Understanding The Issues: Subprime/Housing Crisis

I'm sure you're all aware of the Housing/Subprime crisis. Here's a link to some news of arrests today that is probably much more serious than if Javon Walker should be spraying crowds with champagne

ABC News: Hundreds Arrested in FBI Subprime Sting (http://abcnews.go.com/TheLaw/story?id=5204001&page=1)

So which candidate has the right idea on how to handle this mess?

Obama

- Provide a tax credit to homeowners, which would cover 10 percent of the interest on their mortgage every year.

- Create a $10 billion fund, partly paid for by “increased penalties on lenders who act irresponsibly” to help middle-income "folks" buy their first home or avoid foreclosure, and develop affordable housing in mixed-income neighborhoods.

- Mandate accurate loan disclosure to ensure consumers understand their loan agreements. Create a standardized scoring system to quantify the borrower’s obligation.

- Backs legislation that would allocate 5 percent of Fannie Mae/Freddie Mac pre-tax profits to the trust fund, generating approximately $500 million per year, a campaign aid said. The money would then be distributed to state and local entities that would be responsible for selecting individual projects to assist.

- Create new F.H.A. program to provide meaningful incentives for lenders to buy or refinance existing mortgages and to convert them into stable 30-year fixed mortgages

- Fully fund the Community Development Block Grant program and engage with urban leaders across the country to increase resources to the highest-need Americans.

- Work to eliminate law “that prevents bankruptcy courts from modifying an individual’s mortgage payments.”

McCain

- Initially opposed large-scale federal assistance, but more recently called for the government to help qualified homeowners with subprime mortgages refinance and get federally guaranteed 30-year mortgages

- Eligible homeowners can apply to Federal Housing Administration to replace their existing “burdensome” mortgages for a F.H.A.-guaranteed “manageable loan that reflects their home’s market value. Homeowners would end up with a 30-year mortgage and an equity stake in their home. The new lender would receive a federal guarantee of the mortgage. And the taxpayer gets a benefit if the sale value ever recovers.

- Justice Department should investigate lenders

- Convene meetings with accounting professionals and top mortgage lenders. Says lenders should work together “to provide maximum support and help to their cash-strapped but credit worthy customers.”

- Adopt policies to ensure that homeowners “provide a responsible down payment of equity at the initial purchase of a home.”

- Opposes reducing the down payment requirement for Federal Housing Administration mortgages; believes the requirement should be increased “as conditions allow.”

- Create a task force in the Department of Justice to look into possible crimes related to mortgage backed securities and predatory lending and other practices.

- Favors taking a hard look at, and maybe changing, the controversial accounting rules that force big banks and others to "mark to market" their mortgage holdings -- that is, attempt to estimate the current value of loans and mortgage securities on their books -- in their public reports. Says when there are no good measures of the true value of mortgage bonds -- when no investors want to buy them and no index tracks them -- current accounting rules may make lenders' balance sheets look far worse than they really are.

gotta go mccain on this one. you can't just try to bail everyone out that decided to buy a house they couldn't afford with other people's money.

there's not enough cash and i don't want to be penalized and forced to pay for someone else's property because i was responsible with my money and they weren't.

it's not like these predatory lending scheme weren't well known about two years ago.

they sell them by telling you that yes, you can afford this huge house on a low wage job, just let me know if you'd rather pay 5400, 4600, 3400, or 2200 a month for it. (btw, the 2200 in this example isn't even a minimum payment). of course most of the victims choose the lowest payment, and after three years the 750k house loan (that they've paid the bank about 79k on) is now a 1.2mill loan with a higher rate... short version is, if you couldn't even afford a 600k home, and got talked into taking a bad loan for 750k home that you can't possibly pay down, how are you going to pay it off after it balloons to 1mill+?

the guys that sold those loans got up to 40k PER SALE, and the banks were stupid and greedy to think that people without good credit and without financial means could possibly pay these things off after they got dug in so deeply.


either way, i'm all for forcing the lenders to convert them to fixed rates or adjusting them to new "foreclosure invested" market value, but if there's a straight type of bail out - A) there's not enough money for it, and B) that's punishing those that didn't decide to buy things they can't possibly afford.


to help people get into houses, you already have first time home buyer (anyone) and VA loans (military/ex military).

i don't really know much about the bankruptcy laws, so i'd have to look up obama's last point to see if there's merit there.


seriously though, this isn't a surprise and a simple 4 week finance class in high school could have prevented this... i'm shocked they don't teach basic finance in school, since it'd be the most important class you could take as far as life skills. the military forces you through the basics mutiple times and has finance counsel available (for those that have questions and those that are command directed to get help), and maybe more access to advisors and basic help/education is the best idea for future prevention.

i support Obama. but im with McCain on this issue. lets make the lenders that are a major reason this happened, accountable. the only thing that worries me is that these guys are all big money, so whats to keep them from padding a few wallets, to keep out of trouble?

I think I agree with McCain, as well, with one exception.

As others have said, there is not too much sympathy for those people who bought a $750k house while making $60k/year. That just doesn't pass the sniff test.

However, I do feel for people who were talked into refinancing houses with subprime loans when they already had affordable mortgages on. These were often cold-calls to the elderly and the lower-middle class, and there is a lot of evidence that these people were lied to verbally and hurried through the process to avoid detection.

I also support the Deputy AG leading the investigation:
LITIGATOR OF THE WEEK: DEPUTY ATTORNEY GENERAL MARK FILIP
Yesterday appeared to be a watershed moment in the government's crackdown on mortgage fraud. The Justice Department announced that it made more than 60 arrests across the country, punctuated by the very public perp walk of two former Bear Stearns hedge fund managers indicted on securities fraud and insider trading charges. (The Am Law Daily reports that the government was hell-bent on making a show of the arrests.) We were surprised to learn that the government had charged more than 400 people with mortgage-fraud related crimes in the last few months, since just a couple weeks ago Attorney General Michael Mukasey said the Justice Department didn't need to create a national task force to combat the problem.

Now we know the AG had it all under control with "Operation Malicious Mortgage," a previously unannounced multi-agency enforcement effort that was unveiled yesterday by our Litigator of the Week, Deputy Attorney General Mark Filip. We tip our hat to Filip because he apparently plans to give us plenty to write about in the coming months, not to mention a lot of work to lawyers in the defense bar. The 42-year-old Filip, who chairs the (still alive and kicking!) Corporate Task Force, has a pre-DOJ resume that is as diversified as it is distinguished: Scalia Supreme Court Clerk; Chicago federal prosecutor; Skadden, Arps partner; and federal district judge for the Northern District of Illinois. In his spare time he taught criminal law and civil procedure at the University of Chicago law school. He's only been on the job at Justice since March, but you can expect to hear a lot more from him as "Malicious Mortgage" continues to rack up arrests.

thats cool onlydark. some people deserve to get arrested.

the other side i didn't mention is what made these mortgages so attractive to banks... cause these mortgages just didn't sell until someone created tranches out of the debt (where the less likely to pay/higher risk loans were put in higher interest tranches and sold as a bundle of high return debt - and these are the investors that'll lose the big money - but it's their own fault, and unlike the elderly that got duped, they have no real excuse or reason to get a refund).

anyways, you had several categories of tranches, which are just different layers of debt you could buy from banks that got grouped together by how risky portions of the actual loans in those tranches were (and since these were terrible loans with no hope of getting repaid, some gave returns of 15%). the higher risk tranches got paid after the lower risk tranches were paid out, and a lot of banks and some hedge funds got a little overzealous in buying these things; having since paid for them with multi-billion dollar hits to the bottom line.

i know i haven't really done the best job explaining it, but i've tried to avoid having to explain liquidity and going too in depth with specifics, since that'd take a bit longer to spell out completely.

i support Obama. but im with McCain on this issue. lets make the lenders that are a major reason this happened, accountable. the only thing that worries me is that these guys are all big money, so whats to keep them from padding a few wallets, to keep out of trouble?
Who talked these people into these loans? I have never had a mortgage lender call me about switching my loan. Now I have received stuff in the mail but I would have had to pick up the phone and give them the call. These people did not jump into these loans blind they got greedy and are now blaming someone else for their problems. I'm in the insurance business and I saw these people refinance their houses to these low interest loans then took the money they saved and purchase new cars, boats, pools, etc.. and now that the bill has come due they are in a fix. Now if they took advantage of the low rates and took the extra money to pay off loans, pay dowm ther principle, etc.. like what they should have done instead of adding to their dept they would not be in the fix they are in. There was a thing on the national news about a year ago and they went to the homes of some of these people and interviewed them in front of their new home. They interviewed about 4 families and they all where whinning about how their interest rate has jumped up. I noticed a trend in all thes interviews in front of their home. None of them had any cars in their driveways. I guessed that they made them move their cars because who would feel sorry for them if they had 2 new cars parked in their driveway. That was just my guess but I could not think of another reason why none had cars in their driveway.

Who talked these people into these loans? I have never had a mortgage lender call me about switching my loan. Now I have received stuff in the mail but I would have had to pick up the phone and give them the call. These people did not jump into these loans blind they got greedy and are now blaming someone else for their problems. I'm in the insurance business and I saw these people refinance their houses to these low interest loans then took the money they saved and purchase new cars, boats, pools, etc.. and now that the bill has come due they are in a fix. Now if they took advantage of the low rates and took the extra money to pay off loans, pay dowm ther principle, etc.. like what they should have done instead of adding to their dept they would not be in the fix they are in. There was a thing on the national news about a year ago and they went to the homes of some of these people and interviewed them in front of their new home. They interviewed about 4 families and they all where whinning about how their interest rate has jumped up. I noticed a trend in all thes interviews in front of their home. None of them had any cars in their driveways. I guessed that they made them move their cars because who would feel sorry for them if they had 2 new cars parked in their driveway. That was just my guess but I could not think of another reason why none had cars in their driveway.

To add to what I said. I do believe that the lenders and mortgage brookers do shar some of the blame.

I found this pretty interesting. The "riskiest" of the adjustables are still yet to reset.

Calculated Risk portends the next wave of delinquencies and foreclosures - prime borrowers who used adjustable-rate mortgages (ARMs) as a tool to overstep their affordability boundaries. As adjustable rates reset higher, borrowers become unable to pay. The riskiest adjustable mortgages, option ARMs, in which a borrower can choose to pay less than the monthly interest cost, only to have that difference added back to the principal of the loan, thus eating into their equity, are yet to see the majority of their resets occur. This graph shows the coming resets, and given the difficult refinancing environment and tight lending standards, it will not be pretty for the housing market.
Graph:
IMFresets.jpg (image) (http://bp3.blogger.com/_pMscxxELHEg/RxzD0s_7EYI/AAAAAAAABB4/ljDSXZhMG3o/s1600-h/IMFresets.jpg)

I don't know which candidate has a better plan, but the lenders and borrowers were dumb. The brokers may have been slimy with the borrowers, but the lenders did not want to see people lose their houses. The lenders wanted people to borrow as much money as possible without going into foreclosure. As others have noted, the borrowers often got ARMs for houses they couldn't afford and now they are paying for living beyond their means. Sure, there are exceptions, but I that those sweeping generalizations pretty much capture what's happened.

Going forward, I'll support any plan that helps the economy (helping the borrowers/lenders is just gravy). Unfortunately, I have no clue what that plan would entail.