Posted on 04/25/2008 7:52:37 AM PDT by Notary Sojac
....there's one piece of the mortgage-meltdown tale that virtually every article or television program dances around without ever quite confronting. It's the story of the liar's loan.
At the height of the mortgage boom .the liar's loan became a routine way of doing business;.in 2006 in some parts of the country, these loans made up as much as half of new mortgages
Imagine a city center where running red lights isn't something occasional .... but where everybody does it all the time. That's a lot like the mortgage market one or two years ago.
Of all the problems in mortgage world, the liar's-loan crash was the most foreseeable. Knowledgeable observers were already sounding the alarm in 2005. But it wasn't until the next year—as lenders were furiously writing ever more such loans—that the hard data started coming in....
None of this could have happened without everyone's willing participation. If a car rental agency put up a huge sign saying, "We don't check your driver's license," you wouldn't imagine it really meant anything but "Come on in, we don't care if you have one." The word fraud really doesn't conjure up anything close to the real moral or financial reality.
...in some places ..... half the people in the market were taking out stated income loans and so bidding up prices to points where almost any house became impossible to finance for someone who did not lie.
In ordinary circumstances, the people and institutions you deal with reinforce social norms. They say it's not OK to lie. But what happens when the structures and institutions break down and start telling you the opposite?
....once you get to that point, it's hard to get back. You don't just have to restore the structures. You need to restore the norms, too.
(Excerpt) Read more at slate.com ...
We are in maybe the 3rd inning of the housing crash...
“Out of 100 loans, more than 90 of the applications overstated the borrower’s income at least a little. More strikingly, more than three out of five overstated it by at least 50 percent. This isn’t a few people fibbing a little. This was the whole system breaking down.”
Yet we are supposed to bail these people and banks out???? I don’t think so!
There is a solid reason why for years the standard was:
20% down (maybe 15%, rarely 10%)
30 year fixed rate mortgage (and if you could afford a 15 year mortgage, go for it!)
Similarly, for years to get a credit card you actually had to have a really good credit rating.
These examples are why it’s not nice to fool Mother Nature.
The most utilized product in my portfolio was Countrywide's "Fast & Easy". It was pretty much a No Income, No Asset verification loan. There really was no reason to go with a different product for the people who qualified for it. It was simpler, easier, quicker, and the rate was the same, and sometimes better than a comparable full doc loan.
Its basic guidelines were a 720 middle score or better and at least 10% down, or an LTV of no greater than 90% on a refinance.
Unlike a lot of the liar loans, with the F&E, you had to have solid credit and at least 10% skin in the game. The liar loans that are going bad are the ones that had lower credit requirements and would go to 100%.
I would be interested in how the Countrywide F&E loans are performing. I suspect they are not suffering from late payments and foreclosure at near the rate the other liar loans are.
Great article - however I made the mistake of reading the reader comments - nobody got the message or wanted to get the message - they just wanted to blame some institution. I played by the rules, rented until the market was right & still bought a smaller house than people I know who make less than I do. I don’t feel sorry for anyone caught up in this. It’s really simple economics.
Lots of Floridians and Californians who refi'd to 90% LTV in 2004-05 are now seriously underwater and considering mailing in the keys.
The only safe lending guidelines which could have been used in those years would have taken into account the fact that real estate was in a classic speculative bubble, with the inevitable "pop" on the way. I'm not aware of anyone in the business at the time (perhaps you are?) who was willing to confront this.
HA! Try turning down someones loan application on the basis that "well, in a year or two I think your homes value is going to have dropped by 20 to 30% so I can not approve this 10% down loan."
See how fast you're sued and the regulators come in and shut you down.
It’s happening right now in the bubble states, I don’t see anyone being shut down because they are returning to conservative lending standards.
We didn't do a lot of Countrywide, but your description was prevalent in southern Cal with many lenders. We've heard that Countrywide owned half of Murietta CA and they sold several large bundles of foreclosures for down to 65 cents on the dollar.
We were in a company where associates would stand up and brag about buying multiple homes at 100% per. They even borrowed from different lenders on multiple simultaneous buys.
I reported this to the department of Real Estate before we left the company. No one ever called or contacted me in any way. No sanctions on the company or investigations of the borrowers who were licensees.
The company has had to close 3/4s of their offices though and I don't know how many people they put in jeopardy with their marketing approach.
Find for me a single person with solid A+ credit, and 10% or more down who has been declined for a mortgage to purchase a home and the denial letter said, "we believe your home will be worth less than you owe in 2 years" or something to that effect.
This is easily solvable the gubberment just needs to print more cash. They do it all the time. That way we will all be debt free. Pay off all loans. If our gubberment can do it for foreign countries and the world bank they can surely do it for their own citizens
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