Subprime Woes
I heard something on the radio yesterday that ticked me off. That’s nothing new, really, I listen to a lot of NPR, and there’s often news and politics involved, which often ticks me off. So of course yesterday the big news was the subprime ‘bailout’, a move by the Bush Administration to help a few of the folks out there who are destined to lose their homes because they will not be able to afford the higher payments once their mortgages reset into a higher interest rate.
There’s an assumption among many that these people deserve to lose their homes, because they were gambling anyway, and took on more debt than they could afford. They should have known that they couldn’t afford the payments, and not to get into the housing market to begin with. Idiots. Right? Not so fast. First of all, here’s the thing that ticked me off on the radio yesterday. Many, many of these folks were not your typical candidates for a sub-prime mortgage. They were people who already owned their homes, and were refinancing to take advantage of their equity in order to pay off some high-interest credit card debt, make improvements, etc. They were taken advantage of by shady mortgage brokers. Why? Why would a mortgage broker talk someone into an adjustable loan where payments are going to skyrocket in a few years, when they would easily qualify for a 30-year fixed rate mortgage? $$$. That’s right, the banks pay the mortgage brokers more money for getting folks in under risky, high interest loans than they do for more stable loans. And why might someone fall for it? Because they are told, don’t worry, when the rates go up, you can just refinance, it will be no problem. But now, they’re having trouble refinancing because of the credit crunch, and they’re stuck in bad loans. Housing prices have fallen in the last year or two, and if you’ve only been paying interest on your loan, which many of these folks have, you don’t have enough equity to refinance. So you’re stuck.
Then of course, there are the people who were first time home owners, who ‘should have known better’. Again, predatory practices by the mortgage industry that allow shady brokers to talk people into the idea of home ownership, when perhaps it just isn’t the right option for them, put people into loans that they cannot afford. I can’t tell you how many times we’ve been talking to someone about a home loan, or a car loan, or whatever, and they say something to the effect of, “Don’t worry, in 5 years time you’re bound to be making more money than you are now, so this is the right choice for you.” And, um, what if I’m not making more than I am now? What if the dot.com bubble bursts, and many folks salaries are put more in line with their skills, rather than folks being paid obscene amounts of money who are still learning on the job? What if I work for a company that has a pay-freeze, and yet inflation, health care, and gas prices mean that, in real dollars, I’m making less than I was 5 years ago? Who is going to pay for that mortgage/loan/car/whatever then? That’s right, I am. Luckily, we’re cautious enough that we’ve never taken a loan assuming that we would be better off in 5 years than we are now, but the brokers can be mighty seductive. And, it seems to me, they have a fiduciary duty to deal right with you. Because the world of mortgages, like law and taxes, is complex and convoluted, they have the knowledge, and you don’t. Which means that it is extremely easy to take advantage of people.
Now, whether the government should be involved or not, I’m not sure. I would argue that they should have been watching what was going on a few years ago, and that they shouldn’t have kept the interest rates abnormally low for so long, encouraging people to get into loans that they couldn’t afford. But we are where we are, and something should be done. The right answer, though, doesn’t seem to be to freeze interest rates for 5 years for those few people who will qualify for the program. That’s just putting the problem off until someone else is in the White House. Instead, wouldn’t it be better for those folks to be allowed to refinance, into better loans, which even if not at the most preferred interest rate that someone with a FICO score over 750 would get, could at least be manageable? And who should pay for the closing costs? I’m thinking the banks that paid the brokers more money to sell bad loans than good ones, and the shady brokers that took that money, at their clients expense.
This is a complicated mess. I’m glad I’m not caught up in it. (And of course, I am caught up in it, because it affects our ability to sell our home, and it’s affecting the overall economy, so you’re caught up in it, too.) It really is ticking me off.Â
14 Comments
Curiositykiller
GREAT post. It’s insane how many mortgage options there are out there now, and each one is becoming more attractive than the other with the future calculated in the whole package. It’s an educated guess, not a guarantee of any sorts. I know some people got in some serious trouble. Sigh. People really need to do their research before taking any steps nowadays.
MsMamma
I find the whole situation disgusting. Common sense tells you NOT to take a loan you can’t afford if the worst case scenario happens. It’s about greed…making money by giving loans to people that wouldn’t have otherwise qualified for them. It’s very unfortunate, but I still don’t think the government should bail this situation out. I think it goes against capitalism in general. Call me a beotch, but I say tuff titty.
Maya's Granny
It makes me mad when people are victimized and then get blamed for it. Yes, if you are stupid enough to be caught in the same trap twice, but for people who simply don’t have the information and are caught the first time? Unfair. Many of the subprime borrowers come from families that have never owned a house, and their basic knowledge is much less than that of families who usually own a house.
Laluna
Well, this is a tuff issue. On the Mortgage Broker issue, well, the same Mortgage broker that you used when you bought your home, was one that pulled a real fast one on me a few years ago when I re-fi. I asked for a fixed 30 year and came out with an adjustable. The whole thing was done very shady and quick, without an explanation that I was really signing for an adjustable. So, it is so easy to be taken when you are so trusting and have limited knowledge of the mortgage world.
J
MG and LaLuna, my point exactly. And, even if one were to say tough titty to the folks that were trapped, and use a ‘caveat emptor’ attitude that they should have known better than to trust professionals who supposedly know a lot more than they do about mortgages and finances, the high forclosure rate affects us all. If other houses on your block are forclosing, because of bad loans or not, then you are affected, because your home’s value goes down. And this effects the economy in general, and pretty soon, people are starting to lose jobs. And not necessarily those who made the poor decisions to begin with.
Cherry
I didn’t think I needed to worry and after watching you and your woes with trying to sell your place, I’m starting to worry.
We were sure we’d be out of our place before our loan went adjustable and now it’s not looking likely. And if this comes true…we’re SCREWED!
WEEeeeee!
Jimmy
Wow! J
You explained that so well!
I just assumed it was the borrowers fault, but you built a strong case for their defense!
Glinda
Unless, as in Laluna’s case, the loan was done fraudulently (ie, saying you were signing for a 30 year fixed and you got an adjustable) I would not be so quick to place all of the blame on the brokers. Yes, they were pushing adjustables because it made them more money.
But, plenty of people were anxious to jump onto the real estate bandwagon, and wouldn’t you think that for something that is the BIGGEST PURCHASE IN YOUR LIFE you would do some homework on mortgages and the mortgage industry? To say that they didn’t know any beter means they were too lazy to go to the library and check out some books.
That is exactly why we did not take out an adjustable rate loan, even though everyone else was doing it. So, in effect, if this rate freeze goes through, we are being punished for being prudent and thoughtful. Because here will be all these people in their nice big houses that they stupidly borrowed more than they could afford (get a calculator and figure it out, for god’s sake, don’t take the broker’s word for it) and here we are, still stuck in our little place.
It makes me so mad I could spit.
LauraH
I am a real estate appraiser by trade and I get to see these people’s troubles first hand. Over 50% of my job (Michigan’s housing troubles began about 4 years ago) is appraising foreclosures. And it sucks. And they are not McMansions. They are a 1100 sq.ft. homes that should never have appraised as high as they did 4 years ago when they’re owners refinance to roll all of their car payments and credit card balances in. The problem with Mr. Bush’s solution is that it isn’t a solution. One, the only people that can be helped with this “freeze” are those that have never been late with a payment. Most people have been in mortgage hell for a year or more of slow paying and missed payments before foreclosure proceedings begin. The other ridiculous part of this “plan” is that the banks don’t have to do it. I’d bet a $100 that most are not going to. It makes me ever grateful that we bought within our means and financed with a 15 year mortgage. I am also angry at the unethical, weak appraisers who let themselves be bullied into inflating values and those who are too stupid to be in the business. As you can tell, this subject is a sore one for me. But then, I just had to appraise a property (heavily conditioned on repairs) that was foreclosed on and then the homeowner took his life in the home.
I don’t know the answers either, but something has to give. Too many decent, hardworking people are now homeless.
One more thing (eek, sorry). I am licensed and have to adhere to USPAP (Uniform standards of professional appraisal practice), a set of ethical standards to which I must adhere or possibly lose my license, be fined and/or thrown in jail. Real Estate Agents must also be licensed and adhere to ethical standards. Loan officers and mortgage brokers don’t have to be licensed and answer to no one on ethical behavior. LO’s and MB’s should have to be licensed. It’s disgusting.
hellomelissa
when we bought this home 6 yrs ago, a broker told us we qualified to own TWO homes, and gave us a shockingly high number of what we could afford in a new home.
we chose to sell first, and buy a home at HALF THE PRICE of what we were told we could afford. then the broker tried to hustle us into an a.r.m. when 30 yr fixed rates were 5 and 5/8! we said no thanks.
we could have been one of those folks in foreclosure had we listened to anything she said. getting by month to month is difficult enough with the choices we DID make.
bibliomom
I found this post and the accompanying thread of comments insightful and interesting! I’m no longer a home owner and I saw a very interesting news story about how all of the foreclosures are affecting people who rent as well. That many people are finding themselves homeless over no fault of their own. They rent, pay their rent but they owner of the home was foreclosed on and then the families get evicted. It’s a mess for so many people.
Wanderlust Scarlett
I hear you Jules, the housing market in Colorado stinks too… same reasons. It’s a national disaster… so many people are losing their homes.
It’s horrible… didn’t Bush say that he wanted to see every American own a home? I distinctly remember him saying that during the last campaign.
The whole thing ticks me off too.
But, you know what? The holidays are here and there are good things to think about and be thankful for as well.
I’ve tagged you with a Christmas meme that I made… it’s finals week and I shouldn’t have taken the time, but I really had to take a break and this was nice, so please come by and play, and I hope you enjoy.
Can’t wait to read your answers!
Scarlett & Viaggiatore
Susan in Italy
Hm. This gives another meaning to predatory lending.
Py Korry
The “freeze” is just a PR move by Bush to make it look like he’s doing something for the average American, but according to an article I read in Sunday’s SF Chron, the “freeze” is about this:
“The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value – right now almost 10 times their market worth.”
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/12/09/IN5BTNJ2V.DTL&hw=sean+olender&sn=001&sc=1000