Nightmare Mortgages

After months of dishing out a false sense of security with their feel-good writing about housing for so long this article in Business Week strikes me as too little too late. Hey, Business Week, you're a Johnny-come-lately. But still, I strongly urge everyone to read it in its entirety; there are some surprising details in the article, like this one (underlining is mine):

[Re option ARMs] There was plenty more going on behind the scenes they didn't know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan's interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they'll soon be confronted with the choice of coughing up higher payments or coughing up their home. The option ARM is "like the neutron bomb," says George McCarthy, a housing economist at New York's Ford Foundation. "It's going to kill all the people but leave the houses standing."

...the CFA found that option ARM customers at all income levels said the loans were the only way they could afford their homes...

After prolonging the boom, these exotic mortgages could worsen the bust. They also betray such a lack of due diligence on the part of lenders and borrowers that it raises questions of what other problems may be lurking. And most of the pain will be borne by ordinary people, not the lenders, brokers, or financiers who created the problem.

I won't bother quoting any more from the article as it has already made the rounds in the bubblesphere and has been analyzed every-which-way, but it still depresses me...

It used to be, not so long ago, that home loans were about building communities and were only given to people after a careful risk analysis was done based on the borrower's income, current assets, credit history, etc. It used to be that moderate income people could fairly easily afford a moderate home...even in Marin. But then the speculative fever hit. Without missing a beat, lenders, real estate agents, the NAR, the CAR, etc. shamelessly exploited peoples' emotions, most particularly fear, with such statements as "being left behind", "priced out of the market forever", "renting is throwing money away", "real estate only goes up", etc. We were told that borrowing money was financially savvy, saving money was a waste, debt is good, and that actually paying off a mortgage meant you were doing something wrong. Lenders obliged, "poured gasoline on the fire", by offering more and more toxic loans with almost nonexistent due diligence. As a result, in the world we live in today housing is all about points, fees, investment, speculation,...profit.

At first it was just the flippers and "specuvestors" who were so focused on only the profit. Their numbers were fairly small and so their actions had a fairly small effect on everyone else. But thanks to the fearmongering and related emotional manipulation by the real estate/lending cartel over the last five or so years, the nearly non-existent lending standards, the "housing ATM", etc. the profit mania spread to a much larger group of house buyers who, at any other time, would have just wanted a place to live and who hoped only that when the time did come to sell that they didn't lose money. Whereas before the middle and working classes could fairly easily afford a moderate home, now the prices of even ordinary upper-middle to middle class and working class homes have been bid up to obscene levels and overall affordability is now lower than it has ever been. Not surprisingly, the excess liquidity, lax lending standards, fearmongering, and the upside panic resulted in ordinary people desperately trying to secure a home for their families before they completely lost (or so they feared) the ability to live in the communities where they grew up, where they have family, roots, history.

And thanks to the unfettered greed of others and the official sanctioning of that greed by the Fed, lenders, the real estate industry, etc. these ordinary citizens had to take out what is now commonly referred to as "toxic" loans that are now beginning to force people to default and lose their homes; and it's expected to get much worse. One could legitimately argue that if these people took out these loans and lost their homes because they did not do their own due diligence, then they get what they deserve. On the other hand, one could argue that many were misled and/or too trustful. If they were too trustful was their misplaced trust due to expectations built up after decades of past history when home loans were only given after a serious amount of risk analysis was done on the part of the lender? Were they too trustful because they did not perceive how rapidly lending reality has changed for the worse? Can we blame them for that? No, I don't think we can. These ordinary people were robbed because the system changed so rapidly that it made it easy to rob them. But what about the lenders, the Fed, real estate agents, mortgage bankers, appraisers, flippers, "specuvestors", etc. who either knowingly or through their own negligence helped to fan the flames? Should they be blamed? I think so. What about the folks who were willing to pay what they realized were absurd prices but rationalized it away with their expectation that prices would continue to increase? That's a harder one.

And now, it seems, it is all in danger of crashing down. Some of the enablers of this speculative mania in housing will get burned if not outright ruined. They'll get no sympathy from me. And I won't shed a tear for the people who paid prices that they knew were obscene but were willing to gamble that prices would continue to rise. But what about Joe Average who just wanted a place to live, a place to raise his family, and who trusted the system and its "experts" too much?

To me, that is the crime and a shame of our time which I hope won't be forgotten in history. Many of these ordinary people weren't being greedy, they weren't hoping to never have to work again, they weren't hoping to "retire on the house", etc. Their expectations were grounded and not extreme. They will be the big losers.

The winners in this housing fiasco are:

• The real estate cartel -- lenders, mortgage bankers, real estate agents, appraisers
• The securitization industries
• Flippers who were able to get out in time
• Retiring baby boomers who are selling now and who will be benefiting from social security (which later generations will never benefit from), Prop 13 and its ilk, and who (as voters) did nothing to discourage the nation running up its debt

The losers:

• Everyone else
• Future generations
• The nation

Check out Business Week's "Map of Misery", shown below. If what other sources say is true, then the percentages in this map are a bit too optimistic. And why isn't San Francisco featured?


Well, perhaps this situation will take care of itself. Just today as I was driving home from the airport I saw a large billboard advertising "Housing Prices Are Dropping Like a Rock Here's How You Can Profit From It" or something like that. In the Bay Area? Where everyone wants to live?! How can it be?