap" concern brought to our economic health. This fascination with disparities, and not good health practices and results, is behind the push for universal health care.
-----------

Minorities hit hard by subprime loans
is the headline of USAToday's latest article on how the poor and minorities are victimized in the U.S.A. It really makes you wonder if the journalists learned anything else in college! A closer look at the middle paragraphs:

• Minority home buyers helped fuel the housing boom--49% of the increase between 1995-2005. [Note that this trend of "empowering" minorities by burdening them with impossible debt began under Clinton, and any attempt to reverse it has brought condemnation on Bush.]
• 73% of high income ($92,000-$152,000) blacks and 70% of high income Hispanics had subprime loans, compared to 17% whites.
• Lenders were supported by politicians and "community leaders" eager to promote minority home ownership.
• When Illinois (Cook Co.) tried to establish credit counseling programs for new minority buyers by targeting ZIP codes, the program was pulled as being "racist".
• Access became a buzz word at the expense of sound lending policies.
• Buyers/borrowers with poor credit or low salaries who wanted a cheap deal are a large part of the problem.
• Investigation by a counseling group found 9% of those in trouble were victims of fraud; the rest was poor judgement and poor financial skills.
• Rather than focus on the borrowers' poor financial skills, it appears that new regulations and programs will pounce on predatory lenders.
• Government investigations of charges even before the current problem came to light showed a "good chunk" [not my term] of higher loan cost is attributed to borrower's income, not to race or ethnicity.

But this is America, where nothing happens if it isn't about poverty, race, gender or disability.

No one wants to be reminded, but here's what it took in 1968 to get a home mortgage (our third home): the monthly PMI didn't exceed one-third of the husband's income; there were married parents/in-laws to chip in on the down payment to help a young couple; most mortgages were for 20 years; typical mortgage rate was around 6.5%; the average home and what owners expected was smaller and less grand; a typical applicant for a mortgage wasn't also paying for a leased a car, or a cable bill, monthly broadband, or a cell phone bill, nor did they eat out 2 or 3 times a week and take vacations at resort spots.

Yes, I know it sounds terribly fusty and old fashioned back in the old days when the state and federal governments weren't our foster parents, overseers and field bosses, but that's just how it was.

Predatory Borrowers

Tyler Cowen at NYT writes: "IT’S NOT JUST THE LENDERS There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem. As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default."

So keep that in mind as Washington Democrats (and some Republicans) want you to bail out people who fell for creative financing and then made it worse with fraud.

Kip at Stitch in Haste calls them consenting adults. "What is so "cruel" about being unsympathetic to those who deserve no sympathy? Competent consenting adults, hoping to game the system, got burned -- not by any "predatory lender" but by their own miscalculation (dare one say "their own greed"?). They could have stayed out of the housing market. They could have waited until their finances and credit improved. They could have done their homework before they signed the forms. They could have been, forgive the repetition, competent consenting adults."

Bill Fleckenstein says we've run out of bubbles--capitalism has boom and bust cycles: "We have experienced a wild, drunken binge, and we are going to have a hangover. But the best policy for the country would be to accept the hangover, head to the gym, start working out, and get stronger and healthier for the next go-round."

Can WSJ writers find a real victim?

I've complained here many times about the "news" stories in the Wall St. Journal, WaPo, and NYT. Most of the "social concern" stories belong on the editorial page, except that's what intelligent, well educated people read. But the one on Dec. 6 in the WSJ titled "House of cards; how the subprime mess hit poor immigrant groups" written by Jonathan Karp and Miriam Jordan really takes the cake for biased, bad reporting. What school graduated these incompetents? We really do have a subprime mess--but using one woman, Naira Costa, to make a blanket statement about immigrants, and she an illegal immigrant who used someone else's credit card to inflate her credit score, gets a home loan for $713,000 (on a cleaning job salary of $2,000/mo), never made a payment, and she's suing the broker? Oh PULEEZE! Just for good measure, they throw in her Pentecostal church as one of the bad guys, and in today's WSJ reader section, the pastor says she wasn't a member and besides he has no control over what members do. Karp and Jordan must have really been trolling the dregs to find this story.

Greenspan bursts some bubbles

Demand driven by expection I think is a fancy phrase for greed

"I do not doubt that a low U.S. federal-funds rate in response to the dot-com crash, and especially the 1% rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages and may have contributed to the rise in U.S. home prices. In my judgment, however, the impact on demand for homes financed with ARMs was not major.

Demand in those days was driven by the expectation of rising prices--the dynamic that fuels most asset-price bubbles. If low adjustable-rate financing had not been available, most of the demand would have been financed with fixed rate, long-term mortgages. In fact, home prices continued to rise for two years subsequent to the peak of ARM originations (seasonally adjusted)." in Today's Wall Street Journal

Taxpayer bailout for subprime borrowers?

Why not? The government bails out both agribusiness and the small farmer, the corporations and the mom and pop stores, the railroads and the airlines, the state and local government officials who botch up their congressional earmarks, the auto industry, the poor public schools and the floundering charter schools, the state highways and the interstates alike, the student loan recepients and the university administrations that talked them into it, the medicaid nursing homes and the welfare moms. The USA bails out former enemies and future enemies both. We have been conditioned to think that there will be a safety net no matter what because the good times will always roll.

By the end of 2006, 61% of the subprime loans were going to people who had credit scores good enough for a conventional loan. Whether it was greed, thinking they would flip the property, or emotion, they fell for it. And all sorts of industries benefitted in spending frenzies.

We don't have a subprime loan on any of our properties, but we will certainly be affected if our neighbors in UA or Lakeside or Canal go into foreclosure. We have many friends who work in unrelated industries such as retail, or banking, or construction or service trades, or the university, or travel and leisure, to say nothing of the ones who are living on savings and pensions. Those people struggling to meet $1500-$2000 a month mortgage payments certainly won't be buying new baggy jeans for junior, or buying plane tickets to visit Grandma at Christmas, or meeting their college loans for their daughters.

I wasn't around in the 1920s--but the signs of the coming Great Depression were all around as loans were being called in on the people who bought land to support the war effort. Hoover can't be blamed for the depression and FDR didn't do anything to get us out of it that was effective in the long run.

If giving people a few more months on their mortgage, however badly they planned, will save the whole nation from a collapsing economy, how could that hurt?

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Subprime late payments

A chart in today's WSJ showed the number of people keeping up with mortgage payments on subprime loans is improving. During the last quarter about 7.6% were late and that's dropped to 7.2% (this compares to .8% and .6% in prime). Missed payments were high in mid-1999, then dropping way down to under 2% in mid-2003. Obviously, the reasons for this have yet to be sorted out. But it must not be the economy, or how much was loaned to poor people vs how much to speculators. Subprime loans went to low income people who were poor credit risks and to high income people with high debt in relation to their income. The rest of us went the standard route--10 or 20% down and fixed rates.

But here's what's interesting. After 9/11 there was a drastic drop in late payments for both types of loans. As the economy soared, so did late payments. Seems to be psychological, not financial.

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Fannie, Fred and Sam and the subprime mess

Most of the folks both parties in Congress want to bail out of the widening home mortgage mess are not the poor minority Pedros and Letitias in the red lined neighborhoods of Cleveland you read about in the newspaper sob stories. They are very wealthy investors who were flipping houses in Sarasota, or hiding from the tax man in Colorado, or packaging jumbo loans or going after no doc and low doc loans in Chicago.

Here's an ad in one of my newest premiere magazines, Vertical Living.

A $1,000,000 loan with payments of only $2,528 per month
1.000% start rate / 7.516% APR
Fixed payment for 1st year
No prepayment penalties
Interest-only payments
Unlimited cash out-refinancing available

Adjust those numbers a little, and the appeal is the same as it was for all those low income buyers a year ago. How long before this buyer is asking you for help?

At this time, Fannie Mae and Freddie Mac* can't go that high, but oh, they are knocking, knocking at the door of Congress. Last Saturday the WSJ Hot Topic pointed out that FHA (Federal Housing Authority, a New Deal program that long ago outlived its usefulness) wants to suspend downpayment requirements to insure even zero-equity loans. :

It's a testament to the FHA's underwriting ineptitude that, even during the biggest housing boom in a generation, the agency's delinquency rate has somehow doubled over the last 10 years. In 2004, 2005 and 2006, the FHA's delinquency rate was 5 times higher than the rate on conventional prime mortgage loans, double the rate on loans with private, mortgage insurance, and even slightly high than the rate on subprime loans. . . Downpayment assistance program has suffered default rates as high as 20%. "Uncle Sam: Subprime Lender" 9-22-2007, WSJ

Freddie and Fannie
went up to Capitol Hill
to fawn for a bigger profit
Sticking you and me with the bill.

With help from our taxes
They'll package and resell,
a windfall for the banks and rich,
for the rest of us, economic hell.

Years ago the original aim
was to help the struggling poor.
Now they seek those jumbo loans--
Congress and Bush! Show them the door!

*Freddie Mac is the actual name of The Federal Home Loan Mortgage Corporation, created in 1970. It buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market. Fannie Mae is the former Federal National Mortgage Association, which used to be a government agency, but is now a private corporation. In some sort of quasi-nightmare, these two are supposed to be "competition" for each other.

4095

That's why it's called risk

Sometimes it is good when Rush Limbaugh has a guest host. The guy he has on today, Mark Belling of Milwaukee, has been explaining the mess with the subprime loans better than any I've heard. He's been trying to pound it through the listeners' heads with rhetorical questions, "that's why it's called risk."

• How far do we go with government bail outs when people make the wrong decision?


• What about all those people for whom it was the right decision? Many people bought their dream homes and were able to ease into homes they might not have purchased otherwise.


• What about the banks and Wall Street companies who bought up those loans and now want a Fannie Mae or Freddie Mac bailout of a bad investment?


• Are the people who borrowed the money (at a risk) really worse off than they would have been paying rent for three years (at a higher monthly cost than the loan) and getting nothing back?


• When real estate goes up, it's a huge windfall for some. What about them? They took a risk and won.


• What are the unintended consequences of the government bailing out poor credit risks?


• What if the decline is a good thing--a correction in the market?


• What if the house was over valued when they bought it? Is that my responsibility?


• This might be a terrific time for people who are savvy investors to buy a house. Prices had gone out of reach for many, and are now more reasonable again.


• Many of the people who took out 2/28 loans were also offered fixed loans for 30 years at a slightly higher monthly cost. If they had done the prudent thing, paying a little more now for more security later, they wouldn't be in this mess.


• Because new rules are being put in place, we're making it impossible for people caught in the first mess, to get out of it.


• This is a small percentage of a small percentage. We won't know for 5 years if this correction is really a tremendous opportunity for the market to correct itself. Do we want to meddle with the market before we know?

One problem I can see coming is that those who bought a home at a fixed rate with money down in a neighborhood where others bought with ARMs and no equity are going to see property values fall as banks foreclose, neighbors file for bankruptcy or owners abandon their property. Next, rents are going to start going up for everyone, because there will be former home owners out looking for a place to live.

Either way, if you haven't been putting money aside for the inevitable rainy day, your wallet is in for a surprise.

4056

Lenders are tightening their standards

Apparently, you're going to need a good credit rating and 10% down to get a home loan. Now that's a shocker, isn't it? Sounds just like 1961 (6%), 1968 (6.5%) and 1988 (10%) the last years we took out a mortgage--although in the 1960s banks wouldn't figure the wife's income in the mix. WSJ had another story today in its series about the subprime market problems. Like the Tiger op ed piece I put into poetry a few days ago, this story uses an Hispanic family. There were a few details in the piece that I'll put at the beginning instead of the end:

When the Montes bought their house
they had little savings (no amount was given)
not-so-great credit (no information on score)
were eating out as a family twice a week
paying $70 a month for piano lessons for one daughter
planning college for the other
taking vacations in Lake Tahoe
had 2 car loans (make and model not given)

When they got the home loan
they didn't read the small print
there is a prepayment penalty--$12,000 before 3 years
didn't realize their property taxes would jump $3,000 because of the new valuation based on their purchase price
they got a 2/28 loan, which means it can reset after 2 years for as much as 30% more in the payment amount when it floats to fixed for 28 years
their payment on the 2/28 was $3,200 a month, not adding in the increase in property taxes
their mortgage, which was actually 2 loans, covered only the interest, which means they were not building equity

I'm guessing that a person with the discipline to have a good credit rating and a savings account would have started putting money back immediately by eliminating the restaurant meals and vacations and piano lessons, knowing they had only two years before the crunch would come. But they didn't. They counted on refinancing the house, fantasizing that home values would continue to go up. They didn't, and the house is now worth less than they paid, plus they have no equity built up. They hope to hang on to the house by working some additional part time jobs and making the cuts they should have done two years ago.