Boy, that's a really good question. I'm not in favor of Euro-socialism, but hey, the government does have to serve as the final check on animal spirits and capitalism run amock. Doesn't it? I guess we'll have to wait until the 2008 housing bubble congressional hearings...
Somebody somewhere once told me I'd make a good Trivial Pursuit partner, but any flattery I report about myself is obviously worth what you paid for it. On the other hand, I'm VERY ignorant about the beast known as the option adjustable-rate mortgage, or "Option ARMs."
These let homeowners decide how much to pay each month, beyond a small minimum amount; all unpaid interest rolls into the balance, which of course gets larger with each minimum payment. Yeah, just like a credit card.
So here's what I don't know:
Whose idea was this, and who said it was actually okay?
The government finally seemed to say "It's not okay," in public remarks by the Comptroller of the Currency, as reported by the Washington Post on Dec. 10. The story's lead was, "Federal financial regulators appear to be on the verge of reining in one of the most popular mortgages in hot housing markets nationwide."
But yesterday's Wall Street Journal said that fears of a "regulatory crackdown on option-ARM lending practices… turned out to be more bark than bite." Why, then, did regulators suggest a "crackdown" and then fail to crack down?
After five years or so, Option ARMs can push monthly payments higher by 50% to 100%.
Exactly how small was the print in the contract that explained this clause to the borrowers?
Borrowers who do know about balloon payments apparently believe that "double-digit appreciation" in home values will continue, and in turn bail them out of the heavy debt load. Why do they assume that past performance is indicative of future results?
Lenders who get the minimum payment on Option ARM mortgages are actually able to book the full monthly payment into their earnings. Why is this legal?
"The banks' loan-loss reserves are low, by historical measures," even as Option ARMs comprise dramatically higher percentages of their mortgage portfolios. Why is this legal?
As much as 80% of recent mortgage loans have been "low documentation," which means banks know very little about the creditworthiness of borrowers. As many as 13% of these borrowers are NINAs -- "no income, no assets," which means "customers get mortgages without disclosing their income and assets." Why is this legal?
There's more I don't know, but you get the idea. Here's what I DO know: even the very few people who see the real estate bubble for what it is don't grasp what will really happen to the economy, when that bubble bursts
February 02, 2006
It's one thing for banks/investors/homebuyers to lose their minds. It's another thing for the government to let them!
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13 comments:
"even the very few people who see the real estate bubble for what it is don't grasp what will really happen to the economy, when that bubble bursts"
How about this as an example (from your picture): Google's revenues will take it in the shorts as all of the refinance and real estate related ads are pulled. So much for the expodential growth rate and inflated P/E.
Why is it legal?
Simple answer:
It's the new new "free market". Socialize risks, privatize rewards.
Borrowers get it good. Banks get thumping profits now---CEOs get big fat bonuses and massive stock options. They will know before anybody else when the worm is going to turn and they'll sell.
Because they know that the government ---i.e. taxpayers---will bail them out. Stockholders of the bank who aren't sophisticated will lose---e.g. big pension funds or index funds---the general public.
There is motivation for the banks to go balls-out. Because if they lose a little bit of money, they have to suck it up. If they lose a huge amount of money---it's somebody else's problem.
So they can take enormous risks now to get big profits now, with foreknowledge that this will pay off better (for themselves personally) than prudence.
And everybody has to be doing it---because then nobody's to blame.
"the government does have to serve as the final check on animal spirits and capitalism run amock. "
Not really. What is capitalist about a banking cartel called Federal Reserve Bank which fixes interest rates or a realtor cartel called NAR which fixes commission ?
We need more capitalism, not less.
In the capital of the housing bubble - California - the default rate is rising.
As much as we differ on the homebuilders being a good short. Iw ould have to say the mortgge companies short with the home builders as long for a hedge makes a great investment.
Any recovering the mortgage companies go through will rally the home builders with their low risk and low PE well beyond your lost on the mortgage company short.
If the home builder do dive. The mortgage compaines witheir high risk will crash.
Either senerio you will win
The most likely senior is. Homebuilders continue to profit and rise while the over extend customers of the mortgage companies crash. Now you make a killing.
What is really scary about these finance companies is how isolated they are. Some of them have 90% of their loans made out to people within a 100 mile radius of their corporate office.
Availabilitiy of credit is good, I agree.
However, what is happening here is not a fair and legitimate market.
Against unsophisticated borrowers, there is strong propaganda ("you'll never be able to afford otherwise") combined with specific financial motivation to brokers to push them into horrible junk loans.
This was like the stock market in the 1920's, "bucketshops" and ridiculously hyped stocks. Real estate has been just like this.
There's a reason there are regulations.
Regulations attempt to prevent "information crime"---fraud based on the different amounts of knowledge and information that two parties have in a transaction.
Soon the government (Republican dominated) will blame Freddie and Fannie, who have some responsibility.
But in truth, that will be another covert attack for the benefit of wealthy banks. Reason is that Fannie & Freddie generally only securitize conforming mortgages---ones with more conventional lending standards, and do so at a comparatively low cost.
The private banks---who are responsible for allowing much more egregious underwriting standards---are jealous at Fan and Fred for "taking away" too much business that they feel is "theirs" and they want it back.
So, even in the inevitable backlash, be suspicious for covert motives: follow the money.
I have no doubt that the political response will be to castrate Fan and Fred (eventually hurting the less wealthy part of society) and bail out the big banks and see lots more money go to Republican finance committee members who do their bidding.
"interesting concept- every free and not so free nation on earth has free or cheap healthcare- except the USA-
perhaps that is one reason these nations are eating our lunch
the sooner this country realizes this- the more in the future we will again be able to Compete
if you cannot see that-damn are you dumb"
Thank you for your wisdom, Yoda... Glad you got that all figured out. Socialized medicine has abysmal quality and the countries that try to practice it go broke- look at the European Social-Democracies. Germany, France, Italy, etc. They once HAD 'Cradle-to-Grave' social 'safety nets', rampant unemployment, horrendous tax rates and they STILL go broke. Look at California, liberal state government, maximum government involvement, free healthcare for everybody (except taxpayers), free condoms, free heroin needles, the 5th largest GDP in the world and 40 Billion in debt. Fantastic performance, huh? If you like socialized medicine and dependency upon a government so much, then move to France or Germany or Canada. There are VERY few things that any government does well. Providing free health care and preventing careless people from doing stupid things are not on their 'short list'.
Demonizing Greenspan does not explain why individual homeowners made these decisions. Greenspan did not make them buy homes with ARMs, HELOC and piss away the money or prevent them from understanding simple math. Greenspan also was not responsible for OPEC production levels, my cat getting knocked-up, hurricanes, droughts or any other natural disaster that occured during his tenure. You could just as realistically blame Hugo Chavez or Chairman Mao- neither one of them forced homeowners to overextend themselves financially either.
I'm a firm believer in the bubble markets- trust me, I'm renting in Orlando- but the idea that ONE GUY is responsible for all of this is VERY two-dimensional thinking and it will not help sort out the debris after the smoke clears. Some homeowners as individuals (this is still a 'Free Country, remember?)made some stupid choices and as always, they will have to face their individual responsibilities.
Tomorrow a lot of people will get into their cars and go a lot faster than they know is safe and legally allowed. Some of them will get speeding tickets and have to pay a fine- or worse. Are we going to blame the head of the Department of Transportation for all of those tickets and accidents? I'm going to go outside now, crack a beer and light up a cigar. Cigars are bad for me. Neither the Chairman of Phillip Morris nor Greenspan is forcing me to smoke it.
I think what you are talking about is "the lender of last resort" sort of thing. The problem with that, to be effective, is that the lender of last resort has to convince people that it is very unlikely to lend while at the same time always lending during dire circumstances. Otherwise, everyone will always act crazily because they know the lender of last resort is always there to bail them out.
Anonymous said:
"Socialized medicine has abysmal quality and the countries that try to practice it go broke- look at the European Social-Democracies. Germany, France, Italy, etc. They once HAD 'Cradle-to-Grave' social 'safety nets', rampant unemployment, horrendous tax rates and they STILL go broke. Look at California, liberal state government, maximum government involvement, free healthcare for everybody (except taxpayers), free condoms, free heroin needles, the 5th largest GDP in the world and 40 Billion in debt. Fantastic performance, huh? If you like socialized medicine and dependency upon a government so much, then move to France or Germany or Canada. There are VERY few things that any government does well. Providing free health care and preventing careless people from doing stupid things are not on their 'short list'".
Actually, socialized medicine works very well in Australia, Japan, France, Germany, Greece, Spain, all the Scandinavian countries, Estonia, and much of the world. The debt of many of these countries has little to do with medical care. The Isle of Man, part of the UK, has a flat 10 percent income tax that is more than enough to provide everything government covers, including socialized medicine. But, on the mainland, where the taxes are far higher, government is far less efficient.
Welfare is another issue, and often a disaster when it is given to immigrants who come to expect it (as in France, and California), but greed in the form of outrageous doctor bills, outrageous hospital bills, outrageous drug bills, etc. cannot be ignored. If so many people were not milking the system to get rich, the problem would be far less serious.
More than half of our medical costs go into the pockets of insurance companies. Cut them out, and watch prices drop. When you pay 20 percent of your unadjusted medical bill, and they pay 80 percent of their negotiated, set-fee (much lower) version, you often end up paying more than they.
Incidentally, Canada comprises several provinces, each with its own medical system, so you cannot generalize about socialized medicine there. In some provinces, it works very well; in others (where, for example, elective face-lifts were being financed till recently) it works less well.
The only Americans I've encountered who rabidly oppose socialized medicine are those profiteering from the current system: doctors, hospital administrators, insurance company employees, drug company investors, etc. Follow the money and you'll see who they are.
I like this blog, and the examples presented, but what a bunch of liberal, socialist posters...except for the cigar and beer guy. He rocks. Grow up people, and listen to the beer and cigar guy.
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