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CALIFORNIA SUBPRIME BORROWERS MAY GET RELIEF? - More Questions than Answers

* * * WARNING, HARD CORE REAL ESTATE TALK * * *

INSPIRED by Gena Riede's post today about Mortgage Relief for Subprime Borrowers in California, my head is swimming with questions and potential problems. I would much prefer that an experienced mortgage professional write this, but since it's my head swimming, below are some thoughts. That's all they are, thoughts, because the ramifications of this "program" may be far reaching or it may be severely limited. It appears that a significant percentage of loans from some loan servicing companies are sub-prime loans. The servicing companies Governor Schwarzenegger (love that guy) met with are:

Countrywide Financial Corp.
GMAC Mortgage
Litton Loan Servicing
Home Eq Servicing

Gena's article states: The Governor asked these loan servicers to voluntarily agree to NOT adjust mortgage rates on their subprime loans which constitute 25% of their real estate loans.

That number absolutely surprises and shocks me to my bones. Not because of who the loan servicing companies are. The question is "Who originated that many sub-prime loans for home buyers in California in the critical period". I'm assuming the critical period would be 2004, 2005 and 2006 since most sub-prime loans are going to reset in 2-3 years following origination. These loans would have been originated at the peak of price escalation for the recent "boom". So, I'm assuming that any losses resulting from these loans not adjusting will be absorbed by the lenders that originated the loans. We know who the loan servicers are, but do we know if the loans have been sold? If the loans have been sold to Fannie or Freddie, the loan servicers may take the hit. I'm not clear of the loan originator's involvement in a defaulting conventional loan. We need input from some loan experts here. Also, the number of loans adjusting is not sufficient reason for a bail-out. The circumstances under which the borrowers obtained the loans now defaulting has to be investigated and if mortgage fraud was involved, the originators should be held accountable. If accountability isn't involved, the industry isn't going to change and risky borrowers will continue to get in trouble, mortgage investors will continue to profit and we won't be able to move on. Merely tightening the guidelines now will further degrade the real estate industry through harder qualifying, which has already begun. Are today's home buyers going to have to pay for the irresponsibility of the speculating buyers that are now in default? I believe they already are.

Bryant Tutas has two on-point articles about how the mortgage mess is bleeding into present day buyers. Also, how some lenders haven't changed their ways. Florida is another state that is in serious trouble with massive foreclosures.

Hard to get loans for today's real estate investors.

New home lender commiting loan fraud in front of the buyer's agent.

WHAT "SUBPRIME" LOAN BORROWERS WOULD GET RELIEF??? Or, are any home owners who have an adjusting loan included in the distressed group. There appears to be a tendancy for consumers and many real estate industry folks to classify any loan that is not a fully documented 30 year fixed mortgage as subprime. I don't believe that is accurate. Many 3, 5, 7 year loans are fully documented. If a fully documented loan borrower finds after 3 or 5 years that he can't make payments on the adjusted interest loan, that isn't a subprime problem as we know it. Are these borrowers going to get relief in California?? If California taxpayer's money is going to fund the cost of the relief, fine. If it is going to go national, then the federal government will have to step in and fund the relief for the entire country. That would give some relief to Florida and Nevada. But, many of the subprime problems in California, Florida and Nevada were speculators. The rapidly escalating real estate values of the years 2002-2005 spawned a new breed of speculator.

WHO IS A SPECULATOR? In past years, a speculator would be an investment buyer who acquired property to rent or resale after remodeling. They were not owner occupied buyers or borrowers. We now have an entirely new classification of speculators. They are:

Borrowers who speculated that the price of new construction would continue to rise and they could sell at a profit when the new home was delivered. These homes were often financed with equity loans from the buyers residential property. Now they have two mortgage payments and faced with foreclosure.
Borrowers who speculated that they could buy a new home and be able to sell their existing home prior to delivery. When there was no market for their existing home, they now own two homes and are faced with foreclosure because they can't make two mortgage payments.

IS CALIFORNIA REAL ESTATE THAT DIFFERENT FROM MARYLAND?
During those years, I supervised about 15-20 agents. During those years, we settled about 450 home purchase contracts for Maryland buyers. I can remember only one (1) sub-prime loan closing. It is possible that some of our buyers closed sub-prime loans without my knowledge. However, I was in close communication with our home buyers in Maryland. If there were cases where our buyers were not qualifying for conventional loans and were sent to subprime borrowers, it must have gone very smoothly or I'd have heard about it.

The one subprime of which I'm aware was a buyer that I helped myself because she was referred to me by my attorney. The buyer contracted for a new home and was rejected by the builder's lender, but they agreed to outside financing. It was a difficult loan but finally closed with a 2/27 on which the buyer defaulted after 5 months which surprised me not one bit. The mortgage loan officer that did the loan worked like a dog to get it closed. It was the hardest loan I had ever seen and probably that great loan officers most difficult loan too. He took the loan only because he received 35-35 loans a year from buyers referred by Homefinders agents including myself. If all subprimes are as difficult as that one, I don't envy the loan officers who do them on a regular basis. When the loan officer said he "would get it closed", I knew he would because in 15 years, he had never failed to close a buyer I brought to him. I believe we both regretted that one.

My experience also says that, if 25% of the loans serviced by these companies are subprime, I suspect that there was a lot of mortgage steering involved by the loan originators or brokers who managed the financing for these borrowers. Someone please correct me if I'm wrong, but are 25% of California home buyers that risky??? What is the root cause of this number of subprime loans???

"There are a half million Californians who have subprime
loans that will jump to higher interest rates."

QUESTIONS?
What percentage of the borrowers with subprime loans is represented by the number of loan resetting? It would seem that ALL of the subprime loans would be resetting because, isn't that the nature of the loan?? Low rate for the first 2-3 years, then reset to a higher rate. If that's true, then fully 25% of California borrowers will have loans resetting and will be eligible for relief under the Governor's proposal. Love that guy.

How does this moratorium on resetting subprime loans affect the term of the loan?

How are the mortgage companies going to be compensated for the gigantic losses from freezing
subprime rates?

What's the estimated cost of this proposal?

If subprime borrowers are going to get relief, what about the subprime lenders that recommended these loans? I would suspect that if they wanted to, the regulators could easily determine who wrote subprime loans in numbers far in excess of industry norm.

WHO SHOULD BE PROACTIVE?
Assuming the program is authorized and funded, are the mortgage servicing companies going to be proactive and notice borrowers about the assistance?? Reports to date show that only about 1% of borrowers in default are contacting their mortgage company or servicers for help. That would seem to indicate that the mortgage companies need to search their records of eligible borrowers. It is fruitless to expect defaulting or near defaulting borrowers will initiate contact. It's just not the way things happen. The dynamics that drive borrowers in distress are fear, procrastination, resignation, avoidance, abandonment, embarrassment and simple acceptance of their condition of not being able to make their mortgage payment.

WHAT ABOUT THE FUTURE?
We read daily that mortgage companies are tightening their underwriting guidelines. Yet, we also know that the tightening of the guidelines is not the result of thoughtful quality control. Their more stringent underwriting guidelines are, in my opinion, the result of loss of liquidity because of loan defaults of the mortgage instruments defaulting that the lenders shouldn't have made in the first place. Fannie Mae and Freddie Mac are useless to offer any relief because the management of these giant former guarantors of liquidity have been managed by political hacks who acted with lies, trickery and deceit to cook the books to enhance their own bonuses. It is just possible that many of the loans that went to subprime investors could have been funded by normal means and sold to Fannie Mae had they not been busy covering up massive criminal accounting schemes.

THE MORE THINGS CHANGE, THE MORE THEY STAY THE SAME. Yet, daily we read about borrowers who are being steered to loans that are more expensive and risky for the borrower and more lucrative for the lender. I know from personal experience with home buyers I've worked with in the past 6 months that buyers get one result when they contact mortgage companies themselves and another result when I introduce them to a mortgage officer. It's not my pretty face that gets a good result for my buyers. It's simply that the loan folks know that they are being watched. I am contacted regularly by buyers whom I know have been the victims of mortgage fraud. That is a sad but true fact. I greatly admire good loan professionals. They are worth their weight in gold. Unfortunately, the likelihood of a home buyer hooking up with a good, experienced mortgage professional on their own is about as likely as hooking up with a good, experienced real estate buyers agent.

"So far have we come. So far have we yet to go" Winston Churchill

ADDENDUM: Bill Nazur took the time to answer some of the questions posed in my post above. This needs to be read by anyone interested in the subject of defaulting mortgage loans, foreclosures, subprime, forebearance and related subjects. Thanks Bill for taking the time. This is excellent.

COMMENT BY BILL NAZUR:

Ok, I'm back to hopefully address your questions.

I've been in finance and lending for 20 years as of a month ago, and this is by far the most far reaching painful period that we're experiencing. Even the late ‘80s with the aerospace industry consolidation, we did not see what we're seeing now. That is a different topic for now.

I have spoken to many interested parties, including but not limited to, the various forms of media that report on the happenings of our industry.

First and foremost, I've not seen any statistical data to support 25% of the business in California being subprime business, defined as those consumers with a credit score in the range of 500 to 619. The most accurate data I have shows anywhere from 9 to 14% of the total share being subprime. Now if we're looking at adjustable rate mortgages, the numbers are much higher ranging from 2002 until the first quarter of 2007, between 22 and 39%, but those include subprime, prime, and Alt-A (a fancy way of saying credit worthy but not able to document income enough to qualify). Yes, the issue is far larger than subprime, but few people want to associate with the ‘poor credit' folks. Keep burying your heads in the sand, people.

How does this moratorium on resetting subprime loans affect the term of the loan?

Unless the loan is being modified, which is not usually the case, the term remains the same, so when the loan does re-set, the payment shock will be even HIGHER! This will be a separate post in a day or so.

How are the mortgage companies going to be compensated for the gigantic losses from freezing subprime rates?

They are not, until the rates re-set. In order to pay off the loan over its specified term, they need to start collecting principal at some point, unless the consumer thinks that 30 years of pure interest is acceptable to them, without any payoff of principal.

What's the estimated cost of this proposal?

If compared to the Mortgage Debt and Forgiveness Relief Act of 2007 (don't get me started on that crappy legislation), the cost for that is around $1.4 trillion, and it covers a much smaller share than the amount of loans that are re-setting. I will have my co-author who has her Doctorate in Statistical Analysis extrapolate this out. I know we've looked at it before.

If subprime borrowers are going to get relief, what about the subprime lenders that recommended these loans?

While many of the originators are out of business, the companies that backed them are still very much alive, who are now dealing with the fallout of increasing the share of risky credit issuance. Ameriquest was one of the top companies, and were one of the first to go bankrupt. Their assets were serviced and seized by Citigroup, and we know that they have some of the greatest exposure in this mess. Much of New Century's portfolio was sold to other servicing companies such as Saxon, First Franklin, and Long Beach Mortgage; the latter being a wholly owned subsidiary of Wamu (which will be the next to implode in my humble opinion). Full Spectrum was the subprime arm for Countrywide, which is being hit, not only in the subprime, but every other sector, when it comes to loan performance. Then there is Merrill, Lehman, BearStearns, and all of the other Wall Street firms that are paying their dues for the extravagant growth that they experienced over the last few years.

I agree with Ed, in that you haven't seen anything yet. Sadly, many of us deal with these people on a daily basis. I just did an interview on FoxBusiness that really rattled me after hearing the story of a family in Stockton, California that lost their home after the re-set, rented another, and the owner of that one lost it to foreclosure as well. Sad, sad tale; their total investment: $1,000. Sounds like cheap rent to me. The end result is still sad, but you have to accept it for what it is; an opportunity, not a guarantee. We seem to have forgotten the difference when we see people point the finger at the banks or the lenders exclusively.

We reached this point as an industry, and need to figure out quickly how to resolve the issue. Politics are great for the exposure, but I for one, do not believe that government will be the impetus to change the behavior of the consumer. To that end, I agree with Eric's comment, and of course, Jeff is right about many of the threats that the consumer told the realtor or the lender, so my statement to that, is 'Did you play ball by breaking the rules, just because of the threat to go somewhere else?' I didn't, so this current bloodshed is thankfully not on my hands, but I certainly get to help clean up the mess. Bill Nazur.

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Bryant Tutas just posted an on topic post. Check it out. It is specific to Florida.

Carol Cohen adds information about the market in Ohio. Check it out.

Cheryl Hale has some interesting info below. Check it out.

Ed Rybczynski contributes a thoughtful and fact filled analysis. Check it out.

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Courtesy: Lenn Harley, Broker, Homefinders.com. 800-711-7988.

Posted by Lenn Harley, Real Estate Broker, Maryland & Virginia on 11/23/2007 04:33 AM

Comments (114)

mortgage mess

Post is included in group: Realtors®

114 Comments on CALIFORNIA SUBPRIME BORROWERS MAY GET RELIEF? - More Questions than Answers

NOV

2007

Lenn, the Ca. market is much different. I have done one sub-prime out of my last 200 sales. We of course did not have a bubble market but suffered a much worst setback with Katrina destroying 50,000 homes which is a lot since the metro area population is about 1.2 million. Sub-prime or prime people will default when faced with no home and rent. Many of the people negociated with their mortgage companies. None of the above mention companies had a large share here. Its just too hard to make money here so we missed out on the boom.

Eric. This is astounding. California is in deep trouble because of a high incidence of subprime loans defaulting.

New Orleans missed the subprime debacle because Katrina drowned the real estate market.

What irony.

Lenn, obviously you have not experienced what we have in CA. There have been an incredible amount of subprime loans given with 3-5 and 7 year adjustments. My guess is that the money saved up front may be put in the back end of the loan but just as you probably read the same links I did on the subject that is simply conjecture on my part.

Since California, Nevada and Florida lead the country in foreclosures it's essential that something be done beside turn our heads the other way and hope it goes away. I actually think that the Governor is being proactive in negotiating with the loan servicers instead of letting our entire state go into bankruptcy. So, I do like him and admire the fact that he is stepping up to at least try and help.

None of my clients got a sub prime loan but with as many new agents and new mortgage lenders as we had here that had no idea what they were doing and the amount of fraud that took place and is still taking place, we have a ton of sub prime loans out there that are still waiting to peak. There have been 24,00 foreclosures so far and that's not the peak.

Lenn,

Many of the sub prime loans made in my area in those years were at LTV's at 80 or lower...they would be prime candidates for refinancing if they cleaned up their credit...even in a market with declining or stagnant property values. Thanks, Fran

I will be curious to learn in the coming months how successful this loan modification program is, and how easily distressed homeowners can qualify for it...I am hoping this does not invite people trying to cheat the system! That could ruin this program for those who really need it.

NOV

2007

Gena. We need some input from some loan experts here. I don't pretend to be one I'll send some mail around and see who will help out.

The 3, 5, and 7 year loans you describe don't sound like "subprime" to me. They sound like simple ARM products that are often fully documented. There appears to be a tendancy to classify all loans that are not 30 yer fixed as sub-prime. That's just not accurate.

Further, I suspect that many of the loans in trouble that are now being called "subprime" are low or low-doc loans. Not all of these are subprime.

We need a good key for loan type terminology.

I agree that something must be done. I trust Schwarzenegger to endorse a program that would give relief to home owners who are caught in a situation not of their making, not borrowers who are faced with foreclosure because of a market problem. Otherwise, we'll be taking the entire country down the road to confiscatory taxes to relieve borrowers in Florida, California and Nevada.

I'm going to follow some of the links on your post to dig deeper so I have a better understanding.

Lenn.. I am not a lender, so I can add little except to say that you have hit on a very important element in the whole sub-prime loan issue. All loans characterized as Sub-prime are not sub-prime. Second, all of those seeking relief, are not entitled to relief, they are entitled to one less car, or less square footage.

The other issue that I believe will be exposed before this mess is cleaned up, is the one caused by the"seminar Investor". They were taught that it was OK to say anything to get a loan, any loan was OK because you were going to "flip" before you made a payment, and that Real Estate never declined in value. They have abandond their loans.

Massachusetts' governor has been working on doing something to help some of the folks caught up in this kind of situation there as well. I haven't followed it closely enough to say much about it, except to know that they've been working diligently to get something in place to help where they can.

Corie - you are so right about not all the so-called 'sub-prime loans' actually being sub-prime. That term has become a catch-all phrase that's repeatedly used incorrectly these days. And you're also right about some caught in these situations not being deserving of that kind of help. Many are, but many are not. Your 'seminar investor' phrase is so apropos - and we also have the loan officers who shared in the fallacy that it's perfectly okay to say whatever was needed to get that loan. I've heard some really scary stories about things loan officers said to buyers about how to get around certain sticky issues and how no one's going to be checking up on those things.

It will be interesting to see how all this will end up playing out. Actions like CA's governor and Mass. governor are necessary, and hopefully those will actually impact those folks who really need, and deserve, that kind of relief.

Ann

Lenn,

Obviously we don't need to go there with Florida because I know how knowledgeable you are here. The situation needs to be resolved and hopefully these major lenders will come together and relieve those who suffered. It is a domino effect and unless it is corrected there will be the continued saga.

Ann. Thanks for commenting. I believe we need to determine just who is "really need and deserve, that kind of relief". The key word being deserve.

What I fear is a massive bail-out of borrowers and lenders who committed loan fraud or speculated beyond their means. The American taxpayer shouldn't have to foot the bill for loan originators who sold loans to speculators. Some speculators are simply families who say opprortunity and missed the appreciation boat. I'm not sure they should be bailed out. Borrowers who were defrauded by lenders who steered them to higher cost loans "subprime" than they needed should, of course, be helped. I'm not sure that's the bulk of the folks now in trouble.

We'll see. There appears to be a movement to classify all borrowers who are having a hard time making payments on adjusting arms as deserving of relief. Borrowers who were defrauded are the ones who are deserving of relief first.

Neal. I'm not sure what you mean by "I know how knowledgeable you are here" I know what I read on yours, BB and others' posts about Florida. I'm certainly not a Florida expert and don't pretend to be. I do know that the numbers of foreclosures in Florida has been devistating to home values. I also believe, and I could be wrong, that speculators were more instrumental in causing the problems in Florida than in California.

The price of new construction makes speculating in Florida a lot more enticing than the prices in California. I believe that more folks facing foreclosure in CA are home owner speculators who simply bought over their ability to repay.

Of course, I could be wrong about everything I believe. We need more facts about the owners of the homes facing foreclosure.

Hi Lenn - totally agree that the sticky point will be determining just who DESERVES that kind of relief, and just who will be deciding that. Those who were defrauded should certainly be provided some kind of relief.

I'm with you on the fear about taxpayers having to bear the brunt of the relief efforts. I don't think that's the way it should be handled. I don't have any suggestions for possible solutions but I certainly don't think we should be tapped for it. And no way should anyone who committed fraud or misrepresentation of any degree be considered for any relief. There's another kind of 'relief' they should be considered for, and it wouldn't be pleasant either.

Ann

Lenn, this is a meaty post to start off my day! This proposal raises huge questions. It seems impossible for us to let whatever decisions that consumers and investors make play themselves out in the market place. While I can generate a lot of sympathy for some of the homeowners who wound up getting risky products they didn't understand, I have none for the flippers or the lenders or the investors who bought these loans. Presumably these guys are professionals who knew and understood the risks. Anyway, fabulous post - I always feel smarter after reading your stuff!

Lenn,

I thought you had covered the Florida market for some reason...maybe I was hallucinating but I thought I saw Florida listed in your profile. If I was mistaken then I am sorry. New construction speculators here have suffered recently. I have bought new construction on a speculative basis but a small piece. When we bought we bought from floor plans and not even a sales office. I had an in with a developer and at that time the market was still strong enough to profit from it. We were more conservative on what we purchased and thankfully we didn't need to finance. I do speak to people who are now in trouble. They bought over a year ago and still have not closed and are nervous as to how their rates will be and how much it will cost to carry versus how much they think they will make. I was a lucky one. I got out in time and when we sold them we weren't pigs...I'm not a big expert but when we run numbers in this market you need to have at least a year in reserves to carry...we priced them based on the inventory. My recipe in this market has always been about being the lowest price and offering out enough compensation to the buyers agent. People have to decide if they want to own it or sell it. Did i make more sense? Or did I go too much off subject?

I'm parked, to see all the great lenders on AR jump in. Our state, Michigan in also doing lots of TV ad to call your lender if you are in trouble. And the mayor of Detroit is hosting a conference with mayors of big cities around our area to come up with a resolution and keep people in their homes.

BUT, I have a rental now and when I aske the Buyer Agent why they were renting because it was obvious they had been with their companies a long time and had good jobs, she said their mortgage readjusted and they couldn't make the payment. I told her that usually they could work something out, and you was their lender ? Wells Fargo. She said they wouldn't work with them.

So I said have you tried to help them? She said I've done this before with Wells Fargo but they won't budge. This sounds weird to me, unless they took out a 2nd and payed off cc's and they really do make enought money and just misspent. Anyway, we'lll pull credit and see what is going on.

Lenn

I've seen demographics and statistics as they pertain to the current foreclosure situation. Over the next six months, we're going to see, possibly for the first time, a foreclosure crises in middle class America. Right now 1 in every 196 households is in foreclosure. Some states will be hit harder than others, but the problem will affect most of the country. I personally don't link the problem to sub-prime lending. It's much, much deeper than that. There will be governmental intrusion as there is no other choice.

I tell my son and other young people to watch closely because they will remember this economic correction for the rest of their lives. It may not be a classic recession or depression, but the recipe exists for an adjustment that people will talk about for generations to come. I suspect that the very nature of homeownership will change in the future. We're never again going to witness the hyper-appreciation of the past decade.

Just my humble opinion which I accept as contrary to what most people want to believe.

Well Lenn, it looks like you're even more popular than you might have realized with someone wanting to help change your outlook, and he's even willing to help by offering to be your sponsor....imagine?!?!? I'm thinking that guy's comment will be gone before too long. ;-)

Ann

Lenn,

I agree with Ed's assessment generally, except I've learned never to say never...I would have bet anything in the early eighties that interest rates would 'never' fall into the single digit range...I've been wrong for most of the time I've been in the real estate industry...you gotta be careful with 'crystal balls', you can see right through them!!! Thanks, Fran

P.S. Sub prime loans accounted for less than 15% of mortgages placed in this decade...Ed's right...it's way deeper!

Lenn... I read most comments. It looks like I might be the first lender to jump here... or maybe the bravest. I would bet many don't even have an answer, so I will try my best.

First off, I do 50% of my business in NJ and between 2003 to 2006, 50% of my business was subrpime. It was the nature of the beast. I know everything that you would need to know about FHA and if they couldn't fit that or Conventional, then I would put them in a subprime loan. But I explained everything to them.

Let's start with California. Why 25% of the loans in Cali. were subprime than other states? FHA's max loan amount for the most part was anywhere from $311,000 to $362,000....some in the mid to high 200's. So, as many of you know, home prices were much higher. On the conventional side, the max loan amount was $417,000. Anything over this was a jumbo loan. Jumbo loans at many times could be harder to obtain. On the subprime side, they were flexible up to $500,000, sometimes $600,000. Some subprime companies consider a jumbo loan about $750,000. So, these were some of the problems.

Another issue.... I saw many loan officers put self-employed borrowers into a stated or no doc loan because it was easier than collecting their tax info to make sure they were getting the best deal. OR>... you had lenders placing clients into a stated loan with a very high payment, but they didn't make squat... but the buyer was convinced that they could make it better for them in 2 yrs or so....

I WILL CONTINUE THIS........

In the end its how much of America preceives debt and savings. Many people want something now! My parents had to wait for years to save and were very careful about what they bought. I followed that pattern and did not buy beyond my means. I think the midset of people nad their government has a lot to do with it. The people who struggled most post Katrina were those that were dependent on someone else. The investors will have to take their lumps along with anyone who did something wrong. Thats why its refered to as a market? Its up and down like the stock market. The solution from our leaders my be worse for everybody going forward. The Louisiana market has seen too many ups and downs so people did not over invest in homes. The minorities are genererally the ones who got sucked in to loans that were not for them. Much like car loans. Lets see how they are doing goiing forward.

Now, for some sad pieces of information. As many of us know, from 2002 to 2006, everyone and their mother jumped into real estate and the mortgage side. Brokers had sweat shops.... no proper training but the old school training of just sell, sell, sell. Get the client in the door and we'll work on the rest. Anyone ever saw Boiler Room ? Same concept and I saw a lot of this.

Overall, doing a subprime loan was a lot easier than doing a FHA loan. With most subprime companies, they had matrices that were easy to follow. If I had a client with a 580 credit score and a LTV of 95, then these are the rates... and this is what I needed to close the deal. Besides, it cost money to be FHA approved.

Now, another opinion of mine for the reason why we also had this mess. More and more new lenders popped up on the map in this time frame. Most were brokers... In California and Florida, these two states have the most brokers. A true broker hardly has any responsibility. The loan is directly sold to that lender at the time of settlement. As long as that consumer who has the mortgage gets by the first 6 months, then the broker is in the clear. If there was no first payment default, or a 2nd.... or that it wasn't refinanced in the first 6 months, then the broker kept all their money and didn't have to buy the loan.

I am not trying to put brokers down. I am a mortgage banker and I can broker. But for the most part we use our money upfront and then sell to the secondary market. This could sometimes be 2 weeks to 1 month after settlement. And even after that, we could still be responsible for a little after this.

I hope this helps some... I will go back and read the post again and my response. I am sure I missed a few things. I just wanted to give a basic understanding.

Lenn

I will have to come back....as a lender, I had just posted, and I lost all of my data.......uuuggggghhhhh!

Well done Lenn. Being in the thick of it as I am, I truly believe the market needs to be left alone to run it's course. The fact is values in my area are down about 35% and most of these folks have 100% financing on their properties. What homeowners in my area are doing is just walking away. It's not so much the payment as it is the reality they have lost so much equity they just don't "feel like" making their payments. They are moving on. So giving them payment relief isn't going to change their mind set.

I closed on 60 properties in 2005. I don't know the exact number my guess would be 90% of these were subprime 100% deals with the seller contributing 6% towards closing costs. The buyer had no money in the deal at all. There is ZERO incentive for them to try and hold on to their property.

I talk with sellers everyday that are in dire straights. This is what I hear: Mostly, "I bought my house in late 2005 and was planning to move into it but my situation changed with my job and now I need to sell" Ok fist, they bought to flip and lied on their loan application to say it would be their primary residence. Now they are trying to cover their asses. They will be foreclosed on. They paid $225,000 for a house now worth $170,000 if they are lucky. They've been trying to sell at $299,000 for a year. Still holding on to the dream while they use the equity from their homestead to carry a losing "investment". Now they feel they are entitled to a short sale. I don't work with these folks. There is nothing I can do.

The second scenario, is the young couple who bought their house in 2003 for $85,000. They have refinanced 3 times since then and now owe $200,000 on a house worth $170,000. They do however have beautiful furniture, plasma TVs and new cars. These folks may very well want to stay in their house. Where else would they keep their TVs? These folks need to sit tight and try to keep up with their payments. I can't help them either.

The last seller I speak with is the family who purchased in 2000 for $75,000. They did refinance in 2005 but only pulled out $50,000 to pay some medical bills and do some improvements on their home so the kids would have a little more room. Their house is now worth $150,000 but will be very difficult to sell because it's "old". Homes built before 2004 in Poinciana are now "old" because of all the vacant new homes that are just sitting. These folks I want to help desperately. Unfortunately with the saturation of homes on the market from the first 2 scenarios we may have to reduce to the $130s to have a shot at getting it sold. This would be enough to cover their mortgages but won't give them any money to move forward, so we leave it at $150,000 and hope we get lucky.

Such is life as a Broker in Poinciana Fl. Looks like I should have made this a post:)

Eric makes a great point..... if people want it, they will try and get it.... and they would sometimes pressure a loan officer with a statement...."if you can't help me, I will find someone else"... and I have seen many that would tell the client, don't worry, I will get it for you.... And I know for a fact that loan officers committed fraud to get a loan down... I know 3 personally and they are all still in business. So... what does this tell you? VERY SCARY.....

Is California real estate different than Maryland? You betcha, Lynn. Real estate is the religion of California. Unlike other parts of the country where first-page headlines might talk about the war, congressional investigations, murders and mayhem, in California all eyes are on real estate, it's the favorite topic of discussion in the office break room, and open houses are a real Sunday activity for everybody, sort of like going to Sunday brunch but without food.

Unfortunately, this agreement between Gov. Schwarzenegger and those four lenders is expected to last about five years, and affects only owner occupants and those who can prove they can't afford to make the payment. It doesn't lend any support or assistance to those already in foreclosure. The home owner's payments must be current. So it's kind of a small band-aid on a much larger problem.

We saw an influx of buyers into the marketplace over the past five years who should never have been placed into home ownership, due to a large number of reasons, including mortgage fraud, but much of it had to do with worshiping at the Church of Almighty Real Estate.

but much of it had to do with worshiping at the Church of Almighty Real Estate

Amen, Elizabeth

Missy. I don't find it unusual at all that WF would work with them. Nor do I find it unusual when any lender will not "work with" many home owners in trouble. These things have to be taken case by case and individual cases often are just don't fit any type of work-out.

This is really an interesting subject because it affects all markets, not just the areas with a high number of foreclosures. Our area doesn't have a lot of foreclosures compared with other areas, but if we have a push for lenders to give forebearance to individual borrowers anywhere, it will affect borrowers everywhere.

My point in responding to Gena's post was that the percentage or numbers of foreclosures in an area doesn't necessarily mean that the borrowers in those areas are more worth of relief than borrowers in other areas with a smaller percentage of defaults.

This is very complicated.

Hi Lenn,

Just a little bit of background here about the rate adjusting subprime loans. One, there's a misconception put out there by the media that these types of loans paid higher commission. I work with dozens of lenders, and none of them offered higher commission as an incentive to "steer" a borrower to a subprime loan. I will say that there were aggressive loan officers/mortgage brokers out there who charged hefty origination fees to these subprime borrowers. But the YSP or commission offered by the lender was not exceptional. I have also read that some subprime branches of lenders would place borrowers in subprime loans when they qualified for conventional financing, because they did not want to turn over an income generating loan to their conventional division. So steering did happen in those cases.

Secondly, the 2/28 or 3/27 as those subprime loans are called, were in many cases meant to be a "band-aid" loan. A refinance was done to pay off credit debt or clean up bad debt. What was supposed to happen was the borrower would utilize the loan to clean up their credit and pay off debt, then refinance into a better rate at the end of the 2 or 3 year period. The problem is, a lot of those borrowers did not have the financial management skills to keep their credit in good shape and still don't qualify a conventional loan.

As an mortgage broker, I originated subprime loans after exhausting all efforts to fit the borrower into a more conventional loan. Also, putting a borrower in a 30 year fixed subprime loan meant the rate would be 3/4 to 1% higher, which in turn made the payment higher = cannot meet debt ratio guidelines. So the short term fixed rate was often the only solution available.

Now, the Option ARM is another story. Those loans did have higher commissions and unfortunately, a lot of borrowers were put in to them without really understanding how they worked. Investors requested this loan so they could keep their payments down for the short time they held the property before flipping it. Those who didn't time the market correctly got themselves stuck.

Judging by the credit reports I have pulled in the last several years, I don't find it hard to believe that 25% of loans in CA were subprime loans. You can have a perfect payment history, but if you are maxed out on credit cards, your credit score is going to be impacted. A great portion of those loans were refinances that took advantage of equity to pay off debt, at least in my experience. And as Jeff pointed out, the loan amounts in CA also had an impact.

A lot of blame to go around everywhere...

Bryant. I was hoping you'd stop by because you are, indeed, in the thick of it in Florida. I believe that the Florida market and the California market have different causes for the defaults and possibly would respond to different types of relief.

There is, indeed, good incentive to make the payments - their good credit. I see absolutely no connection between present day value and making mortgage payments. Just because a home has lost market value, if you purchased to occupy, there is little to no reason to walk away. If, OTOH, the home was purchased for speculation, walking away is often the only solution. I believe there is more of that in Florida than California because of the different price ranges. It's one thing to speculate on a $200K market than a $500K or more market.

Those are folks who can simply move on. Their adventure in real estate speculation is over.

This family could have purchased their home, saved for their TV and cars, let their equity stay in their home and with the money they saved by not taking equity out, would be in VERY good shape now. Using equity to finance consumer purchases is a BIG mistake.

In time, if these folks keep their payments up and keep their credit good, they'll be able to sell when the market comes back. Unfortunately, and I have no crystal ball, I don't believe it will be soon. What Florida needs is for a LOT more folks up north to sell and move south. But, until prices come down up here, the market for retirees and relocating buyers moving south isn't going to send the numbers to make for a viable market in your area. If they can't sell here, or won't sell for the price buyers will pay, they can't move south.

Such is life as a Broker in Poinciana Fl. Looks like I should have made this a post:)

Indeed, you should have made this a post. Take it and run with it. This subject has a lot of legs. My point with my post is that, just because there are a lot of foreclosures in an area, isn't cause for massive bail-outs. The market has to work or the inequities will be worse than the interference in the market. Everyone has upside and defaulting home owners. Your comments identify the causes. That is what has to be known. The causes of the defaults. If mortgage fraud in involved, I want to see some accountability in addition to the forebearance or freezing the resetting of the ARM loans. If California wants to do what Gena described, fine. But, if federal money is going to be involved, the program is going to have to be national.

The big question is "who is going to qualify?". Just being in default or having a resetting loan isn't enough.

Cheryl. Your description of the loans and buyers and lenders is precisely my experience. Thanks very much for contributing.

What is being confirmed is that

1. timing was critical to a borrower surviving when price escalation (and equity growth) ceased in late 2005.

2. consumers are very poor money managers and the types of financing and refinancing that put money in their hands was risky because they simply spent and spent.

Thanks very much for commenting.

Lenn, You wrote this: "There is, indeed, good incentive to make the payments - their good credit" Therein lies the problem with giving a subprime 100% financed deal to a borrower with a 550 credit score, they never had "good credit". They have already shown that they do not honor their debts. So why should they stay? They can just move on and go rent the same house(that's costing them $1,800 per month) right down the street for $800. Even though their thinking is flawed the financial aspects of "walking" make perfect sense.

Lenn, You and I have been in this business a long time and I must tell you I have never seen such a lowering of standards due to GREED. I am working on a listing where the person's starting monthly payment was higher than his monthly income - that isn't sub-prime - that is GREED. It isn't even stupidity. We also know of appraisers who were told to appraise it at sales price or you don't get our business - I personally know two appraisers who refused to go along with the con and practically went out of business.

When you start using utility bill payment as justification for a loan you are doomed to failure. Last week I was showing older detached homes under 400K - 4 of 6 were either short sales or foreclosures. People who should have never been put in this position were misled. Frankly, most of them probably still can't afford the loan. Refincing them will only prolong the problem, Karen

Lenn... I am trying to follow the comments now.... KAREN K. makes a great point also... I know one appraiser that was given 20 appraisals every 2 weeks and he was lucky if he could come in at value on 1 or 2 of them.... he was turning away about 30 to 40 appraisals a month, because they didn't meet value. Loan officers didn't do their home work to comp value. And if they did, they found someone to go much higher to make the deal work.

In regards to Cheryl's statements, which I didn't address in my comments.... yes, subprime loans were suppose to be band aide loans. And loan officers just got greedy charging a lot more fees no matter what they were paying on the loan. Here is the problem.... there should have been a cap on what you could charge. Some lenders had this, but they were higher than what they should have been. Many lenders allowed you to make up to 5% of the loan amount. In the state of New Jersey, that is 4.25% to include the closing fee and a few other fees. With those lenders caps, it was just fees that the lender could charge and or make.

Overall, I agree with you, we need this to correct itself. But I also believe that we need to make each state the same in total fees.... as you and so many mentioned, it was greed.

In regards to Elizabeth's comment and Brian dittoing it, I would have no idea about this since I don't live in California.

Erin.Your apprehensions are inevitable. Sad but true.

Elizabeth. Goodness. I thought only real estate industry folks on ActiveRain were that obsessed with "real estate". Your post is a real eye-opener. Thanks.

Brian. You too. I'm surprised that California folks are that interested in "real estate". When is some mortgage professional going to post a list of loan types so we novices will know what a real "subprime" loan is. We need a good mortgage dictionary.

"Subprime" around here is folks who can't qualify for a conventional loan under normal underwriting guidelines because of high ratios or low credit scores. Their loan is then brokered out to a subprime investor or department and, if they do get approved, they will pay a much higher interest rate of they still want to buy the house. This is not what I see a need for in a general population in an affluent area like California. Or, is California no longer considered affluent??

Jeff.

1. Funny. In those years, we could NOT get a contract with an FHA loan because sellers (agents) wouldn't take them. They wanted conventional only because of easier appraisals and limited repair requirements. It was primarily the appaisal matter with prices going up faster than the speeding bullet.

2. You are right. The hot, hot, mortgage market spawned a lot of mortgage brokers. I got mail and telephone calls from them daily. They can't understand why I don't turn one of our buyers over to them and "give them a chance".

3. These are not the buyers that I would believe would be eligible for forebearance of relief of the type in Gena's post about the California initiative.

Bill. See ya later.

Ok, I'm back to hopefully address your questions.

I have spoken to many interested parties, including but not limited to, the various forms of media that report on the happenings of our industry.

How does this moratorium on resetting subprime loans affect the term of the loan?

How are the mortgage companies going to be compensated for the gigantic losses from freezing subprime rates?

What's the estimated cost of this proposal?

If subprime borrowers are going to get relief, what about the subprime lenders that recommended these loans?

Karen. You are absolutely right. I believe the no-doc or low-doc loans were a big part of the problem in our area. If you don't even ask a borrowers' income, you are just asking for trouble. Loan officers must have made a bundle on these loans.

These must have been the buyers that I turned away when I screened them for referral to our agents to sell. Sounds like our procedures were sound. We are seeing more "shorts" and "foreclosures", but nothing like Florida and CA.

I still believe our problem is the disconnect between price and income to qualify. As long as folks can buy homes with do income qualifying loans, it's not going to get better for a while and after more and more defaults.

Thanks for commenting.

Robert Kerr's comment on Bloodhound is funny but true. This measure is what shylocks do.

Ed. Sad to say but I agree completely. I know that our market will not become viable again unless and until prices come down by about 20-25%. Folks don't want to hear that, but I believe it to be true. I could be wrong. I hope so, but I know that most home buyers, unless they dramatically lower their expectations of what they want in a home, are not going to pay todays prices and in many cases are not going to even qualify for what they could have qualified for several years ago. I'm not talking about 10-20% higher prices. As you know, our prices went up a good 100%.

Yes, I agree that we're in for a long hard road that will cause more and more foreclosures and downward pressure on prices.

You know I've been ranting and raving about prices around here and I read agent touting the 1-2% price increase in their market area. True, but they omit that the price increase is on about 1/3 the volume of homes in the past few years. What's the use of a 1-2% appreciation if there are few buyers?

Thanks for commenting.

Ann. If it was who I think it was, it was gone before I got to your comment.

Thanks Lenn! Always a pleasure to read your thoughful insights into the industry.

Hello All,

Working for one of the nation's largest lenders, I find myself trying to understand how clients were mislead into some of these subprime loans. Being bi-lingual, I get a lot of refinance calls from our servicing portfolio hotline. It is amazing that, I'm sorry to say, brokers have duped these clients into. When I explain what they are in and what is going to happen with their adjustable rates, their responses are almost always...I was not told that. Trying to refinance clients who purchased their home 1 to 3 years ago I cannot help with declining values. What is one to do?

Some are subprime, but a lot for the most part are Reduced Doc/No Doc. If by now you don't know, these loans are becoming harder to qualify for with higher credit standards and higher credit score requirements. A lot of people share the blame, our industry included.

Lenn and Ann.. it was a true spammer. I went to the web site. Doesn't someone else trying to make an extra buck.

Nelson. I have experienced buyers who, when things begin to go badly, the first thing they say is "I was not told that". So, I wouldn't put a lot of stock in what you hear from defaulting home buyers.

My experience in my area was buyers were willing to do anything they could to get what they wanted when home prices were escalating faster than you could change the MLS. I did YTD stats every month and posted them on my web site for about 2 years. I finally stopped because it appeared that I was encouraging folks to try to buy with the sole purpose of making a quick profit.

See: http://www.homefinders.com/market-conditions-md-va.php

I'm all for transparency but when someone gets information, they need to be able to understand it.

Lenn, very interesting post and comments. Many on here are experts. I feel for people who lost or or losing their homes, however if they never put anything into other than $1000. they're not really losing their homes - they were never their homes to begin with, like Bill Nazur said it sounds like cheap rent to me.

As far as speculators: Speculator A person who trades (i.e. derivatives, commodities, bonds, equities or currencies) with a higher-than-average risk, in return for a higher-than-average profit potential. Speculators take large risks, especially with respect to anticipating future price movements, or gambling, in the hopes of making quick, large gains.

They took a risk- they lost - such is life

Mitchell. You have, in a nutshell, summed it the remedy. Take risks and win, you win big. Take risks and lose, lose bit.

The thing that is clouding this entire picture is the matter of mortgage fraud and the fact that folks took risks with their family home, either buying, selling or investing. Most speculated that prices would keep going up. Many saw prices going up and took the money and spent their equity.

I saw the interview on TV with the couple that invested $1,000 and lost the house. I was so glad the interviewer asked how much they invested.

Unless there is some evidence or analysis with good common sense or experience behind it, showing that bail outs are the way to go to SAVE our economy as a nation as opposed to seeing it the other way around, I agree with you. And I never feel confident that anyone does useful analysis anyway, regardless of how many economic wizards we have. I would like someone to show me why I have to pay all my debts but others can get relief.

Carole. I am of the opinion that folks are looking for a bail-out now because the alternative is an unmitigated disaster.

I agree with Ed Rybczynski that we are in for an unmitigated disaster anyway and that the "mitigation" efforts will not stop the freight train heading our way. It's like we're in a tunnel with a train coming in both directions.

That sounds very pessimistic but I'm not pessimistic at all. I see foreclosures as the only way to bring prices down so that home buyers can buy homes with reasonable mortgages. As long as the "designer loans" are available, home buyers, many of them, will buy to the limit of what they can qualify for, not what is affordable or wise.

This will, as Ed predicts cause a sea change in the real estate market.

Lenn, I hear what you are saying and I mostly agree with you. But hear me out from a Cleveland perspective before I get back to a National one. Here in Cleveland, for the first time in over 30 years, we had a two year period where consumers (owners) were able to get maybe an average of 5 to 8 percent increase when they sold. We had a few neighborhoods that experienced 10 to 15 percent growth for ONE year. So those of us here in NE Ohio were not looking for the same kind of price correction. Now of course, we are also the hardest hit in foreclosures, so it's a double whammy. And only a precentage of the whammy is from serious predatory lending. But it's there.

Should Cleveland take it on the chin in order to get the National economy back on track. I maybe should pose that in a post. I'm asking a serious question, and if we get dialogue here I'm just as happy as having it on my own post.

This is so complicated. But in the end as painful as the process is going to be I'm with Bryant that the market will have to play this out. If there is some forbearance that the states most affected can do to stave off economic disaster for the state as a whole, then I hope they find ways to make it work. If as a buyer I got a pass on this round, though, what's to teach me not to just do this again? And what's to stop the next round of speculators from the doing the same thing and just expecting a government bailout yet again. How in the world they'll sort how who was a speculator, who was a no doc, who was part of a scheme and who was just greedy is beyond me. And my head spins with the future implications of this done incorrectly.

I'd rather see continued tightened standards for lending so that buyers have skin in the game and hopefully that's the lesson when we talk about the "great sub-prime meltdown"

Greed is not good. And might I get back on my soapbox about the low barrier to entry in this business which caused so many of the problems. Too many saw easy money and hopped in with little or no knowledge of how intertwined the real estate market is with the global economy. Add that to consumer greed and here's the result...

Lenn--We did see a few more subprime loans products come into the market at the tail end of 2005 and into 2006 in MN. I noticed more and more of the buyers for my listings coming in with 0% down conventionals and all looking for seller paids. It was becoming a trend...there are neighborhoods that I have heard 25-50% of the homeowners are 100% financed either directly at purchase or with equity loans taken as a 2nd or 3rd. I do agree there are "new speculators" that were talked into bad situations as well. Several of the listings I had this past year were clients with two homes...The agent that sold them the 2nd home couldn't sell their first one. It is a terrible situation and reachs well beyond the California State line. Keep asking those questions...I hope we all get some good honest answers.

Sorry that's me above with the not logged in blank! I'm never logged out so it was quite the surprise to see!

To Bail Out or Not, tis that thy question for the ages....at least one of them? I LOVED Ed's comment above as I believe it hits the nail on the proverbial head and that doesn't always mean good news. Personally, I don't know what the answer is but I do believe the Subprime part of the industry is getting too much credit for a situation that is much deeper ecomonically. The only thing we can do is continue trying to be part of the solution and posts such as this and threads such as this will continue to be important pieces of literature both now and down the road. Thank you for yet another Wonderfully Insightful Post Lenn!

Carol. Write it. Write it.

The increase in pricing in some areas of Ohio is one thing. However, what was the volume. Some areas of our market have increased too, but volume is town by about 2/3 in two years.

Write it. We'll make a compendium of these areticles when they run their course and put them on a GROUP. Dang, I'm not much of a groupie, but I'll do it.

In fact, I'll do it right now.

Thanks.

Okay, I guess it's a good way to get a true picture of what should be done. I'll have it up today

Carol.

We have areas of our market where prices have increased too. However, the volume of sales is only 1/3 what it was two years ago.

I am very glad you and BB have spun this one off. This is a subject that needs to be addressed AND deserves to be featured. Each area is different so it is interesting to hear how it has affected each market differently from CA to MD to FL.

Our catch 22 is that we need the stated loans for our tipped income workers. There are plenty of folks out there who WANT to buy and have the ability to go stated and afford it. Unfortunately the system was abused time and time again by the wink and the nod from the LO who told someone what their income is or speculators abusing stated also.

We need to give the consumer confidence to purchase again and we need to make them aware of what is going on and where this market has come from and where it is going.

The bottom line is that we will not learn from our past if bad actions are not punished. I do feel band-aids are OK because it will be a win-win for both the lender and buyer. All it boils down to (as I mentioned in Gena's post) is that they are buying time and preserving value.

Teri. Actually, I don't beleive that the 100% loans are the problem. I believe that mortgage fraud on the part of buyers and lenders is one problem. Also, borrowers and lenders who did ARMs without qualifying the buyer for the reset amount. I thought that was required for most loans, especially for borrowers with marginal credit scores.

Just charging a higher interest isn't the answer. That's a recipe for disaster. They have low credit scores, but they can still buy with no money down, they just pay a higher interest rates to offset the risk.

Eeeeeekkkkk.

I haven't read thru all of the comments, but I am a bit of a believer in personal responsibility.

Hi Lenn,

I already posted this on Gena's blog, but it looks like Arnold declared victory a bit prematurely (make that a lot prematurely):

"Those four lenders, however, told The Bee on Wednesday that their lending policies haven't changed and the governor didn't get them to agree to anything new."

http://www.modbee.com/local/story/131542.html

Lenn,

On your comment regarding qualifying for ARM loans.." Also, borrowers and lenders who did ARMs without qualifying the buyer for the reset amount. I thought that was required for most loans, especially for borrowers with marginal credit scores. "

For Pay Option ARM's, the borrowers were qualified on the fully indexed rate, not the "teaser rate". Problem is the majority of those loans were stated income loans. And, those fully indexed rates shot up. Back around 2005, fully indexed rates were under 5% - now we are looking at 8% or so. Borrowers saw more negative amortization than they counted on. Yikes...some folks were even able to get equity lines up to 100% LTV on the back of their neg am loans..talk about being upside down!

As for the 2/28 and 3/27 subprime loans, borrowers were qualified based on the rate at the time and did not have to qualify based on the reset rate. I guess the assumption was most folks were going to refinance out of them when the fixed rate period ended, so no need to worry about that.

Thanks for the thought provoking post..it's great to read the dialogue and see how different parts of the country are affected.

John. Thanks for that link. Very interesting. They apparently are still going to rely on consumers making the contact. Seems to me that lenders could send a letter. Goodness knows, I get three or four letters from my mortgage company everymonth offering to refinace, buy this, buy that.

They know where we are.

I so wish that economics was a greater portion of required learning in schools. And I know the argument about credit being so ingrained in this Country that too many people would be out of work if everyone in a utopian sense behaved in a fiscally responsible manner. But how badly in debt does this Country need to get, either Nationally or as individuals, before we all say a change truly has to come?

Cheryl. Thank you very much for that meaty, albeit short post. I'm going to point to it.

Lenn you were typing as I was commenting. You hit on a pet peeve of mine. We have a non profit group here now taking the lead in contacting lenders ahead of time for people (well also those in danger of default) - people will shy away from financial issues but if lenders were not so greedily chomping at the bit for the reset rates life would be better. Yeah I know, it's a free market.

Carol. Great comment. In my opinion, the time is long past.

Did you see the TV coverage of the shopping crowds today??? Shopping till they are dropping, indeed.

I had a buyer a while back who literally lived on their credit cards. They charged breakfast at McDonalds. I knew we were lost when I saw that. They simply couldn't pay for anything.

Tom. I believe we all do. The conundrum is trying to balance our sense of personal responsibility with then need to cure this crazy mortgage mess.

I did not read many of the comments, there were so many. I can say that in Hawaii, we did not have near the level of sub-prime loans that you are seeing in other areas. We also are not seeing anything close to the level of foreclosures either.

Our prices have continued to increase at the highest rate in the nation. There are many reasons for that. One that has to be considered is that we do not have tons of people defaulting on loans that shouldn't have been written to begin with; like in other markets.

I sleep well at night knowing that I have not put people in homes they can not afford. If all loan officers and real estate agents could say that we would not have this lending crisis.

Lenn, well maybe we can make everyone happy and have all of them lose their homes, have blight in the neighborhoods, bankrupt the County Coffer and raise everyone's taxes while we go into a recession...that way we can make sure that everyone can pay.

May sound a bit cynical but that's kind of what I'm getting from this discussion. Haven't seen the latest that John is discussing but will take a look. Not everyone deserves to lose their home, many were a victim of fraud and "unprofessional" advice.

Perhpas, with all this discussion, there will be a better solution than all those economists, Governor's etc. could possibly come up with.

Glad you got some mileage of it, Lenn. Touche

Randy. You are right. Many cannot say that.

I'm curious. How is the exchange rates with the Dollar affecting the Hawaii market. I know folks from Asian countries often buy in Hawaii and they pay cash. At least many do when they buy here.

Lenn I applaud you for your idea to have as many posts and discussions on this as possible. Gena, no one wants people to lose their homes. Calif may have issues but trust me you don't have any more than we do here and we don't have the luxury of year round good temps and high median salaries.

Geeze, I am hoping we are hear to discuss and see if we can make sense of it all. I for one don't have answers but I want them!

Carole, I'm here to protect my interest in CA and in my home and the homes of those that live in CA.

However, everyone is welcome to their own opinion no matter how ill founded it is.

There is a fair amount of foreign investment. Not as much as years past. I do not see any of that in my business, the areas I service are heavily planned communities and a large percentage of owner occupants. I also get a large number of military, where the biggest risk for them is if they get transferred out sooner than expected or they bought in one of the few areas that has not seen appreciation and they have not built any equity.

Gena I wish it were that simple. Anyway here is a link to an interesting article from Global Economic Monitor. Different ideas bantered about including special committee to handle the issues like they had for the S and L Crisis back in the day.

Just one set of interesting quotes (and Lenn I hope you don't mind the link, but both sides argued here:

I am among the many with serious doubts about the wisdom of the government quasi-guarantees that supported the government-sponsored entities, Fannie Mae, the Federal National Mortgage Association, and Freddie Mac, the Federal Home Loan Mortgage Corp , as they have operated in the mortgage market. But surely if there is ever a moment when they should expand their activities it is now, when mortgage liquidity is drying up. No doubt, credit standards in the subprime market were too low for too long. Now, as borrowers face higher costs as their adjustable rate mortgages are reset, is not the time for the authorities to get religion and discourage the provision of credit."

Dean Baker wants to help the victims (the subprime borrowers in his view) rather than the reckless lenders (the "bloated bankers); so he is suggesting changes in foreclosure rules to allow moderate and low-income homeowners to remain in their homes indefinitely as renters.

Randy, Randy, Randy. My web sites attract many military buyers. Over the years, I was known as the

$0 down, $0 Closing agent. I promised my military buyers that they would buy their home without a dime out of pocket. It was a joke in my company that Lenn only knows one way to write a VA financed contract, no money down, all closing paid by the seller. Military bases in this area are located in or near many communities that are in the VA price range. As long as they were going to be here at least 3 years, their home would appreciate sufficiently to pay the cost of sale. It was a system that worked for 20 years. Then in 2002, sellers around here, on advice of their agents, stopped taking VA financed buyers. Prices were escalating so fast, you just couldn't get a VA appraisal. So, they purchased 100% conventional.

No more. Since 2005, I have advised active duty military to rent. Ugh! I can hardly type the word. It's anathama to me to recommend renting. However, I know that, if they buy now, they will be upside down in 2-3 years and I simply can't sell to them knowing that when their duty station changes, and it will, they'll be faced with renting the property or a VA compromise loan. If they still want to buy and have no significant down payment, they can contact another broker. There are plenty on the Internet where they found me.

Carole, I appreciate your links and will certainly read them. I am worried about the larger picture and what I see happening here in CA especially if there is no relief. Some only see what is in front of their face and others see ahead...it is a very large concern and to sit around and rehash whether someone bought a boat, or refinance etc. is not my main concern...I have a bigger one.

Don't count the Gov. of CA out of continuing to find ways to resolve this issue...there is an entire state that he is most concerned about and the economy here. With all the 24,000 foreclosures and the peak yet to come, property taxes reduced, title companies, realtors, lenders, restaurants, home improvement service providers, etc ( a lot more) either out of business or dramatically suffering...he has quite a problem on his hands...as we all do.

Thank you for the link.

Carol. Link away. I only delete comments when folks advertise themselves.

These links are very helpful.

Your comment about Fannie Mae and Freddie Mac are right on target. I've been ranting and raving for over a year about Fannie and Freddie not being able to help buyers in this market.

Funny you mention the S&L debacle in the early 1990s. I remember that vividly.

Just as Samuel Pierce got off Scott Free in the S&L debacle, Franklin Raines is getting off Scott Free in the present debacle. This is the injustice. He pocketed $Millions and $Millions, and paralized Fannie Mae to a point where they are impotent.

Can you imagine how this present disaster would have worked out if Fannie Mae could have purchased refinanced loans up to say $600K?? Or, $750K?

Who knows??

EEEK. I'll be back to read every single comment tomorrow.

We are fortunate in my market. In our county from 9/06 to 9/07 prices went up over 14% (the highest in the nation). VA is still quite viable for my buyers, except in a few communities where the developers have over built and the prices have flattened or dropped a little.

I sleep well at night knowing that I have not put people in homes they can not afford. If all loan officers and real estate agents could say that we would not have this lending crisis.

Randy is the first REALTOR, other than Lenn, I've seen, that has publicly said they've KNOWN the buyer had the ability to repay the loan; it's about time.

Randy, this statement may tie in all my comments to you about licensing and may help you understand my "crazy" ideas. There is one fiduciary and the lender ain't it. You don't need lenders to act as fiduciaries, you need REALTORs to. One of the reasons I "get" Lenn is that my parents pre-qualified buyers (they were REALTORs).

It is my opinion that REALTORs can solve this problem. If you want all originators to be licensed or have a designation, only use originators that have a license or designation. Be involved in the pre-qualification. Be insistent that originators meet up to your standards. I think Randy's wrong about his insistence upon licensed, local lenders but what do I know...RANDY IS THE LICENSEE- he's in charge of the transaction!

Whether you license originators or not, it won't change the nature of our job- money goes where yield flows. This whole sub-prime crisis wouldn't be in place if more REALTORs like Lenn or Randy said..no sub-prime; end of story.

I went off topic...sorry Lenn. I just saw a flash of brilliance and had to recognize it. REALTORs should hate this measure; it rewards both irresponsible lenders and irresponsible borrowers. Freezing the loan terms just delays the inevitable for both.

So much GOOD can be done when you have a lender that understands how to read a purchase contract and a REALTOR who understands a debt-to-income ratio.

I agree to some extent with Brian's comments. The problem is that we only represent one of the principals in a transaction and even that one we do not have privy to all of their financial information nor should we. I depend on a quality loan officer to walk us through that part of the process. I work closely with my clients and the loan officer to be sure we are working within their budget.

The real estate agents can not do anything about refinancing which is a big part of this mess. We can not do anything about the buyer when we represent the seller. Loan officers are handling huge investments for their clients and need to be held just as accountable as real estate agents.

All professionals in a transaction need to be held to the highest standards possible.

Sorry Lenn for getting on my soap box.

Brian,interesting! Although NONE of my home buyers were ever put in these loans, it would seem logical to me that NONE of this would have ever happened if the Lenders had said, "NO, YOU CAN'T AFFORD A HOUSE." Because you see, the Realtor is not the one doing the loan but unfortunately, we had a lot of VERY GREEDY Mortgage lenders. Very unfortunate.

Such a simple thing...hmmm "YOU CAN'T AFFORD A HOUSE."

Brian. That reminds me of the HUD forebearance program. If a home owner with an FHA loan is unfortunate to get behind in payments. They may be even more unfortunate and have HUD accept them in a HUD forebearance.

However, the arrearages and accuring interest don't go away. They are simply delayed.

That's exactly what I see happening with the programs that freeze rates to the start rate on the ARMs that are going to default. That interest will NOT go away. It will simply be added somewhere and USUALLY COMPOUNDED.

We'll see.

Such a simple thing...hmmm "YOU CAN'T AFFORD A HOUSE."

I say it twice a week and have for years, Gena. Too many originators knuckle under the pressure from the originator-shopping REALTORs who say "get it done...or else". That's why I gave up my AfBA relationship in four offices; if I said it was bad for the customer, the attitude was "well, someone is going to earn a commission, why not me?". But this isn't about me or you, for that matter, Gena. I've talked to you and you get it, too. This is about the problem we're in.

Let's build upon the next statement. Instead of the lender-friendly deal Schwarzenneger brokered, let's hold the professionals to a higher standard. If people are being foreclosed upon, lets drag the REALTOR and originator in and check to see if they properly counseled the buyers about the ability to repay the loan (and refinance doesn't count). If the professionals can't demonstrate that counseling, let's ban them for life.

All professionals in a transaction need to be held to the highest standards possible.

Amen, Randy. Hold them to it (well, you already do).

It's like a bad Sopranos episode. The shylocks realize that the mooks can't afford the vig so they cut the vig and add in on the back-end. Sooner or later, the loan comes due. if the mook can't pay, he gets whacked.

(see second entries on all definitions, in the links, for the interpretation of street slang)

Randy. Your soapbox is not a problem. I disagree though that agents cannot be more active in the qualifying process. I wouldn't think of writing a contract without reviewing a buyers financial statement. In fact, I usually send the financial statement to the lender to make sure we're all on the same page.

When I get the financial statement and it shows that the buyers ratios are out of site, I suggest that they need to look a homes in a lower price range. No need to show homes when I know they won't qualify. Usually just telling them what their mortgage payments will be is enough.

We had a rough period this year when in August/Sept, rates shot up about 1/2%. Since I'm selling new homes, I got enough money to pay a point for the buyer. That helps, but the price has still got to be in an affordable range.

Unfortunately, often when you tell folks what their affordable price range is, they don't want the homes that price range will bring. So be it.

Don't get me wrong. I'm not dedicated to the 30 year loan. I have no problem with ARMs. As long as the buyer knows what their payment will be in 2-3 years.

This business is a lot tougher than it used to be. Unfortunately there is less and less broker supervision for a lot of new agents. They don't know what they're doing and they're turning buyers over to lenders, often in their own company, that will automatically go to the "interest only, short term ARM" without any thought of the reset interest. I believe a buyer should be provided with an amortization table early one by their agent showing the reset payment and all payments for about 5 years.

Yeah, I know. I'm a control freak.

Always enjoy your posts. Thanks for sharing.

Lenn,that's lovely that you do that however, let's get real. We had an onslaught of agents and lenders and many who worked part time. I personally wouljdn't want an agent reading or interrupting anyone's financials. I realize this was something in the past but I don't see it in the future. When an agent "DABBLES" in an area that they don't do full time professionally, mistakes are made and we don't have room for mistakes.

I'm sure you realize that many home buyers when they go to Title initial the loan application. This application many times is NOT what they filled out but is what the LENDER has filled out and what we have experienced here is FRAUD. Amounts have been changed.

I watched my recent home buyers at their signing on Wednesday and they didn't even bat an eye at initialing the loan app without perusing it, until I pointed it out. So, many of these folks are non English speaking, don't have the Realtor attend the signing and the if they did they don't know all of the particulars on the application questions (heck the buyers don't even remember). So easily manipulated and it's done ALL the time!

We even have weirdos refinancing someone else's property through a LENDER right now and the DA's office is sending out letters to everyone whose Deed of Trust has been re-recorded. There is an enormous problem of multiple magnitude and MUST be revamped!

So, there is no easy answer or one small sentence answer for all of the many issues facing CA right now. I certainly can't speak for any other area but I do know that we have enormous issues that can't be swept under the carpet with easy answers.

The answer is simple; prices will drop to a reasonable level and responsible people will buy homes. Wouldn't it be better for the market to take a huge loss in a 3 month period rather than to prolong this agony over three to five years? That won't throw us into a recession; prolonged agony will

Lenn - The in-house lenders is another topic that will get me on my soap box. I will leave that one for another blog post.

This has been a great post ... won't it be great if NAR stepped in to offer some help (financially) let's face facts NAR made a killing during this boom too. What a great PR chance NAR has.

Fantastic post with great comments.

Email me after you write that post, Randy. I suspect I'll just say Amen to what you write (from experience)

Brian, yes yes and yes and yes

Brian, I can wish that it would be over in 3 months...

And this disappoints but does not surprise me. People are being interviewed on local news; now it's not a scientific poll, but, everyone saying they are spending more this year than last year even though fuel is higher and economy tighter. I'm telling you, people do not get it.

NOV

2007

Gena, the whole transaction is about money! If the agent can't "dabble" in that then they are "dabbling" in real estate in general. I had an agent stand up earlier this year and say she never got involved in her clients loans and I was horrified. We are the fiduciaries in this transaction and need to understand it from end to end. I agree completely that the training is deficient in this area but without sound financial and qualifying ability there's no way to catch the problems on the app at settlement. My office is a strong training office and there's still never enough training on financial markets, offerings and frankly just basic math.

Brian, I don't want to just be held to a higher standard. I want the standards to increase dramatically. Otherwise this will just get repeated with every boom cycle. When it's this easy to get and maintain a license it will simply perpetuate itself.

Lenn is being a very gracious hostess to let us all take over her post like this!

Gena....if your wish came true in resolving this in 3 months, there would be blood on the streets, so to speak similar to the foreclosure debacle in the late '80s. In the absence of merely freezing rates, which only prolongs the inevitable, we forget that it will not change the behavior of so many. I personally, do not wish to see this go on through 2012, which it will if we keep trying to regulate it in so many ways. What Arnold did was well intentioned, but not overly realistic in its scope and nature of solving the true problem of the individual being accountable for what they have gotten into, whether they understood the nature of the contract or not. I support that we look at the common threads of originators that steered so many into high cost loans, and prosecute them, though you must bear in mind, that in no way am I absolving the homeowner of any responsibility. Can they afford the payment for an additional year? If yes, then give them 12 months notice to sell or prepare for the increase instead of the current 60 to 90 days notice. My experience leads me to believe that given that much lead time, the end result would be the same.

Sad but true. I'm with Brian and BB; there is no easy way out of this except to take your lumps.

Thanks again to everyone who has fleshed out this post and brought so many critical points. A few things that I believe are very important:

1. My Buyer Agency Agreement contains the following BUYER RESPONSIBILITIES:

3. BUYER RESPONSIBILITIES:

B. Buyer will furnish Broker with necessary financial and personal information to reasonably establish Buyer's ability to purchase property.

How can a Broker (agent) reasonably establish a Buyer's ability to purchase a property if we do not have an understanding of what they are qualified to buy? We cannot. Understanding a buyer's financial ability is part of my job. Otherwise, we are little more than a walking keypad.

The statement above "necessary financial and personal information to reasonably establish Buyer's ability to purchase property" was written and vetted by the attorneys for my Association of Realtors. Agents who do not understand a buyer's ability to finance their real estate purchase do not understand the buyers' needs and cannot represent them adequately.

If an agent cannot read and analyze a buyer's financial statement and determine their ability to buy, they should not be offering buyer representation services. They should disclose to the buyer that they are licensees but only able to provide "custodial" services. If licensees expect to earn the title of "agent", they need to provide "agency level services" which includes understanding a buyer's financial ability to buy.

I am not taking a loan application. I am not ursurping the loan officer's duties. I am not pretending to be a financial expert. I am merely establishing by simple review of the financial statement and simple calculation, a buyer's ability to buy. This permits me to provide good services to a buyer by showing them homes well within their qualifying range.

If a buyer comes to me with a "PRE-APPROVAL" letter from an unknown financial entity, I still get the financial statement. Reading a price range on a letter is not the same as "understanding" a buyers financial profile. Over the years I've seen many so called "pre-approval" letters that are misleading to the agent, the buyer, would be to a seller and a listing agent.

Agents SPECULATING that a buyer is qualified denies that buyer agency level service.
Agents SPECULATING that a lender's letter is accurate is risky.
Buyers SPECULATING that they will be able to make adjusted mortgage payments is risky.
Lenders SPECULATING that the buyer can pay the adjusted mortgage payment is criminal, or should be.
SPECULATING is risky.
SPECULATING is what got home owners in the mess they are in.

Bob and Carolin. Thanks for stopping by.

Michael. No problem with the links. They are providing more information. Michael Tarabotto spotlights one of the problems with the loans written in the past several years; the impotence of the GFEs Fannie and Freddie to respond to the need for liqudity. If Fannie and Freddie had performed their mission:

Fannie Mae has a federal charter and operates in America's secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates. Our job is to help those who house America.

lending institutions would not have gone to the sources they did to maintain liquidity.

"H.R. 3609: Emergency Home Ownership and Mortgage Equity Protection Act of 2007 seems to me to be a sensible solution to the many home owners facing adjusting ARMs. In fact, the bankrutpcy court is now and has always been a viable remedy for the many defaulting home owners. Of course, under chapter 13, the debtor must be able to present a viable plan of restructuring their debt to the bankruptcy court. AND, more importantly, they would have to continue to make regular monthly mortgage payments as well as make payments on the arrears through the chapter 13 plan. This could require a modification of consumer spending by the home owner and that could be a serious problem. Telling many consumers that they must adhere to responsible budgeting would not be easy.

Wow! Really great discussion you got going Lenn.

Diane Bell left this comment over on my post:

"Generally I agree with your post but how about the good honest steady eddy people who
HAVE been paying their mortgages on time but now when the resets take place, their rate may jump 3 points. With the current real estate mess in this country, now this group stands to get caught in the middle"

When I read that I tried to figure out how these folks got "caught in the middle". It makes it sound like they are victims when the reality is they knew their rate was going to adjust after a period of time. They chose to accept this loan with the hopes of property values continuing to increase and then being able to refinance. They made a financial decision based on future events lining up. They are now "caught in the middle" of their own mistake. These folks are NOT victims!

If we bail these folks out they will continue to make bad decisions. Why not? They will feel confident that if they do make a bad decision the Gov will step in with a safety net and make it all OK. They will continue to be "victims" instead of learning to take responsibility for their own actions.

It's the "victim mentality" that needs to change.

Ok, let me try and explain. How can Americans afford... Simple answer: we can't!!

We've been living beyond our means for years, and the skyrocketing national debt, the ballooning trade deficits, plus the plummeting dollar are testimony to that. Why is the world eager to sell to America? Silly question, really: the world will sell to anyone who would buy; they'll keep selling to us right up to the point when we're completely broke. American universities: granted, the best in the world (though no longer nearly as affordable as the ones in Europe...) However, the primary education leaves a lot to be desired. And post-secondary education world-wide is not so bad, either; people with PhDs from Europe and Asia are quite highly valued even here in America. And yes, much of the world's economic growth can be credited to emulation of America, to a degree. However, that doesn't mean that America itself is invincible, infallible, or not digging itself into a catastrophic hole.

Fundamentally, we don't produce much anymore. We only spend, spend, spend, and consume. What happens to a person who does that? He or she eventually goes broke, then dies of a heart attack. I see no reason why the same simple analysis doesn't apply to a large group of people (such as constitutes a country...) At the same time, the economic "growth" we've seen over the last decade or so, is entirely bogus. It's paper wealth; it's not physical or tangible. It's manufactured by pumping ever more funny money into the marketplace (that's what "deficit spending" means); the amount of circulating currency grows, creating the illusion of growing wealth. But in fact, real assets aren't increasing nearly as fast if at all, while the ever more abundant money is worth less and less. In the meantime, we as a nation are digging ourselves into a fiscal/demographic/technological/geopolitical hole of epic proportions:

When our international creditors finally get sick and tired of seeing their holdings devalued, and start shifting out of the dollar, and stop buying our government's debt, the greenback will enter into a spiral of death. Inflation escalates; the Fed has no choice but to hike interest rates, which skewers the economy. In the meantime, Boomers start retiring and bankrupting first Medicare then Social Security; the peak-oil energy crisis hits our totally unprepared society while it's already reeling; consumption drops due to high inflation and wage stagnation, impacting jobs in the service sector; in the free-trade environment our manufacturing sector will never catch up to the 3rd world until the standards of living among our workers equalize with the 3rd world -- which destroys the consumer... Basically, all I see is trouble upon trouble ahead. And this doesn't even begin to address our newfangled debacles in Iraq and Afghanistan (and possibly Iran, and possibly Pakistan.) And that's just the obvious stuff.

Translating the above into an easily digestible collage of cliches: our nation has been run so deep into the ground, that the perfect storm gathering on the horizon is but a tip of the iceberg

Lenn- Great post and the comments have only made it better.. I got so carried away with my comment that it has turned into a post. Most of the problems in California were due to an inadequate supply of housing in major employment centers and cheap money along with high rents. Too many new agents and loan officers who only saw easy money didn't help the situation. Massive foreclosures will not solve the underlying problems.. which is not enough affordable housing in places where most work. However the government stepping in will not solve the problem. Sad to say but the market needs to solve the problem not the bureaucrats.

Brian, I have written several blog posts about dual services including in-house lending at real estate companies and conflicts of interest. I have made a few in our industry upset. I believe the public's interest should always come first.

Lenn, good post. People were buying homes no matter if they could or could not afford to do so. As in other markets, they were overbidding and only looked at "today." You're right that the more things change the more they remain the same.

I have always purchased homes fully documented and with appropriate credit. I also am from the generation that believed in saving for a down payment and staying within my budget. Working in real estate meant that I had to have money in the bank for those off months/years that I wasn't getting a great income.

The mentality about having it NOW, no matter what, is the crux of the problem with many that purchase homes or use their charge cards. I'm a believer in Scott Beck's thinking in his book, "The Road Less Traveled."

Hi Lenn, This would definitely have been too much to digest after Thanksgiving dinner...but I'm glad to have been led here via a link to Ed's post. I read your post and all the comments. It is always interesting to see how things play out in different parts of the country.

Our situation in Michigan is more analogous to what Carole Cohen describes in Cleveland. We did not have massive hikes in appreciation in Grand Rapids, MI...in fact within the past 10 years, our growth in equity for most areas ranged between 3-5%. What we did have, which most of the country did not, was a 1 State Recession. Believe me it's no fun. Michigan dropped to the bottom for jobs lost, more people leaving the state than coming in...etc, etc. I grew to dread the numbers that would come out every December as more people lost their jobs & it wasn't just low end jobs...engineers, managers, supervisors...

Did we see the sub-prime emerge in our area? Well...absolutely. The east side of the state was hit harder with predatory lending than where I work in West Michigan. I decided that the sub-prime market was too adventurous and for the most part advised my clients to opt out. But there were a lot of fully documented loans that were adjustable rate mortgages that most people regarded as a conventional product.

Most loans for my buyers between 2003-2005 were going to adjust 1-2% in 5 years. It seemed an acceptable risk given the fact that most home owners were moving every 3-5 years, the credit was good & the asset to liability ratios within conventional norms. When you loose your job...that equation goes out the window too~!

What is definitely true about this crisis is that there is NO ONE SIZE FITS ALL problem or solution. Different areas have different dynamics and for a comprehensive solution to make sense, there has to be much deeper analysis than simple political will is normally able to summon.

Secondly, the possibility of foreign investment bailouts is decreasing rapidly. Most people have no idea how much money is no longer coming to our shores post 911. If these foreign investors actually start pulling out of our market...what we are experiencing now will be...a proverbial walk in the park.

Lola. Our area has not suffered a reduction in employment. We have somewhere between 2-4% unemployment. We are always lower than the national average.

We do have a large number of foreign investors buying here and in New York. That's due to the exchange rate, not real estate values.

I still believe that things are going to get a lot worse before they get better.

Hi Lenn, I'm intrigued by this discussion. You've sent me all over Active Rain. :) Thank you! In Michigan we lost so many people that our state's population would have reduced even more were it not that we had people who immigrated settling in the state (According to a report by the United Way) This fact was still not enough to abort the unsettling event of a 1 State Recession...We also have very different issues going on between the east side of the state and the west. It's an interesting dichotomy playing out over here. I might just write about it. :)

Lenn, It seems everybody has an agenda. I don't even want to comment on the other commenters.

If we want the Federal Government to help, they could start by repealing The Garn-St Germain Depository Institutions Act of 1982. Before this travesty was overwhelmingly passed by congress we could sell a house subject to its existing financing. Right now, a lot of these people that find themselves a little bit upside down would be able to get out from under this way. There are buyers who would gladly pay a little extra to have financing in place.

Bill Roberts

NOV

2007

A few years ago a famous public speaker at NAR (forgive me I've forgotten who exactly) made the comment we need to build a "Statue of Personal Responsibility" and place it in California.

I so agree with this statement, particularly after reading how others believe the loan officers and Realtors are responsible for NOT giving the consumer what they want.

I ask the question "How can I assert my consumer can afford a home when I have NO control over their future spending habits?" I can't and why should that be MY responsibility?

The personal responsibility lies with the consumer. It's is they that should be educated. Giving them a "by" now just encourages them to not be responsible now or in the future. Swell just what we need more people who believe the government is there to "take care" of them.

We all have the responsibility to do what is right, tell people the truth and not lead them into danger. But ultimately it is up to the person to access if the path they are following is right for them.

With all this said, we also need to remind homeowners who DON'T need to sell to stay put. There equity is only an issue if they have to sell. Values will come back. The market will do what markets do and in a few years things will be fine again.

Lenn is right, values do need to come down. When they come down far enough the investors will come and soak up the values. This is a good thing. When it happens then the market will come back.

Casualties? You bet. It will hurt. Some will work it out, many will walk. It's much like getting the flu. You know it's going to be a rough road, but when the puking is over life will be good again.

Yes, this too will pass.

Kristal. Thanks for stopping by. Yes, it is a matter of personal responsibility. Isn't it always.

With the exception of outright mortgage fraud, agents and loan officers are NOT responsible for buyers buying over their head. It appears that buyers just didn't believe that those adjustable would ever "adjust".

The market is a mysterious thing to many. Perhaps the mystery is what gives the market the power.

I know that our market was almost completely interest rate driven. The mortgage fraud that is blamed for so many of the problems in CA, just might be buyers who bought the nice house and didn't believe that their adjustable rate would ever "adjust".

NOV

2007

Absolutely Lenn. It has been reported that less than 1% of Americans have savings accounts. Which means, their spending habits have been on a want basis for quite sometime. Without a fall back to offset hiogher costs of living expenses such as rising gas prices, heating fuel, insurance, and food costs, there is little left to pay higher adjustable rates on their home loans. Compounded with the rapid depreciation on their homes value, it is a downward spiral effect.

If Countrywide goes into Chapter 13 there will be even a worse case scenario on the frontier. The billions in home loans Countrywide has written could be catostrophic.

Levitt Brothers filing for bankruptcy in Osceola County, Florida leaving some 735 units unsold in Turtle Creek, is just the beginning here in Osceola County. While most lenders have made it virtually impossible to reset adjustable rates, they are not anticipating the fall out when the owners opt out. Even ones with good credit, are not considering walk aways. They have lost so much equity, it is like living on the Titanic.

Bill. I remember the Garn-St Germain Act when it was enacted. I was Congressional Liaison for the SEC at the time. Ostensibly, written to make S&Ls more competitive, what it did was permit the addition of the "due on sale" clause in deeds of trust and notes so that, in order to sell a home, the buyer could assume the seller's loan and had to originate a new loan. Talk about "the fix being in".

The similarities between Fernand St. Germain and Barney Frank are chilling. Both Chairman of the House Banking, Financing and Public Affairs Committee. Both received enormous contributions from big banks and both responsible for legislation severely harmful to the American Consumer.

Allison. The Chapter 11 filing of Levitt and Sons in Florida shock me to my boots. Levitt virtually invented the subdivision, mass production housing market.

Lola. Thanks. Yes, Michigan's troubles are not the same as California, MD, VA, Florida, NV or Texas. I understand that. I read what you wrote and you clearly describe a very troubled state. Perhaps the Grand Rapids folks will be called to help the Detroit folks.

Teri. Thanks for commenting. I really can't object to folks leveraging a new home construction or buying, fixing up and reselling. This is simple economic investing. I've done that myself and made very good profits.

The problems with the adjusting ARMs now is the folks who have them, knew the adjustments were coming and counted on the market to protect them. The market is abandoning them and they want out without losing their shirts. Not going to happen.

NOV

2007

Wow, I just saw your post, and I think the responses here give testament to the complexity and enormity of this issue.

Based on what I've read I believe that this will be a very trying next few years for many folks. It's clear that the real issue goes to adjustable rate mortgages and people's ability to pay for the increase due to resets. Subprime loans are only the tip of the ice here. I believe that aside from the speculators and true "subprime" borrowers there many more average middle income families that will get hit hard by these loans.

My concerns/questions echo yours and I wonder how hard and how long individual markets will be impacted by the aftermath of these loans.

Great topic Lenn, I have way more questions than answers at this point!

Ana. Florida is a special case, no doubt. The numbers of foreclosures in Florida is astounding. Sometimes I can't believe what I read. I believe that folks need to get down to Florida and buy some real estate.

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