Mortgage Meltdown

by hilzoy

Mean, bad, ugly things are happening to the subprime mortgage market. (Subprime mortgages are, basically, mortgages made to less creditworthy borrowers.) Things that make normally sedate publications use words like meltdown (Forbes; also AP, Reuters, and WSJ), crisis (WaPo), turmoil, cratering, and imploding. This site maintains a list of subprime lenders that have "imploded" (which it defines to include "bankruptcy filing, possibly-temporary halting of major operations, or a last-ditch acquisition.") As I write this, there are 41 lenders on the list.

So: what's going on? (Note: I'll try to explain this as best I can, but if I make mistakes, please correct them.)

It all started when lenders began making what, to a normal observer, look like unbelievably bad loans. Here's a little primer:

"Which of these products do you think makes sense?

(a) The "balloon mortgage," in which the borrower pays only interest for 10 years before a big lump-sum payment is due.

(b) The "liar loan," in which the borrower is asked merely to state his annual income, without presenting any documentation.

(c) The "option ARM" loan, in which the borrower can pay less than the agreed-upon interest and principal payment, simply by adding to the outstanding balance of the loan.

(d) The "piggyback loan," in which a combination of a first and second mortgage eliminates the need for any down payment.

(e) The "teaser loan," which qualifies a borrower for a loan based on an artificially low initial interest rate, even though he or she doesn't have sufficient income to make the monthly payments when the interest rate is reset in two years.

(f) The "stretch loan," in which the borrower has to commit more than 50 percent of gross income to make the monthly payments.

(g) All of the above.

If you answered (g), congratulations! Not only do you qualify for a job as a mortgage banker, but you may also have a future as a Wall Street investment banker and a bank regulator.

No, folks, I'm not making this up. Not only has the industry embraced these "innovations," but it has also begun to combine various features into a single loan and offer it to high-risk borrowers. One cheeky lender went so far as to advertise what it dubbed its "NINJA" loan -- NINJA standing for "No Income, No Job and No Assets.""

What's especially fun about some of these loans is that they can reset from low introductory payments to horrifically higher payments, in some cases quite unpredictably. People get in because the low introductory payments look so nice, and then get socked with much higher payments that they just can't afford.

Obviously, people should not take out loans they can't afford. But if you feel inclined to jump all over the borrowers, try reading this explanation of how negative amortization ARMs work. It's pretty clearly written, but I had to really work to understand it. Now imagine that you are not particularly smart, or particularly well-educated. Would you understand it then? Now ask yourself what the odds are that most mortgage brokers understand it clearly; and imagine yourself in the position of someone who is not particularly good at this stuff, being advised by a mortgage broker who doesn't understand it all that well either, but who is eager to cut a deal.

In any case, a lot of people who really should not have gotten mortgages got them, because mortgage underwriters basically lost all restraint:

"I am a little bit shocked that this meltdown didn't happen sooner," said Jeff Lazerson, president of Mortgage Grader, a Web-based brokerage in Laguna Niguel. "In the past, we used to say that if you could fog a mirror you could get a loan. For the last five years, you could be dead and get a loan. That's why we're in this mess today."

You might ask: why would lenders be willing to make such risky mortgages? Part of the answer is that recently, the practice of selling mortgages has become very widespread. The company that writes the mortgage sells it to someone else, promising to buy it back if it goes bad in the next year or two. The buyer then pools the mortgage in with a lot of other mortgages and securitizes them, which (basically) means: transforms them into a tradeable financial instrument (called a CDO). There are decent explanations of this process here, here (most wonky details), and here; for present purposes, the crucial point is that securitized mortgages seem a lot less risky, both because a whole bunch of mortgages are pooled together, and because when they're securitized, it is possible to buy less risky slices of them.

The bottom line is this: no one really has much of an incentive to worry about the possibility that the borrower will default on a mortgage. The company that originally writes the mortgage doesn't: instead of keeping it on the books for the full 30 years, they will sell it very quickly, and if the borrower defaults after the buyback period is over, that's not their problem. The people who buy the mortgages don't have to worry as much, as long as they can securitize it and sell it. The people who buy mortgage-backed securities don't have to worry as much, because the mortgages are pooled, and because they can buy less risky slices of them. And the borrower might just not understand what he or she is getting into.

One way to look at this is to think: hey, people get homes, businesses get money, great! Another way to look at it is as an enormous gamble on the proposition that property values will continue to rise.

If you take out an incredibly stupid loan but property values rise, then when your loan resets and your payment skyrockets, you can always refinance your way into a new loan. You may have been stupid, but your house has been chugging away, appreciating in value, doing its best to cushion you from the effects of your stupidity.

But if property values don't rise, then you might not be able to do this. You might need to borrow more money than your house is worth in order to refinance out of your loan. In that case, you'd be stuck making payments you just can't afford, and you risk default and foreclosure.

So: if property values go up, even idiotic borrowers will probably manage not to default. But this means that if property values go up, then the people who wrote the mortgage will be fine too. No defaults, no problem. Likewise, if borrowers don't default, then the people who buy mortgage-backed securities are likely to be fine as well. So there's a sense in which everyone concerned is banking on the fact that property values will, in fact, continue to rise.

***

As we all (presumably) know, the housing market has gone south recently, and Goldman Sachs expects home prices to fall by another 3% in 2007. This means that we are now finding out just how big a gamble everyone has been taking. Delinquencies and foreclosures are rising:

"U.S. subprime borrowers fell behind on their mortgages at the highest rate in four years in the fourth quarter and foreclosures begun on all types of home loans rose to an all-time high, the Mortgage Bankers Association said.

The share of subprime borrowers making late payments rose to 13.33 percent from 12.56 percent in the third quarter, the Washington-based group said in a report today. Foreclosures also rose on loans to borrowers with the best credit ratings, a sign of broader trouble in the mortgage market."

And the WSJ reports that 14.44% of subprime borrowers with adjustable mortgages are delinquent, and 4.53% of subprime loans were in foreclosure. (Full figures here; handy charts of foreclosure rates for different types of mortgages here.)

The reason all those subprime lenders are in trouble is, basically, a result of their promise to buy back loans that get into trouble quickly. Since a lot of loans have been getting into trouble quickly, they are having to buy back a lot more loans than they seem to have counted on. That's why they're going bankrupt, laying off workers, etc.

A lot of these trends -- dropping real estate values, rising delinquency and foreclosure rates, failing lenders, and so forth -- reinforce one another. When someone defaults on a mortgage, that person's house goes on the market, which increases the supply of houses. Moreover, that person is normally not in a position to buy a new house, so demand does not go up. And if that foreclosure hurts the company that wrote the mortgage, that company might become less willing to write new mortgages, which would, in turn, depress demand. So: a significant increase in foreclosures tends to depress housing prices, which, in turn, leads to more foreclosures, which leads to more lenders having to buy back bad loans, and so on and so forth. Not a pretty picture.

And there's reason to think it will get worse. As I noted above, some of the thrilling new sorts of mortgages involve payments that are held low for an initial 'teaser' period, but that then reset at much higher levels. As I noted above, when a loan resets, borrowers who can't afford the new higher rates will probably want to refinance into a loan with lower payments. When property values drop, however, that may not be possible. So, in the present real estate market, when those loans reset, a lot of people will probably go into default.

For this reason, I tend to think of these reset dates as a disaster waiting to happen. Here's a handy chart of when loans are scheduled to reset (the numbers on the bottom are months starting with Jan. 2007):

Yikes!

So: what does all this mean? It depends on who you ask. The WSJ surveyed some economists:

"Most economic forecasters in a new WSJ.com survey believe recent turmoil in the subprime mortgage market is likely to spread to the broader mortgage market and they expect a widely followed index of home prices to fall this year. But they still think the U.S. will avoid a recession and even a significant rise in unemployment. (...)

Of the 60 economists surveyed, 32 said it is either "very" or "somewhat" likely that the intense and speedy unraveling of the market for subprime mortgages -- home loans made to people with poor credit histories – will spill over to the rest of the mortgage market.

But 26 said that's not likely. Two didn't respond. (...)

But just 22% said difficulties in the subprime market have caused them to downgrade their economic forecasts and, by a 4-to-1 margin, they agreed with the statement that "the worst of the housing bust is behind us.""

I tend to be more pessimistic (though that's a general trait of mine, when it comes to financial markets. The disasters I predict tend to occur, but they also tend to come several years after they seem inevitable to me. For what it's worth, I've thought there was a serious housing bubble for several years.) Nouriel Roubini is pessimistic too, as is Morgan Stanley's Stephen Roach.

The basic case for the pessimistic view involves the intersection of two problems, either of them potentially serious enough to put us in recession, but deadly in combination. They are: a big hit to consumer spending, and a credit crunch. Taking them in turn:

Consumer demand has kept the American economy going recently, and it has been able to do this because American consumers have, basically, been using their houses as credit cards. As property values go up, we magically get more money, and a lot of us seem to be spending this money on all sorts of nice things. As property values go down, we will not be able to do this any more. This means that all sorts of businesses that have nothing to do with mortgage underwriting could get hurt. If you can't remodel your kitchen by taking money out of your house, Home Depot sales will fall, contractors will have less work, etc.

That's much more significant than troubles that are confined to the mortgage business, or even to housing as a whole (where problems are already popping up.) Here's Calculated Risk's summary of a report by Credit Suisse projecting that if our current, tighter lending standards had been in force in 2006, fully 21% of the loans made during that year would not have been approved; and that between that and the disappearance of speculators from a falling market, housing sales could fall by 20% next year. Housing is a major part of our economy, both in itself and because it fuels consumption. This could hurt everyone.

Stephen Roach:

"Therein lies the risk.  To the extent the US economy is now flirting with “growth recession” territory – a sub-2% GDP trajectory – while consumer demand remains brisk, a pullback in personal consumption could well be the proverbial straw that breaks this camel’s back.  The case for a consumer spillover is compelling, in my view.  A chronic shortfall of labor income generation sets the stage -- real private compensation remains over $400 billion below the trajectory of the typical business cycle expansion.  At the same time, reflecting the asset-dependent mindset of the American consumer, debt and debt service obligations have surged to all-time highs whereas the income-based saving rate has dipped into negative territory for two years in a row -- the first such occurrence since the early 1930s.  Equity extraction from rapidly rising residential property values has squared this circle -- more than tripling as a share of disposable personal income from 2.5% in 2002 to 8.5% at its peak in 2005.  The bursting of the housing bubble has all but eliminated that important prop to US consumer demand.  The equity-extraction effect is now going the other way – having already unwound one-third of the run-up of the past four years.  In my view, that puts the income-short, saving-short, overly-indebted American consumer now very much at risk -- bringing into play the biggest spillover of them all for an asset-dependent US economy.  February’s surprisingly weak retail sales report -- notwithstanding ever-present weather-related distortions -- may well be a hint of what lies ahead."

So: a serious drop in housing prices could knock the legs out from under consumer spending. Households all over the country will have shrinking assets. Moreover, we don't just have mortgages: people are heavily indebted in general, and the bankruptcy laws just got a lot tighter. Sounds like fun!

At the same time, however, credit will certainly tighten as a result of the present problems. This has already happened in the subprime market:

"While several dozen lenders have shut their doors, others are quickly upping the minimum credit scores they require for various types of loans.

"The last couple of weeks have been almost catastrophic," said Armand Cosenza, a mortgage broker in Cleveland. Mr. Cosenza said he turned down eight loan applicants on Wednesday because he couldn't get them a mortgage. At least five of them would have qualified for a loan six months ago, he said.

George Hanzimanolis, a mortgage broker in Tannersville, Pa., says his office has turned away 30 to 40 people in the past week because of tighter lending standards. "It's scary how quickly these very large lenders are just...imploding," he says. "The situation will get uglier before it gets better.""

(Bloomberg, however, thinks we've only seen the 'first wave' of foreclosures.) And it's hitting larger companies that have subsidiaries in the subprime business:

"More companies have exposure to the subprime sector than many investors believed. H&R Block (HRB) is down about 20% in the past six weeks amid concern about its subprime mortgage unit, and General Motors (GM) is injecting $1 billion into its lending division because of losses there. Even home-improvement giant Lowe's (LOW) said it could be hurt by problems in the subprime mortgage sector if some financially strapped homeowners lose their homes or don't have the cash for home projects."

The only question is whether, and how far, it will spread. I already noted the WSJ's poll of economists, in which over half said that "it is either "very" or "somewhat" likely that the intense and speedy unraveling of the market for subprime mortgages -- home loans made to people with poor credit histories – will spill over to the rest of the mortgage market." The head of Countrywide (a California mortgage lender) says that mortgages are now in a "liquidity crisis". Moreover, the whole business of collateralized debt obligations and similar financial instruments looks likely to contract in a pretty major way. If this spills over into the general credit market, as Nouriel Roubini argues that it will, we will have a credit crunch. Roubini:

"There is a serious risk of a generalized credit crunch, first in subprime (where the crunch is already severe), then to all mortgage markets, then to consumer credit and overall credit markets. The market myth and spin of a credit crunch limited to subprime is faltering by the hour.

There are already serious signs of contagion to other credit spreads (CDS spreads on major brokers being now near junk, CDX, Itraxx, CMBX, swap spreads all significantly up); and increases in all sorts of measures of market volatility and risk aversion. This contagion will get much worse in the weeks and months ahead."

One other point to consider: investors own the financial instruments based on these mortgages. If enough of the underlying mortgages go into foreclosure, those investors will lose their money, and that will have a further depressing effect on the economy. There is a lot of money in mortgages:

And a lot in CDOs in particular:

That's a lot of nice money. It'd be a shame if something happened to it.

But the real potential for ugliness comes when you put those things together. A fall in housing prices drives consumer demand down, as well as hurting housing-related businesses. A credit crunch means that it's harder for anyone to borrow money, which means that all sorts of demand-creating activities that people want to borrow money to undertake won't happen. All sorts of people will lose money. Not good at all.

And remember: housing recessions take a long time to unwind. When bubbles burst, prices have to return to their normal, non-bubbly level. If the bubble is in tulip bulbs, that happens when people get rid of all the tulip bulbs they couldn't really afford anyways, and things go back to normal. But people don't get rid of homes they couldn't really afford nearly so easily. People like their homes. They'll part with almost anything else first. This could take a while.

And that's without even thinking about Nouriel Roubini's nightmare:

"One cannot even exclude systemic risk consequences if the housing bust combined with a recession leads to a bust of the mortgage backed securities (MBS) market and triggers severe losses for the two huge GSEs, Fannie Mae and Freddie Mac. Then, the ugly scenario that Greenspan worried about may come true: the implicit moral hazard coming from the activities of GSEs - that are formally private but that act as if they were large too-big-to-fail public institutions given the market perception that the US Treasury would bail them out in case of a systemic housing and financial distress – becomes explicit. Then, the implicit liabilities from implicit GSEs bailout-expectations lead to a financial and fiscal crisis. If this systemic risk scenario were to occur, the $200 billion fiscal cost to the US tax-payer of bailing-out and cleaning-up the S&Ls may look like spare change compared to the trillions of dollars of implicit liabilities that a more severe home lending industry financial crisis and a GSEs crisis would lead to."

I think I'll stop now, before I get too depressed, and go off and contemplate the fact that even though I am a wildly conservative person financially -- nothing but plain vanilla fixed-rate mortgages for me, thank you very much -- that in no way means that I won't suffer because of other people's decisions to offer NINJA loans with more flailing option ARMS than an octopus to people with no visible means of support. But it will be a lot worse for others than it will for me. And that's no comfort at all.

Comments

[OCSteve]

I’ve been saying for 3 years now it’s coming… I have one friend (with a swing loan) trying to sell who I have been trying to convince to reduce his price and just basically bail.

I think this could be really bad (i.e. “dot com” bad).

[hilzoy]

OCSteve: I think it could be worse. Like I said, though, I'm a pessimist when it comes to the economy. (I started predicting the dot-com bubble in 1997. I now just assume that there's some mystical force, sort of like whatever it is that lets Wile E. Coyote keep on running after he's over the cliff, that keeps markets and economies perking happily along long after it seems to me that they should be falling like a rock.

[Cardinal Fang]

What will be the difference between, on the one hand, the coming meltdown when these underqualified borrowers stop being able to pay back their risky lenders, and, on the other hand, the situation that would have obtained if the risky lenders hadn't made the risky loans in the first place? (This is not meant to be sarcastic. There is, I'm sure, a big difference, but I don't understand what it is.)

[Nell]

Cardinal Fang, I think the answer to your question is "a whole lot of jobs and production that wouldn't have happened without those new homeowners."

[brent]

Well I am no expert Cardinal Fang but I will give it a shot. It seems to me that the basic problem is that the economy has now expanded on the basis of this borrowed money. Business have grown and expanded, hired more people, branched out with investment. I live in two cities currently, Las Vegas and Miami, where the effects of this sort of expansion are quite visually apparent with new construction and shiny new towers popping out of the ground on a weekly basis. Now that it turns out that the money doesn't really exist, all of that inflation is now becoming deflation. Vegas will be alright for obvious reasons. In Miami however, where lots and lots of people were buying homes that they felt that they would be selling within a year or two for profit, are finding out that that will not be happening and they will either have to sit on their investment or take a loss. Deflating economies means closing businesses and many lost jobs.

[CaseyL]

Well, the homeowners now in danger would still be wherever they'd been living before.

On a more macro scale, the housing market would have been less active, probably, and since the housing and refinancing booms were driving the economy, there would have been fewer jobs and less economic growth generally.

There's no way of telling how much less, though. The problem with building an economy on debt is that it's difficult - probably impossible - to determine how much the economy 'needs' large scale speculation to grow versus how stable it would be without all that risky speculation.

That's also a big problem for an economy based on endless growth: it constantly needs new and bigger markets. It constantly has to sell people more, bigger, fancier, more expensive stuff. If people actually did what prudence dictates - live within your means, save money, etc. - the economy would grind to a halt.

[hilzoy]

Cardinal Fang: Well, the people who got the mortgages paid a bunch of money and will end up evicted and with their credit ratings trashed, instead of having rented all the while; the mortgage lenders would probably have done less well, but would not now be bankrupt, and their employees would probably still be employed; the people who bought the securitized mortgages would probably have made slightly less during the last few years, but would probably not have lost as much as they now will.

Moreover, housing prices would probably not have gone up nearly as much during the past few years. This would have meant that some people didn't have as much equity to tap into, which might have prevented them from doing some stupid spending. It would also have meant that new homeowners didn't have to accumulate nearly as much debt, debt which they will still owe when this is all done.

Also, housing prices would not now tank, which means that a lot of people who will now find themselves underwater and unable to sell would not have.

All in all, just think of all the things people did as a result of all this easy credit being available -- assuming debt, investing, spending, etc. -- and think: all those actions and choices have consequences. Bubbles distort economic choices, and when they burst, those choices have to be unwound in ways that are often painful for all concerned. It's generally a lot better for assets to go up less and then come down less than it is for them to skyrocket and then crash.

It's also better for companies and individuals not to go bankrupt.

[Slartibartfast]

This is hitting folks pretty hard here in Orlando, where "flip your house" nearly became a religion.

I tend to look at that sort of thing this way: by the time word is out, and people are rushing to buy in to whatever is the trend, it's far too late to make any money. And the likelihood is it's you (and lots of others) who'll be left standing when the music stops.

Me? 20-year fixed, with a 2nd folded into it. Our current valuation is such that we still have less than the original sales value owed, although we do plan to pour as much as we can into it for the next few years to drive it down further. We're at about 50% of valuation right now, but I expect that number to go up a bit as the market bottoms. Maybe it's bottomed already; maybe it won't do it for a year or two. I've got no plans to move, though, so it's all good.

[bob mcmanus]

Very good, you have done some work. Roubini has lost some credibility, he has predicted one too many recessions for my tastes. Speaking of credibility or lack of it, Stirling Newberry has recently written another Summary. Long of course, and challenging, I like to think that Newberry is the Zizek or Baudrillard of monetary thinkers. He can do better than I.

It may be crazy to say:"It is all connected," but China and Saudi Arabia are buying many of those mortgage instruments. China etc buys dollar instruments to keep interest rates low feeding the housing bubble and consumer spending which buys Chinese manufactured goods. SA gets high oil prices and continued demand which supports air-conditioned McMansions 50 miles from work.

Both finance Bush's War in Iraq, tax cuts, Keynesian stimulus with pressure on the welfare state. The "GWoT" is directly connected to the housing bubble. How could it not be?

Paranoia can be true perception when trillions are in play.

[hilzoy]

Slarti: we think as one on this point. My theory has always been (a) what you said -- by the time I hear about it, it's almost certainly too late, and (b) there are a lot of smart people out there trying to make money in (pick asset of your choice -- stocks, houses, whatever), and if I want to speculate, I can't expect to outdo them unless I am prepared to commit about as much time and effort as they are. Do I want to do that? Hell no.

Thus, I do not speculate. Though I do, occasionally, regret that back in -- 2002? 2003? -- when Apple was selling for $12-15 and I knew it was way undervalued, I didn't buy some for kicks. (It's pushing 90 now.)

[bob mcmanus]

Incidentally or not, Newberry certainly isn't the first by a long shot to view money and prices as information. But if there are others, besides Uncle Milty himself, to apply post-structuralist theories of discourse and communication to economics I would love to have them linked for me. Even some good information theory. But no rational expectations please, especially about inflation. Good post at Thoma's about why rational expectations will only work for those with adequate information, i.e,. the elite and rich.

And of course the number-crunching neo-liberals and neo-classicists don't respect pomo Stirling.

[Bruce Baugh]

Cardinal Fang, the key difference (I think) is that had lending policies been sane all along, overall growth would have been slower, but the gains people made would have been more sustainable. The problem with the current situation is that having something and losing it is much more disruptive than never having it, particularly when we talk about something as big and fundamental as a home. Everything dependent on the prospect of future resources now dissolved is at risk. In addition, there's a lot more fear and uncertainty, more pain, more anger - all passions ripe for exploitation by scoundrels and demogogues.

People made a lot of stupid choices in recent years. But the experts told them it was smart! Starting with the Chairman of the Federal Reserve Board, one of the most genuinely respected figures in American politics, let us not forget. Now the victims are prone to a mixture of inward directed loathing and outward directed skepticism and anger. They were set up, adn even though we all bear ultimate responsibility for our folly, I don't think people should have to bear the burden of figuring out that the entire fiscal apparatus of their country is feeding them crap for stupid reasons.

And a policy of sensible credit throughout would have forestalled that social situation.

[bob mcmanus]

"And a policy of sensible credit throughout would have forestalled that social situation."

"Another way to look at it is as an enormous gamble on the proposition that property values will continue to rise." ...hilzoy

This is inflation. Asset inflation. It is a global phenomenom, and a product of globalization.

Okay, two insights of Friedman's that most economists I read seem to accept are:

1) Inflation is always a monetary phenomenon.
2) What is important is the expectations of future inflation.

1a) Inflation as monetary phenomenon means that the Fed has enabled or supplied both the tech and housing bubble with easy money or lack of brakes. M3 has been in double digits for a decade. Cheap and crazy credit instruments don't just happen; they happen because there is a lot of money floating around with insufficient productive places to invest it. Now maybe the Fed doesn't deserve direct blame, globalization has simply accelerated the velocity and increased M3 and there is nothing the Fed can do about it. I could say it was a consequence of China coming online, but inflation is a monetary phenomenon.

2a) But we are in our third inflationary bubble. The first was in the mid-eighties with the rise in the Stock Markets, then tech, now housing. Larry Kudlow is still saying Dow 36k. I have no reason to believe that expectations of asset inflation will not be fed by the powers that be, here and overseas. The Far East markets fell more than domestic, they ate some of our sins.

China cannot afford an American recession, and Saudi Arabia does not want the crash in oil prices that a recession would create. The last time (?) oil prices crashed Iraq went to horrible war with Iran, followed by Kuwait. Over oil, and oil money.

[Anarch]

OCSteve: I think this could be really bad (i.e. “dot com” bad).

The trouble, from my perspective, is that a) it looks like it's going to be bigger than the dotcom bust, and b) there are parts of the country -- e.g. here in Wisconsin -- that haven't actually recovered from the dotcom bust in the first place.

[dutchmarbel]

If the bubble is in tulip bulbs, that happens when people get rid of all the tulip bulbs they couldn't really afford anyways, and things go back to normal.

Hmmmmm..... going back to normal was not as easy as you make it sound though.

[Decided FenceSitter]

Heh. My wife and I were one of those with the two mortgages, no down payment loan types. But we did have a 30 year fixed rate; we would have gone with a 20, but just too much in the DC Metro area.

Yeah, they tried to get us into an ARM, but both of us told 'em to go fly a kite.

But yeah, the housing market needs a correction. I have friends who recently bought and probably bought poorly admittedly, but to get a home they had to go to a 40-year mortgage.

Not because they were ready to buy a home, but the house they were renting was going to be sold, and they couldn't find any place with a rent cheaper then what they are currently paying on the mortgage.

And that's 50 miles from DC.

[stevesh]

Echoes of New England late 80's, early 90's:

US Rep. St. Germaine leads passage of the doubling of FDIC deposit insurance. S&L's get into (clueless/Midas) commercial lending. Construction boom, everybody into the pool!!: Mixed-use office, residential, marina-slips included, projects in beautiful downtown Fall River. Deals done, zero due diligence. Outruns the absorption rate by 200%. S&L's start bleeding. Bank of NE (2nd largest regional) crashes, takes fifty smaller banks with it. FDIC/Resolution Trust returns, holding the paper at a dime on the dollar. Foreclosures and Fire Sales!!

[Francis]

as someone who works in the development business here in not-so-sunny So. Cal., I am extremely worried. There is some evidence that our entire economy is much more a house-of-cards than meets the eye.

There is a lot of data to suggest that the housing bubble is enormous (make that ENORMOUS!). (Look at, for example, the sale of stock by Mr. Toll in his own company.)

The usual response to a tanking economy is to ease credit and run deficits. But we are already running huge deficits and the US has already de-industrialized to a large extent due to globalization. In order to get our fiscal house in order, we may need to see a big drop in the dollar so that exports can become competitive again.

This could hurt, a lot.

[sglover]

It's worth emphasizing that, in the option ARM tutorial that you linked to, the folks at Calculated Risk mention at least one instance in which a loan officer had a deep misunderstanding about how the mortgages that he was offering worked. Evidently it wasn't only borrowers who were clueless and delusional.

[Joe Thomas]

The financial page of the New Yorker about two months ago had a great article on the housing bubble. The basic upshot is this:
Once you adjust for inflation and the increase in average house size and amenities (air conditioning and central heating being the biggies) over the 20th century (roughly speaking; I think the numbers started in 1910 or 1920, not at the very beginning of the century), there was actually almost no change in home values throughout the century.
CaseyL raised the big point earlier -- economies based on endless growth don't, uhm, work. Because it's impossible for everyone to keep getting more and more money out of the same basic resources, whether that's oil reserves or a house or an old-growth forest. And the belief in endless growth is what fuels bubbles. Oops.

[Phil]

Decided Fencesitter, I just moved out of the DC area after 7 years, so I feel your -- and your friends' -- pain. I moved back to Cleveland, and got a 30-year FRM with 11% down, paying an extra quarter-percent in interest so that I don't have to pay PMI. I got a deal, in my opinion, and I'm glad I got it now.

[bernard Yomtov]

economies based on endless growth don't, uhm, work.

They do work.

The US economy, and those of other modern countries have been growing probably since at least the Industrial Revolution, maybe much longer. Without growth you have a problem - population grows, the economy doesn't grow, per capita income falls, etc. This is the sort of thing Malthus talked about.

Even if population is constant there's still a problem. Without growth any increase in anyone's income comes at someone else's expense. You want a raise? OK. Whose pay should we cut to give you one?

[Frank Bruno]

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[David Cowan]

Regions and cities which never enjoyed the boom are now relishing in the stability. Yes, there may be a 5-10% drop due to spillover, but modest home values will keep the local economies nearly immune as compared with hot markets. Buffalo is looking balmy,

[yanni raz]

Why Banks are going Out of Business?

Since late 2006, 288 banks closed their doors, while other major banks are in the process of bankruptcy. Indy mac, countrywide, washington mutual, chase wholesale and lately on the verge of a merge wells fargo and wachovia, just to mention some. People are terrified to loose all their savings, so they’re saving money in their homes instead. That is a scary situation for america and the whole world. Which leads me to this question: What is happening to the world?

Remember 5 years ago?
We used to spend money on real estate investments, luxury cars, vacations and we still had some money left, money wasn’t an issue. Back then some people looked at all these spending as a temporary ride, while others thought this dream will last forever. The problem was that 90% of us thought this dream will last forever, unfortunately the banks were part of this category and that’s where the economy crisis started.

We can blame each other or we can blame ourselves, but looking for faults will not fix anything. Many people are completely innocents, they just wanted to have a more comfortable lifestyle, but others (banks, mortgage brokers, loan officers, real estate professionals, etc) wanted to get rich from these innocent people. Why innocent people need to pay the price? Unfortunately that is how the system works in america; rich people’s money always will play a roll over the ones that don’t have as much.

We’ve trusted banks with our money, our investments and our homes. If you think about it for a second you don’t trust anybody in this world like that, so why do we trust banks? No one can understand really why, but many will blame the false advertisement and promises that banks kept on delivering to us through television, radio, newspapers, internet and other sources of advertisements. Banks are a multi billion dollar organizations that run the world, but today it’s a little different.

It’s hard for us to accept changes in life, but this change topped every other small change that we were afraid from. No body ever expects something like this to happen in the year 2008, but we have to learn how to live with this change. Many people have predicted this change to last for about 5 years or more, some say it will last for 2 or 3 years, but no body really knows.

Some of the questions that you’re probably asking your self today are:
Who will tell us what to do with our money?
Who will tell us what is the right investment for our money?
Who will tell us how much money we have?
Who will loan us money when we need it?
Who will help us sleep well at night?
Who will help us finance our homes?
Who will help us build businesses?

We have so many questions and no ones to talk to, because now these banks are fighting for existence. There are some organizations that operate by the government and they can help you with your money, but don’t ever forget that you are the master of your own mind and use it to your benefit. More important you need to learn how to live with this change and make the best of it.

[Equity Loan]

good job

[ezeanyagu ikenna]

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