October 01, 2008

A brief snapshot of why the worldwide financial system is melting down


I don't usually cover the microeconomic homedebtor-in-distress stories out there, and trust me, there are millions of 'em, but this one caught my eye.

Here's what's happening all over California, and all over America today. And this is why Congress should make it illegal to 'buy' a home without 20% down. Period.

Here's the process of home'buying', circa 2005:

1) Listen to a realtor on commission
2) Rent money from a bank in order to overpay for a home that's not yours
3) Watch home plummet in value in a matter of days
4) Even though you can make the payments, walk away, screwing whoever owns your mortgage
5) World economy melts down
6) US taxpayer pays for your stupidity by buying up the bad mortgage

In May 2006, at the height of the housing boom, Karen Trainer bought a $500,000 apartment in California - with money borrowed from her bank.

By this year, Karen still owed $500,000 on her mortgage, but her apartment was worth $200,000 less. So she was deep in negative equity and, to make matters worse, the interest rate on her loan was about to increase.

"I thought 'this is crazy'," Ms Trainer says. "It just does not make financial sense. Is the bank going to pay for my retirement because I was a good girl and paid my mortgage."

As a successful professional, Karen could comfortably have managed the higher mortgage payments her bank demanded. Instead, she decided to stop her mortgage payments altogether and let her bank repossess her apartment. Her credit record will be badly damaged by the decision, but Ms Trainer expects this to recover soon.

"Generally speaking, within 5 years you are about back where you were, so my husband and I decided we'll take the hit and live with it."

51 comments:

bitterrenter said...

Guarantee that she and the hubby are McCain voters.

Anonymous said...

Livin in sac and let me tell you...they are also keeping the BMW, boat, $10,000 diamond, harley, and living rent free for a year while the bank rolls around to the forclosure process. At least they are artificially propping up the economy by using their mortgage $ to feed their "coach" bag obsession. Coach is SO last year...like flying coach now...no longer a status symbol tards...

just another taxpayer said...

I wanted to to send an email to my senator to vote no on the bailout... but the email website is overloaded and redirecting back to senate.gov...so I decided to call...her voice mailbox is full. awesome.

Anonymous said...

Anybody 100s of thousands in the hole would be a fool not to walk away.

Think of how long it would take to pay that off.

All the free market lovers out there embrace this.

All the socialists hold up your hands.

tom12008 said...

She's also an inductee in the Housing Bubble Hall of Shame, which she deserves.

Anonymous said...

It really makes you scratch your head...do any of these people have any sense of responsibility.

There are stories just like this one everywhere. If I pick 5 people I know, I can find you 2 stories just like this one. I live in Southern California and this story repeats all the time.

Ex I have a friend who is in the process of moving back from Phoenix to LA. He bought a house in Phoenix back in 03', but he and his wife needed a bigger house...so they went "all in" for the McMansion (Neg Am of course) in 06'. Of course they also added a HELOC and spent another $100,000 having fun and buying more junk. Well, recently they have decided that its just not "right" to have the payments going up, up, up when their value is going down, down, down. Their plan, they hired a 6%er and are asking their lender for a short sale. If they don't get it, they are planning to walk away. No remorse. In fact, they are bragging about it. Its hard to even look this couple in the eye anymore.

I bought a house in 95' and sold at the peak in 06'. Walked away with my "equity" and have been renting for the last 2+ years. I am no financial genius but following blogs like this one, the thedailyreckoning.com and of course a number of other well schooled economists. I am safely on the sidelines.

Thanks to all of you folks for saving my ass.

CorgiGuy said...

Keith love your blog, my first post.

This video from KCET in Los Angelse titled Foreclosure Alley was a shocker to my senses since I live in the Inland Empire where the video was filmed and it really documents the nature of the problem and who is affected by it.

Anonymous said...

"As a successful professional, Karen could comfortably have managed the higher mortgage payments her bank demanded. Instead, she decided to stop her mortgage payments altogether and let her bank repossess her apartment. Her credit record will be badly damaged by the decision, but Ms Trainer expects this to recover soon.

"Generally speaking, within 5 years you are about back where you were, so my husband and I decided we'll take the hit and live with it."


Typical, stupid, self-centered American bitch!

A "successful professional"? Professional what? Probably something in sales. People in sales, more than anyone else, tend to have sociopathic personalities.

Anonymous said...


bitterrenter said...
Guarantee that she and the hubby are McCain voters.


Unless you can prove it or back up your guarantee, shut your stupid mouth!

Anonymous said...

That Adjust Rate Mortgage is going to be higher if the LIBOR Rate keep on going up.

http://www.forbes.com/markets/
2008/09/30/briefing-closer-
credit-markets-equity-
cx_ss_0930markets29.html

The London interbank offered rate, a key measure of banks' willingness to lend, has surged in recent days and Tuesday was no different.

Overnight Libor spiked to 6.88, from 2.56%

pwnd said...

would love to see a law where in order to walk away from a mortgage you had to declare bankruptcy. always thought you had to. Why doesn't the bank sue them for the money they owe??

Anonymous said...

Coach is crap made in China but women all have to have it. Nearly every girl I see has a Coach bag. If everyone I saw was wearing Rolex, Vacheron, or Patek, I would be wearing something different. Back to the story, if she borrowed 500k and the bank only sells the house for 300K, then she gets a bill for 200K. The bailout bill is to get the borrowing going again. America's biggest export is debt. Nice work until the bill comes due, which is aroung 2012 when Boomers start to cash out of the common stock casino.

patrat said...

corgiguy, thank you. Stunning and sad. Feel sorry for the people - it was probably pretty easy to get talked into this stuff not too long ago. "Suzanne researched it!" Who can blame someone for wanting it. Makes me think of James Howard Kunstler a lot - he is so negative, but this kind of confirms it.

Anonymous said...

Use the FEMA camps to good use. Make them debtors prisons.
Use this greedy yuppie couple as an example after striping them of all their assets.

Next in line.

You're Welcome.

patrat said...

The LIBOR rate has a huge affect on the pay-option-arms, which are about to start resetting in April or May of 09. These are the MOST ridiculous loans -you pay what you want and the amount owed goes on the balance. Negative amortization. There were a lot of them sold in those last days of the run-up. That will be another Tsunami for about 3 years, according to the Credit Suisse chart.

mickeyc said...

She made a rational financial decision.
Anyone not making the same choice needs to have their head read. As a business owner I make constant evaluations about the financial ability of my clients to pay. The banking sector abrrogated this responsibility because the government let them know they could screw up all they wanted and they would be saved.
If I misread peoples ability to pay, I go bust.
I would encourage anyone who has made a mistake and bought an over priced property to walk.
The decision has absolutely nothing to do with "morals" as some people have claimed. You want your moral fiber (aka paying an extortionate mortgage) to be used to pay Wall Street bonuses this year?!
If you think like a sheep you will get shorn.

Anonymous said...

I thought my neighbor abandoned her condo, because the mailman was asking she was was. But today I saw her for the first time a over a month, wearing sweat pants, driving her moms car going through stuff in her condo. Everything's in boxes.

She bought the place for 460k, had the kitchen and bath torn out and remodeled, never to use her brand new stainless and granite kitchen.

Lost her job, her car, and now is living back with her parents because I think all the utilities are turned off.

This is what happens when people buy places they cant afford.

Anonymous said...

Congress is better off giving $100 billion bailout plan to US Auto manufacturers then giving $700 billion bailout plan to the failed Investment Bankers because there are better return on investment for the US Tax Payers.

The 100 billion will provide more high paying jobs to the states that needs them the most.

http://online.wsj.com/
article/SB122281787423492359.html

President Bush on Tuesday signed into law a low-interest loan package to aid U.S. auto makers, but those struggling companies will still have to wait months to find out how and when they can tap the $25 billion designated to smooth their transition to building more fuel-efficient vehicles.

The loan package was approved last year as a way to help auto makers and their suppliers meet fuel-economy standards set by the federal government.

But the funding for the package wasn't passed by Congress until this year.

One estimate put the total cost to auto makers at $100 billion to meet stricter efficiency standards that require vehicles to reach 35 miles per gallon by 2020.

Andrew Hac said...

Quote:
"""""
"As a successful professional, Karen could comfortably have managed the higher mortgage payments her bank demanded. Instead, she decided to stop her mortgage payments altogether and let her bank repossess her apartment. Her credit record will be badly damaged by the decision, but Ms Trainer expects this to recover soon.

"Generally speaking, within 5 years you are about back where you were, so my husband and I decided we'll take the hit and live with it."

Typical, stupid, self-centered American bitch!

A "successful professional"? Professional what? Probably something in sales. People in sales, more than anyone else, tend to have sociopathic personalities.
"""""

What do you have to say now, the great Americano citizens ?

Are you all still hubba, bubba, chubba... about Americana being the greatest nation on Earth, and her citizens are first class to none comparing to other human beings from other nations on this Allah-Given-And-Blessed Green Earth ?

Do you want me to post another story about the Great Snapper Turtle or no ?

Oh, I forget: Does the Americano ever find the WMD in the Iraq nation or no ???

Anonymous said...

She's just doing strategic credit management. Any corporation would have no problem doing this, they look at the cold numbers of upside and downside and choose accordingly.

They don't have any moral obligation to long term employees, they're just a number in a spreadsheet. They'd get rid of you in a nanosecond.

Why shouldn't people be the same?

If it's an asset backed mortgage with no recourse (a 1st residential mortgage in CA always is), then the lender gets the asset. That's it, that's what the contract said.

les said...

If the banks are smart, they would never lend money again to anyone who let their house go into foreclosure.

That would definitely discourage people from simply walking away from their houses.

Anonymous said...

Seriously, how can anyone call this people "professionals". Sometimes I wonder how retards can have six-figure salaries, especially those who bought $500k apartments at the peak of the bubble in 2005.

I mean, don't these freaks read anything during the day? They're like Hollywood celebs who are nothing but a bunch of high school dropouts, earning a ton of money with bull$hit, and still have the nerve to endorse presidential candidates.

Frank@Scottsdale-Sucks.com said...

Her credit record will be badly damaged by the decision, but Ms Trainer expects this to recover soon.

The sick part is that credit is treated like one big bell curve in most cases - your score is compared vs. the average, and the average is about to go WAY down.

I'm sure she's voting Obama, who represents the very concept of "getting something for nothing" and promises it to everyone.

It's pretty sick that the winners of elections today are determined by which candidate promises to hand out the most free sh*t.

Anonymous said...

Mortgage Mess Cartoon for the Lay Person...

http://www.suburbanhousehunters.com/about/mortgage-crisis/

Anonymous said...

All the gamblers that have loss now over the gambling decisions they made are
either walking or asking for a bail out ,( the banks ). While I do not believe that the gamblers can pay in full for their gamble ,at least they should pay something .

A talking head said today that Europe has even a greater housing bubble and it makes the United states look good .

Anonymous said...

All the free market lovers out there embrace this.

All the socialists hold up your hands.

--------------------------

um, I think you mean "hold out your hands", don't you?

Anonymous said...

Guarantee that she and the hubby are McCain voters.

----------------------------------

uh, no. only democrats would be that stupid to buy an apartment in CA for 500k.

Anonymous said...

bitterrenter said...

Guarantee that she and the hubby are McCain voters.

-----------------------------

only yamyam would say a thing like that.

Anonymous said...

bitterrenter said...
Guarantee that she and the hubby are McCain voters.


Unless you can prove it or back up your guarantee, shut your stupid mouth!

----------------------------------

but that is not the way of liberals. Prove something? say something actually based in fact?

No, name calling and degrading your opponent is the compassionate liberal way.

Anonymous said...

As a successful wall street investment Bank, Bear Sterns , Merrill Lynch, Lehman Brothers, etc could comfortably have managed the mortgage portfolios. Instead, they decided to stop using sound banking standards altogether and let the government repossess the bad loans. The banks credit record will not be badly damaged by the decision, but Mr and Ms Banks expects this to recover soon.

"Generally speaking, within 5 years after the taxpayers "government" buys all your bad mortgage debt you are about back where you were, so the banks decided we'll take the hit and live with it."

fast actin tinactin said...

Now that's the picture I want to see on the cover of TIME mag.

Anonymous said...

That video is sad, but I see what happened there. As a low-income renter, the same thing has happened to me. Lost my job, had to move, couldn't afford a moving service, stuffed my car to the gills with what I could, looked around at the stuff I couldn't take, felt helpless that I couldn't take the rest, then turned and fled, leaving the rest. That family would have taken that stuff if they could have, but they were broke and desperate, proving how precarious was the hold they had on that profligate lifestyle. But many people are short-sighted and impulsive. Dumb and dangerous, but true.

Anonymous said...

What do you have to say now, the great Americano citizens ?

Are you all still hubba, bubba, chubba... about Americana being the greatest nation on Earth, and her citizens are first class to none comparing to other human beings from other nations on this Allah-Given-And-Blessed Green Earth ?

Do you want me to post another story about the Great Snapper Turtle or no ?

Oh, I forget: Does the Americano ever find the WMD in the Iraq nation or no ???


Andrew Hac (if this is the real one) has jumped the shark.

Megs said...

bitterrenter said...
Guarantee that she and the hubby are McCain voters.


Unless you can prove it or back up your guarantee, shut your stupid mouth!

October 01, 2008 4:38 AM
_________________________

Ditto.. I am sick of you guys assuming the worst of McCain and his supporters.
__________________________

Guess what? I lost 20k when I tried to sell my house in KY to take a job in Fl... In order to sell the house, I took a personal loan to cover the difference.. b/c I am honest.

I am not stupid, nor completely self-centered. I entered an agreement with a company for a loan and when I sold my house 2 years later.. the market was imploding and I decided better to lose money and get out of it and move on..

my credit score is over 800.. I was "rich" according to Obama making almost 160k last year.. ironically got laid off from the fortune 10 company I worked for 8 months after i moved to florida.

Bottomline.. common sense is that if you make a deal with someone, you do what you need to do to keep your word. the woman in this story is not professional, nor conservative b/c she seems to have entitlement attitude.

I'm one of the adults i guess trying to do the right thing even when it's unpleasant.

It's life.. you take risks some pan out, some don't. I am happily renting, just got a new job and will eventually buy a very affordable home when this market bottoms..

happy days are ahead of us!

Anonymous said...

megs,

When she made the deal with the bank for the mortgage the law was that if she walked away the bank got the apartment and that's all.

Hence that was the deal the bank agreed to. Exercising call options when the strike price is above the market price is retarded - and that's what you think she should do???

The bank new the rules when they loaned the money, if they mispriced the risk that's their problem.

Anonymous said...

Some great statements in here.

Keith, I think the next outrage and email campaign to Senators has to be about all the $30k millionaires who lived like kings whilst sensible people behaved,... sensible, and got screwed then and continue to get screwed. A third of So. Cal is living in beautiful homes rent free for 18 months, driving Escalades and still frequenting the fancy restaurants because they have no mortgage to pay.

They will eventually go rent but still have the Jet Skis, boats, Rolexes, gold coins; you name it, stolen from American tax payers. Even today they still are getting a better deal than us because they don't have a mortgage or rent payment.

Let's start putting some heat and the spotlight on these people, who share the blame with Wall Street for getting us into this mess.

GT Charlie

Anonymous said...

I see why she walks, however she is just another example of Americans not accepting responsibility for their own actions....a disgrace to be sure.....after all, did the bank do anything wrong?

bitterrenter said...

How do I know they're republicans? Because they're superficial, greedy and have no sense of shame for what they're doing. When it comes to money, that is the way of the republican. Money is sacred and anything they can do to get their hands on it is a-ok. I mean, we're talking about an ideology based on greed whose adherents would eat their mothers if they thought they'd shit money.

Republicans often live beyond their means because for them, being shallow and incredibly materialistic is a way of life. They must "look" prosperous to impress their friends and neighbors. It's everything for them. That's why they hate paying taxes to support the country they profess to love. It takes away money they could be spending on more crap from the mall that will further convince their friends and neighbors of how superior they are due to their many possessions.

We all know republicans are like this. It's no secret. It's like saying gay people can decorate well. A stereotype but with a basis in reality.
----------
Some blogs, like this one, aren't run by Nazis who censor opinions they don't like. Portland Housing Blog is run by one of those Nazis. As expected, he's a republican shitheel.

Anonymous said...

"I thought, this woman is both stupid for paying $500K for an apartment and crazy to think that I should pay to bail he out," said anonymous.

Anonymous said...

I view her action & the action of the masses of sheeple just like her as justice. The sheeple woke up and realized they had been taken and now they are just out flanking the corrupt bankers who forgot that as long as its not a recourse loan then they are on the hook for figuring out how to recoup the losses associated with the sale of an asset that is so overvalued that it cannot satisfy all liens. Multiply this loss by a few million awakenings by the sheeple now "walkers" and you have just desserts and rewards to the banks that gamed the system to make/maximize their profit on the transactions and pass the risks onto the greater economy.

When the bailout was for individuals and the banks would take a 25% haircut on each loan it was "Welfare." Now that it was defeated and everyone has or is walking and sticking it to the banks who will now take a 50%+ haircut its "Saving the Economy" when it is really nothing more that Corporate welfare. Sorry but rough justice and individualism is for both the little guy and the banks and not just the former. I say bring on the recession and/or depression and watch all the banks implode. Justice, sweet Justice. They will never play this game again if we just let it happen.

ARCHIE said...

YOU GOTTA BE REALLY, REALLY STUPID TO BE A REPUBLICAN LAPDOG.

Anonymous said...

What does it all represent but massive wealth transfer and massive inflation? Banks will fail, maybe all of them, and thus depositors will lose some money, maybe all of it, who knows? But was any money destroyed? No, it was printed in enormous quantities, the world economy was flooded with dollars. People sold their 50K sheetboxes for 500K, 450K of which in the best cases was money provided simply as fiat currency. Then the -450K on the balance sheet was sold and resold in a big virtual reality money market. But no money has been destroyed. It's all out there stored up or sloshing around, driving up the price of everything worth trading. That's right, real estate isn't worth trading, for the most part, it isn't worth much unless you can rent it for a profit, and you can only do that when there are businesses that can pay. The vast quantities of paper that have been created are going to go into something, I would imagine. Who would want to hold a bunch of paper that's rapidly losing it's value. It looks like it's the beginning of the end of the dollar as the world's reserve currency.

Anonymous said...

The Tragedy of How Housing Wrecked America: What act are we in?

DAve said...

It would be SIMPLE to make walking away so damaging financially through tax assessments or huge credit dings etc...
that people would be more "motivated" to fulfill their obligations.
If we don't we're going to lose everything I'm afraid.

Anonymous said...

DAve said...
It would be SIMPLE to make walking away so damaging financially through tax assessments or huge credit dings etc...
that people would be more "motivated" to fulfill their obligations.
If we don't we're going to lose everything I'm afraid.

October 01, 2008 7:52 PM
-------
We've already lost everything. Where have you been.
Legal obligations that are the result of a gaming of the system by the banks to me are contrived and therefore do not hve to be honored. What's good for the goose ios good for the gander and its survival of the fittest (not the foolish). If the banks were not so foolish they'd have foreseen this as the product of what the sowed and they would not have done it!!

Refuse to buy overpriced said...

If Pennsylvania Governor Ed Rendell had his way, they wouldn't even have to worry about a negative impact on their credit score.

Anonymous said...

Refuse to buy overpriced said...
If Pennsylvania Governor Ed Rendell had his way, they wouldn't even have to worry about a negative impact on their credit score.

October 01, 2008 10:16 PM
--------
Good for him & the citizens of PA. But out side of Philly I do not think much of the bubble perked up in PA

AmazingRuss said...

"It really makes you scratch your head...do any of these people have any sense of responsibility. "

People have been punished for taking responsibility for too long. If you're identified as responsible, a line forms of people wanting to use that to f*ck you over.

Gotta adapt, or become extinct.

Anonymous said...

F you bitterrenter!

I know a couple in the Sacto area that bit for 650 on the first, added another 200 just to f around and add a pool and the like, and now that their POS mcBox is worth about 400k, they are towwing the keys to their stupid lender.

Guess what/ They have obama signs all over the front yard of their soon to be repo'd POS.

So don't give me the Mccain shit you a-hole.

bitterrenter said...

There's always exceptions to the rule but generally, republicans are the shallow, money-obsessed freaks of nature.

jahman said...

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http://patdollard.com/2008/10/it-is-here-the-banned-snl-skit-cannot-hide-from-louie/