Subprime Artistry
February 17, 2008 11:00 AM Subscribe
The Subprime Primer. [via] An entertaining, lo-fi, comic-book style explanation of the complex Subprime Mortgage mess.
would be better if you didn't have to login to google to see it, but that was a pretty good explanation.
posted by empath at 11:19 AM on February 17, 2008
posted by empath at 11:19 AM on February 17, 2008
Yep, that about sums it up, even if they misspelled "Cayman" and "tranche."
posted by ikkyu2 at 11:20 AM on February 17, 2008
posted by ikkyu2 at 11:20 AM on February 17, 2008
Surprise real-time chatting. With snarky people.
posted by sonic meat machine at 11:25 AM on February 17, 2008
posted by sonic meat machine at 11:25 AM on February 17, 2008
But it's got Comic Sans! That makes it a comic, doesn't it?
posted by echo target at 11:32 AM on February 17, 2008
posted by echo target at 11:32 AM on February 17, 2008
I like this summary better. Although the illustration might not be much more illustrative.
posted by echo target at 11:41 AM on February 17, 2008 [2 favorites]
posted by echo target at 11:41 AM on February 17, 2008 [2 favorites]
"Surprise real-time chatting. With snarky people."
so, it was a link to Metafilter??
posted by HuronBob at 11:51 AM on February 17, 2008 [1 favorite]
so, it was a link to Metafilter??
posted by HuronBob at 11:51 AM on February 17, 2008 [1 favorite]
damn, i thought the headline was "submarine primer". would have been perfect timing as I'm currently watching Red October...
posted by spish at 12:06 PM on February 17, 2008
posted by spish at 12:06 PM on February 17, 2008
Well, HuronBob, I would assume that most of the people chatting (and snarking) were mefites, yes :)
posted by sonic meat machine at 12:09 PM on February 17, 2008
posted by sonic meat machine at 12:09 PM on February 17, 2008
Joe Flaherty in chat about subprime interest rates? Count Floyd?
posted by kingfisher, his musclebound cat at 12:10 PM on February 17, 2008
posted by kingfisher, his musclebound cat at 12:10 PM on February 17, 2008
I'm not sure what is so complex about this issue. Greedy banks suckered people they wouldn't have even talked to a few years earlier into signing financial time bombs disguised as mortgages, then packaged and sold the mortagages to greedy investors as "securities".
When the time bombs eventually went off, the results were fairly predictable.
posted by hwestiii at 12:10 PM on February 17, 2008 [2 favorites]
When the time bombs eventually went off, the results were fairly predictable.
posted by hwestiii at 12:10 PM on February 17, 2008 [2 favorites]
I like the end where it says fuck.
posted by synaesthetichaze at 12:30 PM on February 17, 2008 [1 favorite]
posted by synaesthetichaze at 12:30 PM on February 17, 2008 [1 favorite]
These things would have been caught long ago, had the Fed not been so focused on preventing all economic pain, ever. As Buffett has said, when the tide goes out, you find out who's been swimming naked, and the Fed's been absolutely focused on making sure the water never goes below anyone's waist.
Swim trunks are expensive, see, and if UncleGreenspanBernanke is keeping the water level high, there's no need for the unnecessary expenditure...
posted by Malor at 12:31 PM on February 17, 2008 [5 favorites]
Swim trunks are expensive, see, and if Uncle
posted by Malor at 12:31 PM on February 17, 2008 [5 favorites]
If you're going to call the banks greedy, you should really call the mortgage customers greedy too. They knew they couldn't afford to buy a house (hence "liar's loan"), but bought one anyway.
posted by hoverboards don't work on water at 12:38 PM on February 17, 2008
posted by hoverboards don't work on water at 12:38 PM on February 17, 2008
I think the people who bought those mortgages are more accurately described as credulous than greedy.
posted by hwestiii at 12:43 PM on February 17, 2008
posted by hwestiii at 12:43 PM on February 17, 2008
I don't know, there is a fine line between credulous and greedy when it comes to thinking you're getting a deal. Those people wanted to believe they were getting a deal. They talked themselves into it, because the alternative was not getting a house. It's like buying stolen property from a dodgy market and rationalizing to yourself "well, I don't know that what I'm doing is wrong, so I'll just assume everything's fine". The banks wanted the deal to happen too, so they also conveniently forgot to exercise due caution. Whatever mix of credulity and greed is going on here, I think the banks and the customers are guilty of the same as each other.
posted by hoverboards don't work on water at 12:51 PM on February 17, 2008
posted by hoverboards don't work on water at 12:51 PM on February 17, 2008
hb-d-w-o-w: Hmm, the difference between the stolen property vendor and the mortgage vendor is that the stolen property vendor doesn't have the backing of major banks, financial institutions, governments, and isn't creaming vast amounts out of the public coffers when they're pulled up on it.
...or am I missing something in your analogy?
posted by davemee at 12:57 PM on February 17, 2008
...or am I missing something in your analogy?
posted by davemee at 12:57 PM on February 17, 2008
I was looking around at houses last year, and every broker I met with tried to convince me that taking any random loan would be fine because "house prices always go up. So even if your ARM resets in 5 years, you can just re-fi because your house will be worth double your loan." The experts were telling me this.
Of course now we all know that these "experts" were handing out bad advice ("prices always go up"). How can you blame the customers for that? If you go to buy a car, and the salesman says "this car can go 60mph" and you later find out it only goes 50, is that your fault? What's the point of having an 'expert' advise you if they don't know jack shit (and are making a commission to boot).
Luckily I had done my research. Hell, I even knew more than most of the brokers. Point is, there is plenty of blame to go around. Consumers for not educating themselves, brokers, realtors, and bankers for trying to make an easy/quick buck, and the govt for being too afraid to enact necessary "painful" precautions against situations like these. Pass the buck.
posted by afx114 at 1:02 PM on February 17, 2008 [7 favorites]
Of course now we all know that these "experts" were handing out bad advice ("prices always go up"). How can you blame the customers for that? If you go to buy a car, and the salesman says "this car can go 60mph" and you later find out it only goes 50, is that your fault? What's the point of having an 'expert' advise you if they don't know jack shit (and are making a commission to boot).
Luckily I had done my research. Hell, I even knew more than most of the brokers. Point is, there is plenty of blame to go around. Consumers for not educating themselves, brokers, realtors, and bankers for trying to make an easy/quick buck, and the govt for being too afraid to enact necessary "painful" precautions against situations like these. Pass the buck.
posted by afx114 at 1:02 PM on February 17, 2008 [7 favorites]
I think the banks and the customers are guilty of the same as each other.
It always amazes me when people put the little guys who get fleeced on the same level as the rich institutions that fleece them. "Sorry, bud, if you'd only been a perfect human being this wouldn't have happened! Now move your stuff onto the street before we have to call the sheriff."
posted by languagehat at 1:23 PM on February 17, 2008 [2 favorites]
It always amazes me when people put the little guys who get fleeced on the same level as the rich institutions that fleece them. "Sorry, bud, if you'd only been a perfect human being this wouldn't have happened! Now move your stuff onto the street before we have to call the sheriff."
posted by languagehat at 1:23 PM on February 17, 2008 [2 favorites]
If you're going to call the banks greedy, you should really call the mortgage customers greedy too
and that's where you go wrong in your thinking. People go to financial institutions expecting they have fiduciary responsibilities, even if these are implicit. If the bank thinks a strawberry picker in Watsonville is good for a $750K loan, who is he to tell them otherwise?
But the problem isn't "government" OR "banks". This is going to come as a shock to some people, but these institutions don't actually exist as actors in the real world . . . they are legal fictions that consist of people arranged in organizations. It is the people that are the actors.
The core issue, and understanding, is that the people within these institutions made rational decisions in the short-term. This is what people do.
This is an issue that free market fundamentalists need to get their head around. Laissez faire people put into power in government + profit making opportunities = Gilded Age boom/bust cycles, Teatpot Dome, the Great Depression, S&L crisis of the 80s, and the present mortgage meltdown . . . Second verse, same as the first.
posted by panamax at 1:52 PM on February 17, 2008 [10 favorites]
and that's where you go wrong in your thinking. People go to financial institutions expecting they have fiduciary responsibilities, even if these are implicit. If the bank thinks a strawberry picker in Watsonville is good for a $750K loan, who is he to tell them otherwise?
But the problem isn't "government" OR "banks". This is going to come as a shock to some people, but these institutions don't actually exist as actors in the real world . . . they are legal fictions that consist of people arranged in organizations. It is the people that are the actors.
The core issue, and understanding, is that the people within these institutions made rational decisions in the short-term. This is what people do.
This is an issue that free market fundamentalists need to get their head around. Laissez faire people put into power in government + profit making opportunities = Gilded Age boom/bust cycles, Teatpot Dome, the Great Depression, S&L crisis of the 80s, and the present mortgage meltdown . . . Second verse, same as the first.
posted by panamax at 1:52 PM on February 17, 2008 [10 favorites]
My husband and I looked into a house a few years ago. The agent tried to sell the beauty of the ARM loans, saying that when it adjusted, our payments might even go down! I said, "But it's an interest rate. It might go up." And her response was, "It's real estate! It will probably go down!"
We declined, and funny enough, the last time we went past that new development, probably a good fourth of the houses there had foreclosure papers in the windows. At the time, it sucked being that close to having our own home, but having to turn it down. I feel a whole lot better about that decision, now.
posted by headspace at 1:53 PM on February 17, 2008 [2 favorites]
We declined, and funny enough, the last time we went past that new development, probably a good fourth of the houses there had foreclosure papers in the windows. At the time, it sucked being that close to having our own home, but having to turn it down. I feel a whole lot better about that decision, now.
posted by headspace at 1:53 PM on February 17, 2008 [2 favorites]
This is entertaining in the same way that watching a video of the economy being shit on would be entertaining.
posted by OverlappingElvis at 2:18 PM on February 17, 2008
posted by OverlappingElvis at 2:18 PM on February 17, 2008
I think panamax has it about right. In a real-estate market as large as the one in the U.S. you can't expect everyone, or even most people, to have the financial sophistication to understand the complexity of those adjustable rate mortgages, so most people are going to just trust what the lender tells them.
The lender, on the other hand, has their eyes open the entire time. They know that five years ago they never would have given the people they are selling these instruments to the time of day, and they also know that they are most likely going to lay these mortgages off on the secondary market long before they are scheduled to reset, at which time all the risk will be held by whomever buys them in the secondary market.
I'm sure some fault lies with the packagers and investors in the secondary market who evidently didn't do much due diligence on what they were buying or they wouldn't have bought them so readily.
There was a pretty good piece in a recent Economist magazine covering some research from the University of Chicago showing that most of the defaults on these loans are showing up in the areas where they were most oversold, meaning areas that wouldn't have qualified for conventional mortagages at earlier times, and seeming to demonstrate a sort of predatoriness in their sale.
posted by hwestiii at 2:42 PM on February 17, 2008 [1 favorite]
The lender, on the other hand, has their eyes open the entire time. They know that five years ago they never would have given the people they are selling these instruments to the time of day, and they also know that they are most likely going to lay these mortgages off on the secondary market long before they are scheduled to reset, at which time all the risk will be held by whomever buys them in the secondary market.
I'm sure some fault lies with the packagers and investors in the secondary market who evidently didn't do much due diligence on what they were buying or they wouldn't have bought them so readily.
There was a pretty good piece in a recent Economist magazine covering some research from the University of Chicago showing that most of the defaults on these loans are showing up in the areas where they were most oversold, meaning areas that wouldn't have qualified for conventional mortagages at earlier times, and seeming to demonstrate a sort of predatoriness in their sale.
posted by hwestiii at 2:42 PM on February 17, 2008 [1 favorite]
The core issue, and understanding, is that the people within these institutions made rational decisions in the short-term. This is what people do.
No, I'm sorry, the people within these institutions did not make rational decisions at all. Their fiduciary responsibilities are clearly stated; they ignored them; if the laws were actually enforced then a lot of them would be in jail.
If by "rational decisions in the short-term" you mean "criminally short-sighted behaviour" then I suppose I agree with you but I can't call this "rational" by any stretch of the imagination!
posted by lupus_yonderboy at 2:50 PM on February 17, 2008 [1 favorite]
No, I'm sorry, the people within these institutions did not make rational decisions at all. Their fiduciary responsibilities are clearly stated; they ignored them; if the laws were actually enforced then a lot of them would be in jail.
If by "rational decisions in the short-term" you mean "criminally short-sighted behaviour" then I suppose I agree with you but I can't call this "rational" by any stretch of the imagination!
posted by lupus_yonderboy at 2:50 PM on February 17, 2008 [1 favorite]
Here's a link to the story in The Economist that I referred to above.
posted by hwestiii at 3:05 PM on February 17, 2008
posted by hwestiii at 3:05 PM on February 17, 2008
you can't expect everyone, or even most people, to have the financial sophistication to understand the complexity of those adjustable rate mortgages,
How about "I make 50,000$ a year, and I'm buying a 600,000$ house." Is that not supposed to arouse some kind of basic, primitive, financial alarm bell?
posted by blenderfish at 3:12 PM on February 17, 2008
How about "I make 50,000$ a year, and I'm buying a 600,000$ house." Is that not supposed to arouse some kind of basic, primitive, financial alarm bell?
posted by blenderfish at 3:12 PM on February 17, 2008
I'm not sure what is so complex about this issue.
Uhhh...
Page 5: Don't get it.
Is the "mortgage broker" lying to the bank somehow about the buyer's poor credit?
Page 7-8: Don't get it.
How does a bank "get rid of" a loan? My understanding is that they already gave out some money. If the person isn't paying them back I can see how the bank can impotently sue either the "mortgage broker" or the poor person for their losses, but don't see how they can "get rid of" anything, but their contract with a customer who will not pay them back the borrowed money and agreed upon interest.
And I don't see why anyone would want to pay the bank to take that contract with the nonpaying customer. Is the banker lying to the "Wall Streeters" somehow about the borrower?
Page 11-17: Really don't get it.
Too many unfamiliar concepts: "Security", "Collateral", "Investors". Same questions as above, though, I don't see how you sell what is, AFAICT, just a contract for owed money that will not be paid! I don't get why the Wall Streeters bought such a stupid thing in the first place, or how they can sell it to anyone else. If the bank lied to the "Wall Streeters", why didn't they hold the bank accountable?
Page 18-22: Gets even more confusing as it goes deeper into the incomprehensible mechanics of whatever it is they are talking about.
Page 23-26: Huh?
Page 30-45: Why don't they sue the "Wall Streeters" for lying?
posted by dgaicun at 3:51 PM on February 17, 2008
Uhhh...
Page 5: Don't get it.
Is the "mortgage broker" lying to the bank somehow about the buyer's poor credit?
Page 7-8: Don't get it.
How does a bank "get rid of" a loan? My understanding is that they already gave out some money. If the person isn't paying them back I can see how the bank can impotently sue either the "mortgage broker" or the poor person for their losses, but don't see how they can "get rid of" anything, but their contract with a customer who will not pay them back the borrowed money and agreed upon interest.
And I don't see why anyone would want to pay the bank to take that contract with the nonpaying customer. Is the banker lying to the "Wall Streeters" somehow about the borrower?
Page 11-17: Really don't get it.
Too many unfamiliar concepts: "Security", "Collateral", "Investors". Same questions as above, though, I don't see how you sell what is, AFAICT, just a contract for owed money that will not be paid! I don't get why the Wall Streeters bought such a stupid thing in the first place, or how they can sell it to anyone else. If the bank lied to the "Wall Streeters", why didn't they hold the bank accountable?
Page 18-22: Gets even more confusing as it goes deeper into the incomprehensible mechanics of whatever it is they are talking about.
Page 23-26: Huh?
Page 30-45: Why don't they sue the "Wall Streeters" for lying?
posted by dgaicun at 3:51 PM on February 17, 2008
How about "I make 50,000$ a year, and I'm buying a 600,000$ house." Is that not supposed to arouse some kind of basic, primitive, financial alarm bell?Why? The proper metric is income to loan payments. a 600,000$ NINJA loan, with those loooow looooooow interest rates, and some creativity (say, "2 years interest-only payments and then we reset but you'll see your house will have doubled value by then, just refinance and voila!") is totally within the means of someone making 50k/year. And with TV shows, banks and the Fed talking all day about the wonders of this New Economy -Only in America!!11 We're the best go team go!- allowing everyone to own a house...
Oh and, there's nothing "basic, primitive" about financial matters, cavemen didn't even have money.
posted by vivelame at 3:59 PM on February 17, 2008 [1 favorite]
Is the "mortgage broker" lying to the bank somehow about the buyer's poor credit?
Ayup. Wells Fargo stopped taking loans from the brokers earlier this decade, and everyone else has essentially closed down their lines to brokers.
How does a bank "get rid of" a loan?
Assuming it's too big or doesn't meet Federal guidelines (Fannie Mae and Freddie Mac), the banks bundle 1000 or so similar loans together into a financial instrument that people can subscribe to.
The bank is recapitalized by these investors who take over the interests in the mortgage performance.
1000 jumbo mortgages collectively throw off a lot of cash so Wall Street was able to find willing buyers for these securities.
The New Math of this decade was that since previous housing downturns were localized, a nationwide bundle of loans "should" be relatively safe.
Additionally, innovative financial engineering went on the "tranch" these mortgage-backed securities into risk pools, eg. A, B, and C. From the C pool new instruments would be created in tranches, the higher the tranch, the less risk (again, so as people thought) since they were guaranteed first dibs on the cash coming in from the borrowers. These tranched instruments are called CDOs, and were how Wall Street got investors to invest in C-grade debt that looked like AAA-rated debt.
Is the banker lying to the "Wall Streeters" somehow about the borrower?
Everyone -- especially the Wall Street playas -- involved in the transaction except the end borrower knew the wheels would come off of this game eventually, but it was in nobody's financial interest to blow the whistle or bow out of the game, not when millions and millions of bonuses were being paid out to people who stayed in it.
If the bank lied to the "Wall Streeters", why didn't they hold the bank accountable?
There are some codicils or what have you on these instruments where the banks DO have to return the investors' money should the loan portfolio not perform as expected. Parameters like % first payment default, 3 & 6 month defaults, etc. The problem comes with these CDOs, where the investors who are losing money first don't even know which parts of loans they own or where they are going bad, and also there is a conflict of interest between the CDO owners and the true AAA owners, who each own different income streams from the same property, and what benefits one owner (ie bank taking back the loan) can harm the interests of the other.
I've been following this for about 2 years now and that's the best I understand it, and I didn't even mention the "monoline" bond insurers who signed on to these loan products to raise C-rated debt issues to investment-grade A issues.
It's complicated ;)
posted by panamax at 4:29 PM on February 17, 2008 [1 favorite]
Ayup. Wells Fargo stopped taking loans from the brokers earlier this decade, and everyone else has essentially closed down their lines to brokers.
How does a bank "get rid of" a loan?
Assuming it's too big or doesn't meet Federal guidelines (Fannie Mae and Freddie Mac), the banks bundle 1000 or so similar loans together into a financial instrument that people can subscribe to.
The bank is recapitalized by these investors who take over the interests in the mortgage performance.
1000 jumbo mortgages collectively throw off a lot of cash so Wall Street was able to find willing buyers for these securities.
The New Math of this decade was that since previous housing downturns were localized, a nationwide bundle of loans "should" be relatively safe.
Additionally, innovative financial engineering went on the "tranch" these mortgage-backed securities into risk pools, eg. A, B, and C. From the C pool new instruments would be created in tranches, the higher the tranch, the less risk (again, so as people thought) since they were guaranteed first dibs on the cash coming in from the borrowers. These tranched instruments are called CDOs, and were how Wall Street got investors to invest in C-grade debt that looked like AAA-rated debt.
Is the banker lying to the "Wall Streeters" somehow about the borrower?
Everyone -- especially the Wall Street playas -- involved in the transaction except the end borrower knew the wheels would come off of this game eventually, but it was in nobody's financial interest to blow the whistle or bow out of the game, not when millions and millions of bonuses were being paid out to people who stayed in it.
If the bank lied to the "Wall Streeters", why didn't they hold the bank accountable?
There are some codicils or what have you on these instruments where the banks DO have to return the investors' money should the loan portfolio not perform as expected. Parameters like % first payment default, 3 & 6 month defaults, etc. The problem comes with these CDOs, where the investors who are losing money first don't even know which parts of loans they own or where they are going bad, and also there is a conflict of interest between the CDO owners and the true AAA owners, who each own different income streams from the same property, and what benefits one owner (ie bank taking back the loan) can harm the interests of the other.
I've been following this for about 2 years now and that's the best I understand it, and I didn't even mention the "monoline" bond insurers who signed on to these loan products to raise C-rated debt issues to investment-grade A issues.
It's complicated ;)
posted by panamax at 4:29 PM on February 17, 2008 [1 favorite]
dgaicun: the mortgage brokers did lie a bit. They suggested that applicants might put the best spin on their income, and sold them loans with low initial repayments (in Australia we call them 'honeymoon rates') that went up after a few years - called resetting. The borrowers could afford the initial repayments, but not the higher ones when it reset. The brokers told the borrowers not to worry, they could always refinance at another honeymoon rate when the reset came along - providing property prices continued going up.
As the brokers got paid at the start, they didn't care too much about the future, and the borrowers got a house of their own, so they were happy to believe the story.
posted by bystander at 4:29 PM on February 17, 2008
As the brokers got paid at the start, they didn't care too much about the future, and the borrowers got a house of their own, so they were happy to believe the story.
posted by bystander at 4:29 PM on February 17, 2008
How about "I make 50,000$ a year, and I'm buying a 600,000$ house." Is that not supposed to arouse some kind of basic, primitive, financial alarm bell?
The most rational players, eg. if *I* had decided to play the game in 2004-2005, if I couldn't refi into another teaser / neg-am mortgage after 2-5 years of free rent I could unload the house and pocket the 10-30% PA appreciation. After all, real estate only goes up, right?
Plus, the really smart specuvestors understood they could just walk away from their no-down purchases. They were playing with the Casino's money, and for some reason (cough, "Ownership Society"). the banks were giving out free money like there was no tomorrow.
posted by panamax at 4:37 PM on February 17, 2008 [1 favorite]
The most rational players, eg. if *I* had decided to play the game in 2004-2005, if I couldn't refi into another teaser / neg-am mortgage after 2-5 years of free rent I could unload the house and pocket the 10-30% PA appreciation. After all, real estate only goes up, right?
Plus, the really smart specuvestors understood they could just walk away from their no-down purchases. They were playing with the Casino's money, and for some reason (cough, "Ownership Society"). the banks were giving out free money like there was no tomorrow.
posted by panamax at 4:37 PM on February 17, 2008 [1 favorite]
As the brokers got paid at the start, they didn't care too much about the future
actually, there's another dynamic present here too -- brokers were selling boomerang products that FORCED the borrowers to come back to them.
Kinda like 1960s Detroit with their 5-year "planned obsolescence" cycles.
posted by panamax at 4:39 PM on February 17, 2008
actually, there's another dynamic present here too -- brokers were selling boomerang products that FORCED the borrowers to come back to them.
Kinda like 1960s Detroit with their 5-year "planned obsolescence" cycles.
posted by panamax at 4:39 PM on February 17, 2008
After all, real estate only goes up, right?
No, and there was no reason to think that real estate could only go up. There was nothing rational about that position. Real estate had lost value in the past, as anyone who had done even the slightest bit of research would discover.
posted by Mr. President Dr. Steve Elvis America at 4:53 PM on February 17, 2008
No, and there was no reason to think that real estate could only go up. There was nothing rational about that position. Real estate had lost value in the past, as anyone who had done even the slightest bit of research would discover.
posted by Mr. President Dr. Steve Elvis America at 4:53 PM on February 17, 2008
dgaicun: the banks were prepared to not look too closely at the mortgage broker's claims as they got rid of the loans. That is, they issued a thing like a term deposit (called a CDO) that promised to repay the depositer over 30 years. Normally, a depositer buying a term deposit gets FDIC protection. The banks wouldn't offer this on these however, as they didn't want to keep responsibility for the repayment, as they knew some of the loans were a bit dodgy. So they combined a pile of these together then divided portions of them up. This is the masterful bit the Wall St guys got the big money for.
By packaging both your loan and your neighbours they could first argue they were less risky as not everyone would default. Next they split the pooled loans into "tranches", each one representing a portion of the pooled loans. The best tranche was for 80% of the pooled value. It was least risky as even if the borrower defaulted, it was likely the home could be sold for 80% of the original value. If that happened the investors in the 80% tranche would get all their money back, no problem.
Then they packaged together the next 15%. These were more risky, as if everyone defaulted they would only be repaid if the homes could be sold for at least 95% of the original purchase price. Finally, they got the top 5%, the riskiest portion, which would only be repaid in a default if the homes sold for more than what they were bought for - unlikely as in such a situation a default probably wouldn't happen.
Why would you buy a CDO like this? Well, the 80% ones were not that risky, and they paid much better (well a few percent) better interest that a normal bank term deposit. And the 15% ones paid even more, and the final 'toxic' 5% paid great. If you thought property prices would continue to rise, so no defaults, the toxic ones were a great investment.
Even so, some people were still concerned, so the Wall St types bought insurance on the 80% tranche. This insurance was to be paid if the unthinkable happened and the market fell so much that the safe 80% tranche could not be repaid. The lowish risk and the insurance allowed these to attain AAA security ratings, allowing pension funds and Norwegian village councils to buy them, even though their usual investment rules don't allow them to buy such riskier investments.
At this point the bank no longer has any risk if the loans go bad, it has sold them and banked the investors money (and started the cycle again, to make more money), although in reality often the 5% tranche was held by the banks own investment arms as a risky investment because they were hard to sell.
So far, so good. For a few years everyone was happy. Even the 5% guys were getting their payments.
Then rates went up a bit and property prices stalled and fell. Soon the 5% and 15% owners were not getting paid as lots and lots of people defaulted all at once.
When you see Citi announcing big losses it is the 5% tranches they couldn't sell that now are worthless.
The last shoe to drop is with the 80% folk.
As prices drop below 80% of the homes original purchase price the home owners default and payments to the 80% guys stop. At first this was kinda OK, they had insurance remember, but it turns out the insurance companies don't have enough money to cover the pay out if "everywhere" tanks at the same time. They acted like normal insurers, figuring if things went bad in New York they would hold up in Florida etc.
So, what does it mean. Well, at the moment, the 80% guys are still OK, as long as they don't need to cash in their CDO. Because nobody will buy these, because the market may fall further, and who knows which actual houses are behind the CDO. So this is the root cause of the 'credit crunch' or 'liquidity crisis'. The only crisis is if you have to sell, there is nobody to buy, so even though you technically own these houses (well the mortgage on them) if you have to sell today you can't, making your investment worthless.
Basically, if you try to sell your car, and nobody will buy it, it is worthless - worth $0. In the real world this rarely happens, because a buyer can look at your car, see what it is like and will probably offer you something, you might just need to lower your price. As long as you can find a buyer (called having a 'liquid' market) your car retains value.
But because the CDOs do not represent actual houses - they don't come with a list of addresses of the property you own mortgages over, just the promise from the banks that sufficient mortgage documents are in a file somewhere, potential buyers can't look at the underlying asset and determine a price.
Obviously, at some point the sellers will work out some way to demonstrate the value of their CDO - it might be by tracking down the list of addresses, or as simple as holding them for a few years and saying "look, we are still getting the monthly payments so the loans aren't in default". But this is tough luck if you need to sell NOW!
posted by bystander at 5:03 PM on February 17, 2008 [10 favorites]
By packaging both your loan and your neighbours they could first argue they were less risky as not everyone would default. Next they split the pooled loans into "tranches", each one representing a portion of the pooled loans. The best tranche was for 80% of the pooled value. It was least risky as even if the borrower defaulted, it was likely the home could be sold for 80% of the original value. If that happened the investors in the 80% tranche would get all their money back, no problem.
Then they packaged together the next 15%. These were more risky, as if everyone defaulted they would only be repaid if the homes could be sold for at least 95% of the original purchase price. Finally, they got the top 5%, the riskiest portion, which would only be repaid in a default if the homes sold for more than what they were bought for - unlikely as in such a situation a default probably wouldn't happen.
Why would you buy a CDO like this? Well, the 80% ones were not that risky, and they paid much better (well a few percent) better interest that a normal bank term deposit. And the 15% ones paid even more, and the final 'toxic' 5% paid great. If you thought property prices would continue to rise, so no defaults, the toxic ones were a great investment.
Even so, some people were still concerned, so the Wall St types bought insurance on the 80% tranche. This insurance was to be paid if the unthinkable happened and the market fell so much that the safe 80% tranche could not be repaid. The lowish risk and the insurance allowed these to attain AAA security ratings, allowing pension funds and Norwegian village councils to buy them, even though their usual investment rules don't allow them to buy such riskier investments.
At this point the bank no longer has any risk if the loans go bad, it has sold them and banked the investors money (and started the cycle again, to make more money), although in reality often the 5% tranche was held by the banks own investment arms as a risky investment because they were hard to sell.
So far, so good. For a few years everyone was happy. Even the 5% guys were getting their payments.
Then rates went up a bit and property prices stalled and fell. Soon the 5% and 15% owners were not getting paid as lots and lots of people defaulted all at once.
When you see Citi announcing big losses it is the 5% tranches they couldn't sell that now are worthless.
The last shoe to drop is with the 80% folk.
As prices drop below 80% of the homes original purchase price the home owners default and payments to the 80% guys stop. At first this was kinda OK, they had insurance remember, but it turns out the insurance companies don't have enough money to cover the pay out if "everywhere" tanks at the same time. They acted like normal insurers, figuring if things went bad in New York they would hold up in Florida etc.
So, what does it mean. Well, at the moment, the 80% guys are still OK, as long as they don't need to cash in their CDO. Because nobody will buy these, because the market may fall further, and who knows which actual houses are behind the CDO. So this is the root cause of the 'credit crunch' or 'liquidity crisis'. The only crisis is if you have to sell, there is nobody to buy, so even though you technically own these houses (well the mortgage on them) if you have to sell today you can't, making your investment worthless.
Basically, if you try to sell your car, and nobody will buy it, it is worthless - worth $0. In the real world this rarely happens, because a buyer can look at your car, see what it is like and will probably offer you something, you might just need to lower your price. As long as you can find a buyer (called having a 'liquid' market) your car retains value.
But because the CDOs do not represent actual houses - they don't come with a list of addresses of the property you own mortgages over, just the promise from the banks that sufficient mortgage documents are in a file somewhere, potential buyers can't look at the underlying asset and determine a price.
Obviously, at some point the sellers will work out some way to demonstrate the value of their CDO - it might be by tracking down the list of addresses, or as simple as holding them for a few years and saying "look, we are still getting the monthly payments so the loans aren't in default". But this is tough luck if you need to sell NOW!
posted by bystander at 5:03 PM on February 17, 2008 [10 favorites]
So the next question is, "why would a CDO holder want to sell now?" - after all they still hold mortgages on real houses, and when the dust settles these will have a value.
Unfortunately, many CDO investors were pension funds, local governments and other groups who must look after other peoples money. These groups almost all have rules saying you cannot invest this money in risky stuff - you can only invest in AAA rated investments.
Sadly, as the underlying property market drops, the CDOs get re-rated to B or worse. The pension fund MUST follow its rules, so as soon as the investment gets downgraded they must sell it. But as stated before - nobody is buying at the moment. The outcome is these guys must find some dodgy hedge fund or similar investment cowboy who will generously buy them out for 8 cents in the dollar.
And because of all the forced selling, there aren't enough cowboys, so even 8c per dollar of original investment starts to look good.
So why aren't Warren Buffett and other long term smart guys stepping in here and buying these bargain mortgages? Good question. They will eventually, but they are still nervous about how bad this will get, and this is why there is talk about financial disasters. If they wait, the prices may fall further - but of course it is a vicious cycle as the declines suck money out of the market, making everyone a bit poorer (e.g. higher property taxes if your county got shafted) making house prices fall a bit more making the CDO prices fall further.
So the Federal Reserve, the European central banks and lots of others government and quasi-government groups are doing things like lowering interest rates and lending heaps of money to banks in the hope they can break the cycle, make the distressed CDOs look like a bargain, and avert another great depression.
posted by bystander at 5:19 PM on February 17, 2008 [7 favorites]
Unfortunately, many CDO investors were pension funds, local governments and other groups who must look after other peoples money. These groups almost all have rules saying you cannot invest this money in risky stuff - you can only invest in AAA rated investments.
Sadly, as the underlying property market drops, the CDOs get re-rated to B or worse. The pension fund MUST follow its rules, so as soon as the investment gets downgraded they must sell it. But as stated before - nobody is buying at the moment. The outcome is these guys must find some dodgy hedge fund or similar investment cowboy who will generously buy them out for 8 cents in the dollar.
And because of all the forced selling, there aren't enough cowboys, so even 8c per dollar of original investment starts to look good.
So why aren't Warren Buffett and other long term smart guys stepping in here and buying these bargain mortgages? Good question. They will eventually, but they are still nervous about how bad this will get, and this is why there is talk about financial disasters. If they wait, the prices may fall further - but of course it is a vicious cycle as the declines suck money out of the market, making everyone a bit poorer (e.g. higher property taxes if your county got shafted) making house prices fall a bit more making the CDO prices fall further.
So the Federal Reserve, the European central banks and lots of others government and quasi-government groups are doing things like lowering interest rates and lending heaps of money to banks in the hope they can break the cycle, make the distressed CDOs look like a bargain, and avert another great depression.
posted by bystander at 5:19 PM on February 17, 2008 [7 favorites]
Will reading it from back to front explain reverse mortgages?
posted by Poolio at 5:39 PM on February 17, 2008 [2 favorites]
posted by Poolio at 5:39 PM on February 17, 2008 [2 favorites]
languagehat writes "It always amazes me when people put the little guys who get fleeced on the same level as the rich institutions that fleece them."
Ehehe moral equivalency levels the playing field ! It's so convenient to consider a concentration of people with advanced math degrees to be as financially gullible as Jeo SixPack.
Also, notice all the % flying in the comments above ? Aren't they cute % % % % ?
Except that one single bit nobody thinks about : 100% of zero is still zero :D !
BUT let me impress you with this ! m(t,s)=(1+i(t,s)) and also v(t,s)=(1-i(t,s)) !
posted by elpapacito at 5:42 PM on February 17, 2008
Ehehe moral equivalency levels the playing field ! It's so convenient to consider a concentration of people with advanced math degrees to be as financially gullible as Jeo SixPack.
Also, notice all the % flying in the comments above ? Aren't they cute % % % % ?
Except that one single bit nobody thinks about : 100% of zero is still zero :D !
BUT let me impress you with this ! m(t,s)=(1+i(t,s)) and also v(t,s)=(1-i(t,s)) !
posted by elpapacito at 5:42 PM on February 17, 2008
How does a bank "get rid of" a loan? My understanding is that they already gave out some money. If the person isn't paying them back I can see how the bank can impotently sue either the "mortgage broker" or the poor person for their losses, but don't see how they can "get rid of" anything, but their contract with a customer who will not pay them back the borrowed money and agreed upon interest.
Here's how it works. The originating bank lends funds to the borrower, who uses the funds to purchase a house. The loan is "secured by a mortgage" on the house (another way to say this is that the borrower "pledges the house as collateral.") All this means is that if the borrower "defaults on" (i.e. doesn't pay) the loan, the lender may "foreclose" on the house (i.e. take it and sell it, applying the proceeds against the loan).
The originating bank can (and typically does) sell the loan to another institution. The purchasing lender pays the selling lender some amount of money, and in exchange, the seller transfers to the purchaser all of the seller's rights under the loan. Before the sale, the borrower owed the selling lender some amount, and after the sale, the borrower's obligation to the selling lender are discharged, but the borrower owes an identical amount to the purchasing lender.
And I don't see why anyone would want to pay the bank to take that contract with the nonpaying customer. Is the banker lying to the "Wall Streeters" somehow about the borrower?
No one would, you're right. The originating banks were selling all (or almost all) of their loans, though. Not just the stinkers. They were selling them shortly after origination, too.
Look at it this way. If I have $1000, I can make ten $100 loans to people so they can buy houses. Once I make my ten loans, though, my business kind of grinds to a halt, because I need cash to make loans, and I lent all my cash out. Eventually, I'll receive enough in interest and principal payments from my borrowers to make a new loan, but in the mean time, I can't make any loans.
However, if I immediately sell my 10 loans for $1100, I can make ten new $100 loans, pocket $100 of profit, and repeat the whole process.
The purchaser of all my loans is probably buying loans from lots of other originators, too. What the purchaser is going to do is try to use financial modeling to predict the statistically likely payment stream on the pool of many, many loans he's accumulated by modeling probable overall rates of default and refinancing on the loans.
The purchaser knows that not all of the loans will be paid off, but he's betting that a certain percentage will.
For example, let's say a bank ends up buying 1000 mortgage loans representing a total principal of $10 million. After defaults and refinancing, the bank expects the loans to pay an average of 6.5%.
The bank transfers the loans to a specially created entity, and causes the entity to issue:
$5 million of 5.5% senior securities, which will be paid first, and
$5 million of 7.5% subordinate securities, which will be paid second, and
$0 of residual securities, which will be paid last.
Since we have $10 million that's paying around 6.5% (we hope), committing to pay 5.5% on $5 million seems pretty safe. Highly risk averse investors will be happy to buy these senior securities, because they's so much "cushion," so to speak.
More risk averse may be interested in speculating with the subordinate securities, because even though they won't get paid fully if there's a shortfall on the underlying pool, they'll get paid a whopping 7.5% if the pool performs to expectations.
Nobody will buy the residual securities, but they exist to sop up excess payments if our predictions on the pool performance prove pessimistic.
posted by Mr. President Dr. Steve Elvis America at 5:43 PM on February 17, 2008 [1 favorite]
Here's how it works. The originating bank lends funds to the borrower, who uses the funds to purchase a house. The loan is "secured by a mortgage" on the house (another way to say this is that the borrower "pledges the house as collateral.") All this means is that if the borrower "defaults on" (i.e. doesn't pay) the loan, the lender may "foreclose" on the house (i.e. take it and sell it, applying the proceeds against the loan).
The originating bank can (and typically does) sell the loan to another institution. The purchasing lender pays the selling lender some amount of money, and in exchange, the seller transfers to the purchaser all of the seller's rights under the loan. Before the sale, the borrower owed the selling lender some amount, and after the sale, the borrower's obligation to the selling lender are discharged, but the borrower owes an identical amount to the purchasing lender.
And I don't see why anyone would want to pay the bank to take that contract with the nonpaying customer. Is the banker lying to the "Wall Streeters" somehow about the borrower?
No one would, you're right. The originating banks were selling all (or almost all) of their loans, though. Not just the stinkers. They were selling them shortly after origination, too.
Look at it this way. If I have $1000, I can make ten $100 loans to people so they can buy houses. Once I make my ten loans, though, my business kind of grinds to a halt, because I need cash to make loans, and I lent all my cash out. Eventually, I'll receive enough in interest and principal payments from my borrowers to make a new loan, but in the mean time, I can't make any loans.
However, if I immediately sell my 10 loans for $1100, I can make ten new $100 loans, pocket $100 of profit, and repeat the whole process.
The purchaser of all my loans is probably buying loans from lots of other originators, too. What the purchaser is going to do is try to use financial modeling to predict the statistically likely payment stream on the pool of many, many loans he's accumulated by modeling probable overall rates of default and refinancing on the loans.
The purchaser knows that not all of the loans will be paid off, but he's betting that a certain percentage will.
For example, let's say a bank ends up buying 1000 mortgage loans representing a total principal of $10 million. After defaults and refinancing, the bank expects the loans to pay an average of 6.5%.
The bank transfers the loans to a specially created entity, and causes the entity to issue:
$5 million of 5.5% senior securities, which will be paid first, and
$5 million of 7.5% subordinate securities, which will be paid second, and
$0 of residual securities, which will be paid last.
Since we have $10 million that's paying around 6.5% (we hope), committing to pay 5.5% on $5 million seems pretty safe. Highly risk averse investors will be happy to buy these senior securities, because they's so much "cushion," so to speak.
More risk averse may be interested in speculating with the subordinate securities, because even though they won't get paid fully if there's a shortfall on the underlying pool, they'll get paid a whopping 7.5% if the pool performs to expectations.
Nobody will buy the residual securities, but they exist to sop up excess payments if our predictions on the pool performance prove pessimistic.
posted by Mr. President Dr. Steve Elvis America at 5:43 PM on February 17, 2008 [1 favorite]
It always amazes me when people put the little guys who get fleeced on the same level as the rich institutions that fleece them. "Sorry, bud, if you'd only been a perfect human being this wouldn't have happened! Now move your stuff onto the street before we have to call the sheriff."
I suppose some of us don't see it as a "fleecing."
The borrowers chose to take out a loan that they knew that the would not be able to repay unless they were able to secure further financing in the future. They knew (or should've known) that the needed financing would only be available if their houses had significantly appreciated.
They decided to gamble on the house appreciating further, and they lost. They could've purchased a more modest home with a safer loan, but they decided that living in a nicer home was worth the risk. They weren't fleeced.
They simply decided to take a risky position, and there was plenty of information available to show that it was a risky position.
posted by Mr. President Dr. Steve Elvis America at 5:56 PM on February 17, 2008
I suppose some of us don't see it as a "fleecing."
The borrowers chose to take out a loan that they knew that the would not be able to repay unless they were able to secure further financing in the future. They knew (or should've known) that the needed financing would only be available if their houses had significantly appreciated.
They decided to gamble on the house appreciating further, and they lost. They could've purchased a more modest home with a safer loan, but they decided that living in a nicer home was worth the risk. They weren't fleeced.
They simply decided to take a risky position, and there was plenty of information available to show that it was a risky position.
posted by Mr. President Dr. Steve Elvis America at 5:56 PM on February 17, 2008
They knew (or should've known) that the needed financing would only be available if their houses had significantly appreciated.
This is incorrect. People roll debt (at favorable terms) over all the time, even if the underlying asset doesn't appreciate. Who could have known (or on the blogs I read, "hoocoodanone?") that prices would decline 30% so quickly. Hell, this time last year we were still arguing whether or not prices were going to go down at all still ("no price bubble here, no sirree!").
They weren't fleeced.
I realize you're the typical glibertarian here operating in your usual Ideal Land, but here in the real world the asymmetrical information and general stress level associated with home buying transactions resulted in plenty of people -- from all parts of the IQ distribution -- getting fleeced in various by the system. The brokers were getting paid YSPs (yield-spread premiums) to put their borrowers into loans with unfavorable terms like pre-payment penalties and the like.
Nobody will buy the residual securities, but they exist to sop up excess payments if our predictions on the pool performance prove pessimistic.
from what I've read, and I could be entirely wrong on this, Wall Street firms doing the deals just held onto the unsellable tranches themselves.
posted by panamax at 6:14 PM on February 17, 2008 [1 favorite]
This is incorrect. People roll debt (at favorable terms) over all the time, even if the underlying asset doesn't appreciate. Who could have known (or on the blogs I read, "hoocoodanone?") that prices would decline 30% so quickly. Hell, this time last year we were still arguing whether or not prices were going to go down at all still ("no price bubble here, no sirree!").
They weren't fleeced.
I realize you're the typical glibertarian here operating in your usual Ideal Land, but here in the real world the asymmetrical information and general stress level associated with home buying transactions resulted in plenty of people -- from all parts of the IQ distribution -- getting fleeced in various by the system. The brokers were getting paid YSPs (yield-spread premiums) to put their borrowers into loans with unfavorable terms like pre-payment penalties and the like.
Nobody will buy the residual securities, but they exist to sop up excess payments if our predictions on the pool performance prove pessimistic.
from what I've read, and I could be entirely wrong on this, Wall Street firms doing the deals just held onto the unsellable tranches themselves.
posted by panamax at 6:14 PM on February 17, 2008 [1 favorite]
There was no reason to think that real estate could only go up. There was nothing rational about that position. Real estate had lost value in the past, as anyone who had done even the slightest bit of research would discover
GMAFB. The entire media was in the tank with the REIC ("real estate industrial complex") not to mention the Feds and State governments in blowing up this asset bubble. 95% of the so-called economists featured in the mass media -- the NAR's Lereah, CAR's Leslie Appleton-Young, down to Orange County's very own Gary Watts ("10% is in the bag!") were feeding the people bullshit propagada ("No price [national] price declines since the Great Depression!") and only isolated bloggers and renegade, marginalized economists like Shiller and Thornburg.
posted by panamax at 6:20 PM on February 17, 2008
GMAFB. The entire media was in the tank with the REIC ("real estate industrial complex") not to mention the Feds and State governments in blowing up this asset bubble. 95% of the so-called economists featured in the mass media -- the NAR's Lereah, CAR's Leslie Appleton-Young, down to Orange County's very own Gary Watts ("10% is in the bag!") were feeding the people bullshit propagada ("No price [national] price declines since the Great Depression!") and only isolated bloggers and renegade, marginalized economists like Shiller and Thornburg.
posted by panamax at 6:20 PM on February 17, 2008
So basically, the institutions are treating mortgages the same way Joe Sixpack may transfer his credit card balance from one card to another?
posted by afx114 at 6:21 PM on February 17, 2008
posted by afx114 at 6:21 PM on February 17, 2008
(....sorry rant completing thought follows...)
got anything contrary into the public mind.
posted by panamax at 6:21 PM on February 17, 2008
got anything contrary into the public mind.
posted by panamax at 6:21 PM on February 17, 2008
Maybe we shoulda thought twice before we repealed Glass-Steagal.
posted by notyou at 6:26 PM on February 17, 2008
posted by notyou at 6:26 PM on February 17, 2008
CNN pimps Harvard Study in mid-2006; mentions Lawrence Yun of the NAR, before he rose to their "Chief Economist", Yun probably fed that story to the CNN reporter.
posted by panamax at 6:49 PM on February 17, 2008
posted by panamax at 6:49 PM on February 17, 2008
"I realize you're the typical glibertarian here operating in your usual Ideal Land, but here in the real world the asymmetrical information and general stress level associated with home buying transactions resulted in plenty of people -- from all parts of the IQ distribution -- getting fleeced in various by the system."
Not to sound cruel, but whose fault is it? Doesn't everybody learn in about 3rd grade to read and understand any contract you sign, and if you are not capable of understanding it to get a lawyer?
Now I'm sitting here realizing that I'm probably going to end up paying welfare to middle and upper class people, who probably have a much nicer car and house than I do, so they don't have to face the consequences of getting in too deep.
What I should have done is get a $1.5 million dollar house, whine that I can't afford it, and demand assistance. We all should have! After all, isn't owning a home a right that must be protected by laws and bailouts, no matter what it costs society?
People all across the IQ scale are stupid when it comes to their money. I just don't think its fair to ask all the solvent taxpayers to shoulder a burden they did not create and will not benefit from.
posted by Sukiari at 7:19 PM on February 17, 2008 [2 favorites]
Not to sound cruel, but whose fault is it? Doesn't everybody learn in about 3rd grade to read and understand any contract you sign, and if you are not capable of understanding it to get a lawyer?
Now I'm sitting here realizing that I'm probably going to end up paying welfare to middle and upper class people, who probably have a much nicer car and house than I do, so they don't have to face the consequences of getting in too deep.
What I should have done is get a $1.5 million dollar house, whine that I can't afford it, and demand assistance. We all should have! After all, isn't owning a home a right that must be protected by laws and bailouts, no matter what it costs society?
People all across the IQ scale are stupid when it comes to their money. I just don't think its fair to ask all the solvent taxpayers to shoulder a burden they did not create and will not benefit from.
posted by Sukiari at 7:19 PM on February 17, 2008 [2 favorites]
You know, they should have laws to punish people who lie and steal.
posted by mecran01 at 7:32 PM on February 17, 2008
posted by mecran01 at 7:32 PM on February 17, 2008
How about "I make 50,000$ a year, and I'm buying a 600,000$ house." Is that not supposed to arouse some kind of basic, primitive, financial alarm bell?
Those instincts have atrophied in people who grew up living on credit cards and home-equity loans.
Of course now we all know that these "experts" were handing out bad advice ("prices always go up"). How can you blame the customers for that? If you go to buy a car, and the salesman says "this car can go 60mph" and you later find out it only goes 50, is that your fault?
Are you joking? Your analogy is an excellent one — but no one trusts car salesman. "Used-car salesman" is a synecdoche for "untrustworthy person," for crying out loud. For some reason people don't see people in the financial industry as salesmen and suffer under the delusion that they are, indeed, both independent and "expert." It's baffling to me, and even more baffling that this confidence persists even in the face of risible statements such as "prices always go up." We should be teaching people in the first grade that whenever someone says "prices [of anything] always go up" it means that it is time to run like hell. Extraordinary Popular Delusions & the Madness of Crowds should be required reading in every high school.
I understand that not everyone who got fucked in the price collapse believed the bullshit. Some of them didn't want to get priced out of the market and have to wait for the adjustment to buy, and miscalculated that they'd be able to afford the payments in a few years when they reset even if they couldn't now. Some were just counting on the greater fool and had lousy timing. But a number of people did believe this, and moreover the media let the industry use it to spew this nonsense unchallenged.
Not to sound cruel, but whose fault is it? Doesn't everybody learn in about 3rd grade to read and understand any contract you sign, and if you are not capable of understanding it to get a lawyer?
I have far more sympathy for people who were lied to about what their mortgages said (many people have reported being unaware that their balloon-mortgage payments would ever reset) and didn't read them (or didn't read them closely enough to pick up on the discrepencies) than I do for the people who believed the NAR's hype. It is amazing how much pushback you get when you start asking questions about the terms of a contract, or even when you're sitting there with someone waiting on you while you read through it. You will be made to feel like an anal, obstructionist asshole, wasting everybody else's time when they're just trying to get some work done. I'm usually pretty good about reading contracts through and making a fuss about parts I don't like, but I've taken a lot of shit for it and it can be difficult to hold your ground if, like most people, you prefer to avoid conflict.
posted by enn at 7:36 PM on February 17, 2008 [5 favorites]
Those instincts have atrophied in people who grew up living on credit cards and home-equity loans.
Of course now we all know that these "experts" were handing out bad advice ("prices always go up"). How can you blame the customers for that? If you go to buy a car, and the salesman says "this car can go 60mph" and you later find out it only goes 50, is that your fault?
Are you joking? Your analogy is an excellent one — but no one trusts car salesman. "Used-car salesman" is a synecdoche for "untrustworthy person," for crying out loud. For some reason people don't see people in the financial industry as salesmen and suffer under the delusion that they are, indeed, both independent and "expert." It's baffling to me, and even more baffling that this confidence persists even in the face of risible statements such as "prices always go up." We should be teaching people in the first grade that whenever someone says "prices [of anything] always go up" it means that it is time to run like hell. Extraordinary Popular Delusions & the Madness of Crowds should be required reading in every high school.
I understand that not everyone who got fucked in the price collapse believed the bullshit. Some of them didn't want to get priced out of the market and have to wait for the adjustment to buy, and miscalculated that they'd be able to afford the payments in a few years when they reset even if they couldn't now. Some were just counting on the greater fool and had lousy timing. But a number of people did believe this, and moreover the media let the industry use it to spew this nonsense unchallenged.
Not to sound cruel, but whose fault is it? Doesn't everybody learn in about 3rd grade to read and understand any contract you sign, and if you are not capable of understanding it to get a lawyer?
I have far more sympathy for people who were lied to about what their mortgages said (many people have reported being unaware that their balloon-mortgage payments would ever reset) and didn't read them (or didn't read them closely enough to pick up on the discrepencies) than I do for the people who believed the NAR's hype. It is amazing how much pushback you get when you start asking questions about the terms of a contract, or even when you're sitting there with someone waiting on you while you read through it. You will be made to feel like an anal, obstructionist asshole, wasting everybody else's time when they're just trying to get some work done. I'm usually pretty good about reading contracts through and making a fuss about parts I don't like, but I've taken a lot of shit for it and it can be difficult to hold your ground if, like most people, you prefer to avoid conflict.
posted by enn at 7:36 PM on February 17, 2008 [5 favorites]
Mr. President Dr. Steve Elvis America: Nobody will buy the residual securities, but they exist to sop up excess payments if our predictions on the pool performance prove pessimistic.
panamax: from what I've read, and I could be entirely wrong on this, Wall Street firms doing the deals just held onto the unsellable tranches themselves.
I am not sure how mortgage-backed CDO issuers made money, but in ABS- and CDS-backed CDOs, I believe the issuers booked the equity tranche to themselves as a kicker. So if you took the 4% equity tranche when you issued a CDO with $1 billion notional, you would book $40 million in profit when the deal at initiation.
Panamax is not saying this, but to be clear, I don't believe the issuers paid for the equity tranche.
Of course, if you hold the equity, then your interest should be aligned with the holders: if yours was the first capital to be eaten by losses, you would manage the deal to keep losses really small. I don't quite get why the deal makers would sit by idly as the losses racked up.
posted by A-Train at 7:59 PM on February 17, 2008
panamax: from what I've read, and I could be entirely wrong on this, Wall Street firms doing the deals just held onto the unsellable tranches themselves.
I am not sure how mortgage-backed CDO issuers made money, but in ABS- and CDS-backed CDOs, I believe the issuers booked the equity tranche to themselves as a kicker. So if you took the 4% equity tranche when you issued a CDO with $1 billion notional, you would book $40 million in profit when the deal at initiation.
Panamax is not saying this, but to be clear, I don't believe the issuers paid for the equity tranche.
Of course, if you hold the equity, then your interest should be aligned with the holders: if yours was the first capital to be eaten by losses, you would manage the deal to keep losses really small. I don't quite get why the deal makers would sit by idly as the losses racked up.
posted by A-Train at 7:59 PM on February 17, 2008
Sukiari: Not to sound cruel, but whose fault is it? Doesn't everybody learn in about 3rd grade to read and understand any contract you sign, and if you are not capable of understanding it to get a lawyer?
Yup. And then they're forced to sign a ten-page contract nobody but a contract lawyer could understand to do anything from renting sporting equipment to using a free piece of software from the internet.
People get jaded. Yeah, buying a house should be different, you should read that one. I know I would (hell, I'd probably get a lawyer to do it.) However, I can't really blame them for glazing over when you have to read more legal documentation and sign more contracts to install the software on a single computer than a man would have been asked to do in his entire life a hundred years ago.
posted by Mitrovarr at 9:14 PM on February 17, 2008 [3 favorites]
Yup. And then they're forced to sign a ten-page contract nobody but a contract lawyer could understand to do anything from renting sporting equipment to using a free piece of software from the internet.
People get jaded. Yeah, buying a house should be different, you should read that one. I know I would (hell, I'd probably get a lawyer to do it.) However, I can't really blame them for glazing over when you have to read more legal documentation and sign more contracts to install the software on a single computer than a man would have been asked to do in his entire life a hundred years ago.
posted by Mitrovarr at 9:14 PM on February 17, 2008 [3 favorites]
Funny and basically accurate explanation of CMO meltdown. No faulting the cartooning--one can't demand amazing artistry and understanding of asset-backed securitization from the same source. Einstein wasn't a painter.
For the most part, the "little guys" are not the ones who got fleeced in these transactions. Little guys can't even buy these securities. Large institutional investors, who should be able to do their own due diligence, are the ones who took the risks and, subsequently, the losses. They should have had said no, the warning signs were all over the place, but they wanted the returns.
posted by susanmullin at 10:01 PM on February 17, 2008
For the most part, the "little guys" are not the ones who got fleeced in these transactions. Little guys can't even buy these securities. Large institutional investors, who should be able to do their own due diligence, are the ones who took the risks and, subsequently, the losses. They should have had said no, the warning signs were all over the place, but they wanted the returns.
posted by susanmullin at 10:01 PM on February 17, 2008
wasting everybody else's time when they're just trying to get some work done. I'm usually pretty good about reading contracts through and making a fuss about parts I don't like
plus when most people come to the closing table they're basically fully committed to the deal, eg. have their stuff in a moving van heading to the new place, etc. etc.
posted by panamax at 10:16 PM on February 17, 2008
plus when most people come to the closing table they're basically fully committed to the deal, eg. have their stuff in a moving van heading to the new place, etc. etc.
posted by panamax at 10:16 PM on February 17, 2008
Mitrovarr I can't really blame them for glazing over when you have to read more legal documentation and sign more contracts to install the software on a single computer than a man would have been asked to do in his entire life a hundred years ago.
Very, very good point.
posted by aeschenkarnos at 10:33 PM on February 17, 2008
Very, very good point.
posted by aeschenkarnos at 10:33 PM on February 17, 2008
So the Federal Reserve, the European central banks and lots of others government and quasi-government groups are doing things like lowering interest rates and lending heaps of money to banks in the hope they can break the cycle, make the distressed CDOs look like a bargain, and avert another great depression.
Again, this was caused by monetary disorder; too much liquidity, and too much willingness to step in and make sure nothing bad ever happened. The Fed should have realized that first stock prices, and then house prices and debt loads, going up like rockets was not normal, and they should have nipped the bubbles in the bud. But they didn't even TRY to understand why asset values were doing these weird things.
Instead, they encouraged and abetted these bubbles, because this corrosive and very nasty form of inflation is incredibly popular. Even though it's unbelievably damaging over the long term, people love it and want more. (I mean, I've actually seen people argue that house prices going up 15% a year isn't even inflation... that's it's "asset appreciation". Talk about wishful thinking!)
We got ourselves lost in fiscal fantasy with a deeply toxic brew -- unlimited supplies of magic money from nothing, combined with Fannie Mae and Freddie Mac's status as 'quasi-governmental entities'; they had access to gigantic sums of capital at remarkably low interest rates because of the implied government guarantee. (there isn't any, but it's widely assumed that if either get in trouble, the government will bail them out.) Combine that with the ability to securitize the loans they're making, and the ability for banks to create new money by lending against those assets, which then become new securities, causing yet more 'money' to be available.... we had enormous house price inflation. Everyone involved was trying to position themselves to get as much of the cash gusher as they possibly could, and all standards went entirely out the window as greed overtook all common sense.
Then, adding to the witches' brew, we've got foreign central banks that are willing to sop up vast numbers of dollars to keep their own currencies strong; in essence, they have been importing our inflation, and hiding it from us here at home. China and Japan have built up dollar holdings somewhere north of a trillion dollars each.
So of COURSE things are blowing up badly. The whole thing is a rickety, cobbled-together structure that's totally dependent on the Fed's constant supply of endless liquidity on demand. Anytime a segment of this new, seriously deranged system started to go awry, Uncle Alan was there with cash to soothe it and make it all better. But it wasn't all better... it was like treating a tumor with morphine.
Suddenly, we're getting the news that the cancer has spread, and that, gee, it's really bad.... so what does the Fed do? Come up with new and improved morphine delivery systems.
posted by Malor at 10:58 PM on February 17, 2008 [1 favorite]
Again, this was caused by monetary disorder; too much liquidity, and too much willingness to step in and make sure nothing bad ever happened. The Fed should have realized that first stock prices, and then house prices and debt loads, going up like rockets was not normal, and they should have nipped the bubbles in the bud. But they didn't even TRY to understand why asset values were doing these weird things.
Instead, they encouraged and abetted these bubbles, because this corrosive and very nasty form of inflation is incredibly popular. Even though it's unbelievably damaging over the long term, people love it and want more. (I mean, I've actually seen people argue that house prices going up 15% a year isn't even inflation... that's it's "asset appreciation". Talk about wishful thinking!)
We got ourselves lost in fiscal fantasy with a deeply toxic brew -- unlimited supplies of magic money from nothing, combined with Fannie Mae and Freddie Mac's status as 'quasi-governmental entities'; they had access to gigantic sums of capital at remarkably low interest rates because of the implied government guarantee. (there isn't any, but it's widely assumed that if either get in trouble, the government will bail them out.) Combine that with the ability to securitize the loans they're making, and the ability for banks to create new money by lending against those assets, which then become new securities, causing yet more 'money' to be available.... we had enormous house price inflation. Everyone involved was trying to position themselves to get as much of the cash gusher as they possibly could, and all standards went entirely out the window as greed overtook all common sense.
Then, adding to the witches' brew, we've got foreign central banks that are willing to sop up vast numbers of dollars to keep their own currencies strong; in essence, they have been importing our inflation, and hiding it from us here at home. China and Japan have built up dollar holdings somewhere north of a trillion dollars each.
So of COURSE things are blowing up badly. The whole thing is a rickety, cobbled-together structure that's totally dependent on the Fed's constant supply of endless liquidity on demand. Anytime a segment of this new, seriously deranged system started to go awry, Uncle Alan was there with cash to soothe it and make it all better. But it wasn't all better... it was like treating a tumor with morphine.
Suddenly, we're getting the news that the cancer has spread, and that, gee, it's really bad.... so what does the Fed do? Come up with new and improved morphine delivery systems.
posted by Malor at 10:58 PM on February 17, 2008 [1 favorite]
Well, on the bright side this only affects America... right? right?
posted by TwelveTwo at 11:23 PM on February 17, 2008
posted by TwelveTwo at 11:23 PM on February 17, 2008
For once I feel glad that I rent, don't have a family that depends on me, and am able to live on near nothing a day besides cigarettes and cheap food.
Ha! I said it. (This goes out to all of my HS and College colleagues who bought plastic houses in the suburbs upon acceptance of some stupid corporate job and now don't know WTF to do with their lost job and worthless house)
posted by localhuman at 11:30 PM on February 17, 2008 [1 favorite]
Ha! I said it. (This goes out to all of my HS and College colleagues who bought plastic houses in the suburbs upon acceptance of some stupid corporate job and now don't know WTF to do with their lost job and worthless house)
posted by localhuman at 11:30 PM on February 17, 2008 [1 favorite]
Anyone who believes that all homeowners now facing difficulty were all innocent sheep lead to the slaughter need to remember the hordes of speculators' in CA and FL like Casey Serin.
Speculator numbers might have been much smaller than regular buyers but in an illiquid market like property where selling times can be measured in days and weeks (and now months) rather than minutes and hours (like stocks) they have a much more pronounced impact.
posted by PenDevil at 11:34 PM on February 17, 2008
Speculator numbers might have been much smaller than regular buyers but in an illiquid market like property where selling times can be measured in days and weeks (and now months) rather than minutes and hours (like stocks) they have a much more pronounced impact.
posted by PenDevil at 11:34 PM on February 17, 2008
My sister works in real estate, and there were a lot of fraudulent buyers.
Bubbles attract fraud. They always do. We'll be discovering new layers of fraud for years. Every type of entity involved, from the smallest to the largest, will be revealed to have at least some members that were dishonest. Buyers, brokers, banks, purchasers of securities -- all of them will have things exposed they'd really prefer to hide.
You don't get bubbles this big without tons of crime to go with it.
posted by Malor at 12:40 AM on February 18, 2008
Bubbles attract fraud. They always do. We'll be discovering new layers of fraud for years. Every type of entity involved, from the smallest to the largest, will be revealed to have at least some members that were dishonest. Buyers, brokers, banks, purchasers of securities -- all of them will have things exposed they'd really prefer to hide.
You don't get bubbles this big without tons of crime to go with it.
posted by Malor at 12:40 AM on February 18, 2008
keep their own currencies strong
Oops. I should have said, "to keep their own currencies weak". Strong dollars relative to their currencies mean that their exports are cheap for us, and we'll buy more of them. That means their economy grows, and they like that.
Because of the endless money-printing to buy the endless supplies of dollars, China has also been in a bubble, and I expect they'll crater when we do. Japan will, I think, return to the long slow malaise that's been affecting them for more than twenty years... ever since THEIR property bubble. The huge inflationary impulse of their money printing overcame their natural deflation for awhile, but until they're willing to let bad companies die and let their economy 'clear', as it were, they're probably not going to get truly better again.
posted by Malor at 12:45 AM on February 18, 2008
Oops. I should have said, "to keep their own currencies weak". Strong dollars relative to their currencies mean that their exports are cheap for us, and we'll buy more of them. That means their economy grows, and they like that.
Because of the endless money-printing to buy the endless supplies of dollars, China has also been in a bubble, and I expect they'll crater when we do. Japan will, I think, return to the long slow malaise that's been affecting them for more than twenty years... ever since THEIR property bubble. The huge inflationary impulse of their money printing overcame their natural deflation for awhile, but until they're willing to let bad companies die and let their economy 'clear', as it were, they're probably not going to get truly better again.
posted by Malor at 12:45 AM on February 18, 2008
For once I feel glad that I rent, don't have a family that depends on me, and am able to live on near nothing a day besides cigarettes and cheap food.Well...
Maybe you're right, but maybe not.
posted by vivelame at 1:04 AM on February 18, 2008
Some interesting bits from this week's Credit Bubble Bulletin (note: he has a horrid tendency toward inappropriate caps, but is otherwise pretty okay):
The Breakdown of Wall Street Alchemy:posted by Malor at 1:08 AM on February 18, 2008 [1 favorite]
This week provided further confirmation of ongoing momentous Credit market developments. From today’s article by the Financial Times’ Michael Mackenzie:
“The auction-rate securities market, a $330bn slice of the municipal bond sector, could disappear if the credit squeeze remains entrenched, analysts warn. ‘The auction-rate securities market is unwinding and most of the market will enter a failed state,’ said Alex Roever, fixed-income strategist at JPMorgan. ‘The lack of confidence is the contributing factor and there is a risk this type of structure will go away.’ Like the asset-backed commercial paper market that was popular with structured investment vehicles until last summer, auction-rate securities, a form of rolling short-term funding for long-term municipal commitments, have become fashionable in recent years.”
“Auction-rate securities” has joined the beleaguered ranks of “subprime,” “asset-backed commercial paper,” “SIVs,” and the “monolines” – financial structures that flourished during the prolonged Credit Bubble but no longer pass market muster in today’s Post-Bubble Risk Revulsion Backdrop. This week's “unwinding” of the “auction-rate” market and the blowing out of Credit spreads should be seen as an escalation of the ongoing unwind of “Contemporary finance” and its many avenues of Risk Intermediation.
On numerous fronts, the markets and economy confront a Highly Problematic Breakdown in “Wall Street Alchemy” – the disintegration of key processes that had for some time transformed ever-increasing quantities of risky loans into perceived safe and liquid debt instruments that enjoyed insatiable demand in the marketplace. In the case of the “auction-rate securities,” it was a clever restyling of long-term and generally illiquid municipal debt (as well as student loans and other borrowings) into perceived liquid securities that could be easily sold at regularly recurring auctions (every one to a few weeks). With scores of flush corporate treasury departments and wealthy clients (managing huge Credit Bubble-induced cash-flows) keen to earn extra (after-tax) yield on “cash equivalents,” the Wall Street firms had been diligent in ensuring (making markets for clients, when necessary) a highly liquid and enticing marketplace. Now, with the onset of Risk Revulsion and Acute Financial Sector Balance Sheet Pressures, investors are running for cover and Wall Street firms are shunning the use of their own capital to support this and other markets. Market liquidity has evaporated, confidence has been shattered, and we are witnessing yet another “run” on a previously popular risk market/asset class. The music has stopped for another game of musical chairs.
This week saw heightened systemic stress stampede toward the epicenter of the U.S. Credit system. It certainly didn’t help that insurance behemoth AIG Group reported an almost $5bn writedown of its Credit default swap portfolio or that international securities dealer behemoth UBS reported massive losses on its U.S. Credit positions. Confidence was further shaken by huge losses reported by mortgage insurers, as well the twists and turns of the “monoline” bust turned apparent bailout. In the markets, various indices of investment grade Credits widened sharply to record levels. The key “dollar swap” (interest-rate derivative hedging) market saw spreads widen sharply. Agency spreads also widened significantly. Benchmark Fannie Mae MBS spreads widened a remarkable 20 bps against 10-year Treasuries, while agency debt spreads widened a noteworthy 12.5 basis points to 69.5 bps (high since November). The Breakdown of Wall Street Alchemy is now pushing the Credit Market Dislocation uncomfortably close to the core of our monetary system.
I’ll return to financial aspects of this crisis, but I definitely feel the economic ramifications of the unfolding Credit Crisis are receiving short shrift in the media. This week saw parts of the municipal debt market grind to a virtual halt and the corporate debt market take another significant blow. Investment grade debt issuance has now slowed markedly after beginning the year at near record pace. At this point, the junk, CDO, ABS, “private-label” MBS, muni, and even investment grade debt markets are all somewhere between impaired, dislocated and completely dysfunctional. There is no mystery behind the recent string of abysmal economic reports.
The preliminary reading on February University of Michigan Consumer Confidence dropped 8.8 points to the lowest level since the 1992 recession. The Economic Conditions index sank and the Economic Outlook index plunged, while one-year Inflation Expectations rose from 3.4% to 3.7%. The Economic Outlook has sunk a remarkable 22 points since July. Falling national home prices are clearly wearing on confidence. This week, Dataquick reported that home sales throughout much of California have collapsed to more than 20-year lows, while home price declines accelerate. This is a huge unfolding issue/debacle for the MBS, agency, mortgage insurance, CDO, and Credit derivatives markets, not to mention the U.S. banking system and real economy. Countrywide Financial reported delinquencies on its $1.5 TN mortgage servicing portfolio had jumped to 7.47%, up from the year ago 4.32%. The New York “Empire” Manufacturing index sank to the lowest levels since April 2003.
The economy is now faltering badly and there is every reason to expect the downturn to gather pace – negative real interest rates compliments of the Fed and stimulus package compliments of the federal government notwithstanding. While fourth quarter data is not yet available, one can look to the first nine months of 2007 to gain important perspective. Despite the dislocation in the subprime mortgage market, Non-Financial Debt Growth accelerated from Q2’s 7.2% to Q3’s 8.9% (from the Fed’s Z.1 report). And while Household Debt Growth had slowed to a 6.9% pace, Business Borrowings accelerated to a blistering 11.9% annualized rate in the third quarter. This was the strongest corporate debt growth since the tech/telecom boom in the late nineties. Importantly, total (financial and non-financial) Corporate Debt expanded at an 11.1% rate during the first three quarters of 2007, followed by 9.3% growth in State & Local government borrowings. And while residential mortgage debt was slowing meaningfully, Commercial Mortgage Debt was expanding at an almost 13% rate.
Total (financial and non-financial) Credit expanded a seasonally-adjusted and annualized record $5.0 TN during the third quarter – as nominal GDP expanded at a 6% pace. While many trumpeted the “resiliency” of the U.S. economy in the face of mortgage and housing woes – more adept analysis would have focused on the massive Credit creation that had come to be required to sustain the Bubble Economy. Importantly, the faltering subprime market initially instigated only greater excesses throughout commercial real estate, municipal finance, M&A finance, and corporate lending more generally. The Credit Bubble was sustained at the great cost of heightened instability and weakened structures – especially throughout leveraged lending, state & local finance, and investment-grade corporate borrowings. Keep in mind that through the third quarter CDO issuance was actually running ahead of 2006’s record pace. Until the fourth quarter, record Credit growth continued to fuel the finance-driven economy. This is all now coming home to roost.
Today, with bursting bubbles in corporate and municipal finance joining the mortgage bust, the U.S. Bubble economy has quickly fallen desperately short of sufficient Credit and liquidity. And the greater the Credit market dislocation and broad-based tightness of Credit, the bleaker become economic prospects and the more intense the Revulsion to Wall Street’s Credit instruments. The days of free-flowing cheap finance for home buyers, state and local governments, LBO firms, commercial real estate speculators, college students, risky auto buyers, and high-risk Credit card holders are over - and they will not be returning for some time to come.
When I have previously underestimated the “resiliency” of the U.S. Credit Bubble and economy, it was in each instance a failure to appreciate the capability of Wall Street finance to expand to ever greater degrees of Bubble excess. Today, with “contemporary finance” mired in a historic collapse, I am confident that the Credit system is today only in a position to surprise on the downside. It is this framework that shapes my view of a rapidly escalating Credit crisis feeding an arduous economic adjustment period.
And while it could undoubtedly prod a highly speculative stock market, there is no resolution to the “monoline” dilemma that would meaningfully influence the trajectory of the unfolding Credit and economic bust. As we’ve been saying for awhile now, confidence in Wall Street finance has been irreparably shattered. Trust has been broken in “AAA” ratings, "mark-to-model," CDO structures, myriad risk models, Credit insurance, counter-party risk, and various instruments and vehicles for intermediating risk in the markets. Moreover, old fashioned lending will not come close to sufficing the demands of a highly imbalanced Bubble economy, especially with bankers nervous and retrenching. Again, we’re witnessing nothing less than the Breakdown of Wall Street Alchemy – one that took a turn for the worst this week.
TwelveTwo writes 'Well, on the bright side this only affects America... right? right?'
No. (Advance warning: I don't know what I'm talking about). In Australia, interest rates are rising because the reduced credit in the US is affecting our banks who borrow a lot from over there. Several mortgage brokers (eg; RAMS home loans) have gone bankrupt/folded, and property companies (Centro) who I think have assets and loans in the States as well, are struggling because they can't refinance their loans and the property values have gone below what they're mortaged for, so they have to throw a fire-sale of their assets. A friend of my parents (works for Centro) is probably about to lose his job and his house because the company offered home loans to employees, and now the loan needs to be paid back pretty much instantly, and his employee stock options are worth nothing either.
Clarification or correction welcome
posted by jacalata at 2:32 AM on February 18, 2008
No. (Advance warning: I don't know what I'm talking about). In Australia, interest rates are rising because the reduced credit in the US is affecting our banks who borrow a lot from over there. Several mortgage brokers (eg; RAMS home loans) have gone bankrupt/folded, and property companies (Centro) who I think have assets and loans in the States as well, are struggling because they can't refinance their loans and the property values have gone below what they're mortaged for, so they have to throw a fire-sale of their assets. A friend of my parents (works for Centro) is probably about to lose his job and his house because the company offered home loans to employees, and now the loan needs to be paid back pretty much instantly, and his employee stock options are worth nothing either.
Clarification or correction welcome
posted by jacalata at 2:32 AM on February 18, 2008
People mocking the "it will always go up" scenario need to remember that is exactly what happened when this all started. We bought our house 4 years ago with an ARM and knew we had to refinance as soon as the LTV would let us. We did, and now have a fixed 5.5. If we had tried to do this a year ago, no go.
We relied on the mortgage people and our realty for their knowledge, and we got lucky.
posted by Big_B at 8:25 AM on February 18, 2008 [1 favorite]
We relied on the mortgage people and our realty for their knowledge, and we got lucky.
posted by Big_B at 8:25 AM on February 18, 2008 [1 favorite]
I had a mortgage broker flat-out lie to me about how much an adjustable-rate mortgage might change, when it came to monthly payments. She made it sound as though we were discussing something akin to rent increases, with payments increasing 5% in a bad year, but also sometimes decreasing.
Fortunately I understood this was dishonest, but a lot of people surely believed her, not understanding that an adjustment might actually change their payments by 25-40% or more in the case of some of the more exotic loans.
posted by mosch at 8:57 AM on February 18, 2008
Fortunately I understood this was dishonest, but a lot of people surely believed her, not understanding that an adjustment might actually change their payments by 25-40% or more in the case of some of the more exotic loans.
posted by mosch at 8:57 AM on February 18, 2008
I don't understand the ire that ARMs create in US homebuyers. Traditionally the entire mortgage market in the UK has been floating rate.
posted by patricio at 9:10 AM on February 18, 2008
posted by patricio at 9:10 AM on February 18, 2008
patricio: I'm guessing there are two main differences, first that your population is likely more accurately informed about the sorts of payment changes that are possible, and second that your ARMs are less "exotic" than those that spurred these problems.
We had mortgage brokers pushing people into negative amortization interest-only arms, where after 5 years of payments the person might actually owe 25% more than they had originally borrowed. These loans were advertised extremely aggressively in the United States, and were the source of nearly all of the "$300,000 mortgage only $750/month!" ads that were everywhere in the US for the previous 6 years or so.
posted by mosch at 9:21 AM on February 18, 2008
We had mortgage brokers pushing people into negative amortization interest-only arms, where after 5 years of payments the person might actually owe 25% more than they had originally borrowed. These loans were advertised extremely aggressively in the United States, and were the source of nearly all of the "$300,000 mortgage only $750/month!" ads that were everywhere in the US for the previous 6 years or so.
posted by mosch at 9:21 AM on February 18, 2008
for some reason (cough, "Ownership Society").
Disowned by the Ownership Society
Free marketers are about as relevant as anarchocommunists in this discussion.
I want to thank Fannie Mae, Franklin Raines for being here. He is joined with many in the private sector to unlock millions of dollars, to make it available for the purchase of a home. Listen, when people own a home, they have a stake in the future of our society. If we're interested in economic security, we must promote home ownership for all Americans.
If you want to fleece the flock, you need the flock to think they're fleecing someone else. Lords -> serfs -> slaves. Keep the # of slaves at the sustainable max, and you avoid a revolution.
Also, I thought the (god awful) illustration was somewhat intentional.
posted by mrgrimm at 10:23 AM on February 18, 2008
Disowned by the Ownership Society
Free marketers are about as relevant as anarchocommunists in this discussion.
I want to thank Fannie Mae, Franklin Raines for being here. He is joined with many in the private sector to unlock millions of dollars, to make it available for the purchase of a home. Listen, when people own a home, they have a stake in the future of our society. If we're interested in economic security, we must promote home ownership for all Americans.
If you want to fleece the flock, you need the flock to think they're fleecing someone else. Lords -> serfs -> slaves. Keep the # of slaves at the sustainable max, and you avoid a revolution.
Also, I thought the (god awful) illustration was somewhat intentional.
posted by mrgrimm at 10:23 AM on February 18, 2008
Free marketers are about as relevant as anarchocommunists in this discussion.
I disagree; I believe the corporate fraud present this decade from Enron to FGIC is a Class A example of how unbridled free marketeerism works here in the real world.
In a world without external oversight and redistribution -- let's call this "the State" -- the economic actor -- the Millikens, Skillings, Mozillos, and their minions -- only has to [legally] steal a couple million to be able to win the game and transcend from being a putative productive member of society, becoming a pure rentier for the rest of his life, not to mention be able to pass on this capital to future generations to continue the cycle for all eternity.
posted by panamax at 11:09 AM on February 18, 2008
I disagree; I believe the corporate fraud present this decade from Enron to FGIC is a Class A example of how unbridled free marketeerism works here in the real world.
In a world without external oversight and redistribution -- let's call this "the State" -- the economic actor -- the Millikens, Skillings, Mozillos, and their minions -- only has to [legally] steal a couple million to be able to win the game and transcend from being a putative productive member of society, becoming a pure rentier for the rest of his life, not to mention be able to pass on this capital to future generations to continue the cycle for all eternity.
posted by panamax at 11:09 AM on February 18, 2008
I don't understand the ire that ARMs create in US homebuyers.
Widely available affordability products artificially push up prices. They serve the bankers not the borrowers in the end.
ARMs would not be a problem if banks qualified people on the back-end "taser" rates not the front end "teaser" rates. (Banks are actually required to do this now, one of the first rule changes to come in the aftermath of the first subprime shocks this time last year).
posted by panamax at 11:13 AM on February 18, 2008
Widely available affordability products artificially push up prices. They serve the bankers not the borrowers in the end.
ARMs would not be a problem if banks qualified people on the back-end "taser" rates not the front end "teaser" rates. (Banks are actually required to do this now, one of the first rule changes to come in the aftermath of the first subprime shocks this time last year).
posted by panamax at 11:13 AM on February 18, 2008
I disagree; I believe the corporate fraud present this decade from Enron to FGIC is a Class A example of how unbridled free marketeerism works here in the real world.Some would counter that the US is not a free market. If it were the US would've entered a much more severe recession after the tech bubble in 2000/2001 instead of having the credit bubble inflated by the Fed cutting rates to near zero and keeping them there for too long.
posted by PenDevil at 11:33 AM on February 18, 2008
This is true. We're not as centrally managed as the Soviet Union was, but there's still a strong component of central planning to the Fed's manipulation of the money supply. Central planning is _always_ a bad idea over the long term.
There's also, of course, the concept of moral hazard, which appears to have been entirely abandoned. Britain's taking over Northern Rock is a classic example. Why would any bank in Britain be careful, when if it gets in trouble, it knows the government won't let it fail?
That'll be happening here too, in one form or another. They'll try to attach some free-market rhetoric to the bailouts, but don't be fooled.
posted by Malor at 12:04 PM on February 18, 2008
There's also, of course, the concept of moral hazard, which appears to have been entirely abandoned. Britain's taking over Northern Rock is a classic example. Why would any bank in Britain be careful, when if it gets in trouble, it knows the government won't let it fail?
That'll be happening here too, in one form or another. They'll try to attach some free-market rhetoric to the bailouts, but don't be fooled.
posted by Malor at 12:04 PM on February 18, 2008
Central planning is _always_ a bad idea over the long term.
Can you point to any countries, throughout history, that had no central planning?
posted by mosch at 12:27 PM on February 18, 2008
Can you point to any countries, throughout history, that had no central planning?
posted by mosch at 12:27 PM on February 18, 2008
I've seen arguments that the current mess is just a continuation of the dot-com crash. The 'fixes' that were made then simply put things on the backburner. In other words, there was a lot of hurt due back then, and it was simply delayed until now when it's rearing its ugly head again. The question is, are today's 'fixes' going to allow the inevitable and much-needed correction to happen, or are they just going to delay them even further down the road, making the hurt-period even more painful? We need to get past all this pain-aversion and take the kick in the pants and deal with it. Seems like all we've done this past decade is pass the buck.
posted by afx114 at 2:06 PM on February 18, 2008
posted by afx114 at 2:06 PM on February 18, 2008
And I don't see why anyone would want to pay the bank to take that contract with the nonpaying customer. Is the banker lying to the "Wall Streeters" somehow about the borrower?
The thing about the finance industry (and Wall Street especially) is that there's a lot of Smart Businesspeople there who think they can take any piece of shit, repackage it into something moderately attractive, and successfully market it to some poor schmuck because They're Just That Good™.
This whole thing is hubris for those douchebags. By proposing bailouts for the buyers that will now lose their houses, politicians are also bailing out the people who thought up this brilliant plan in the first place. What a message to be sending - "As long as you screw up so massively that it has the potential to hurt the national economy, we'll absorb all the risk for you! Enjoy the billions of profits in the meantime!"
With apologies to the borrowers who got screwed - next time do your homework better. I know there was a lot of misinformation, and it's not all your fault, but you buying the house you did with the financing you got was a MISTAKE. People used to be forced to learn from those.
posted by chundo at 9:48 AM on February 19, 2008
The thing about the finance industry (and Wall Street especially) is that there's a lot of Smart Businesspeople there who think they can take any piece of shit, repackage it into something moderately attractive, and successfully market it to some poor schmuck because They're Just That Good™.
This whole thing is hubris for those douchebags. By proposing bailouts for the buyers that will now lose their houses, politicians are also bailing out the people who thought up this brilliant plan in the first place. What a message to be sending - "As long as you screw up so massively that it has the potential to hurt the national economy, we'll absorb all the risk for you! Enjoy the billions of profits in the meantime!"
With apologies to the borrowers who got screwed - next time do your homework better. I know there was a lot of misinformation, and it's not all your fault, but you buying the house you did with the financing you got was a MISTAKE. People used to be forced to learn from those.
posted by chundo at 9:48 AM on February 19, 2008
Lets say I had a million dollars and decided that I wanted to start making loans. So I set up an office at the local mall. All I ask for was that that they fill out a postcard with how much they make and their address on it, so I know how much they can borrow and where to mail the payments.
Now, if most of the people defaulted on their loans, whose fault is it? Is it the people who took the money? Or is it my fault for not making responsible loans?
Ultimately, I'd say it was my fault for not even checking to make sure people could afford to pay me back.
Yes, the people who took the loans were irresponsible. But people are irresponsible and make bad decisions all the time. It's a part of human nature. People get sick, or divorced, or have unplanned children, or get sent to fight a crappy war, or any number of things.
The people with the money, if they want to keep it (or, in this case, get it back), need to be the responsible parties.
I'm not saying that the people who took the loans are blameless. Just that lenders were fooling themselves just as much as the people who took the loans. And if you start fooling yourself when you have a bunch of money you will soon loose it. So whose fault is that?
posted by webnrrd2k at 10:55 AM on February 19, 2008
Now, if most of the people defaulted on their loans, whose fault is it? Is it the people who took the money? Or is it my fault for not making responsible loans?
Ultimately, I'd say it was my fault for not even checking to make sure people could afford to pay me back.
Yes, the people who took the loans were irresponsible. But people are irresponsible and make bad decisions all the time. It's a part of human nature. People get sick, or divorced, or have unplanned children, or get sent to fight a crappy war, or any number of things.
The people with the money, if they want to keep it (or, in this case, get it back), need to be the responsible parties.
I'm not saying that the people who took the loans are blameless. Just that lenders were fooling themselves just as much as the people who took the loans. And if you start fooling yourself when you have a bunch of money you will soon loose it. So whose fault is that?
posted by webnrrd2k at 10:55 AM on February 19, 2008
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