A "classic double bubble"

Good morning. Repeat after me: It's not just a sub-prime mortgage crisis, it's a mortgage crisis. Or, as PIMCO's Paul McCulley writes, it's a "classic double bubble" -- one bubble is the asset, the other bubble is the lending against that asset.

One bubble is housing, the other is mortgage lending. Not just sub-prime lending. All of it.

If you don't believe me, read E. Scott Reckard's piece in today's L.A. Times about growing troubles with Option ARMs.

Option ARMs, Reckard writes, "were the easiest and most profitable home loans for lenders and brokers to make for much of this decade."

Why did borrowers like them? Simple: Option ARMs allow you to buy maximum house for minimum initial monthly payment. They are not particularly complicated or confusing. You buy now and pay later.

"... more than 75% of option ARM borrowers have been making only the minimum payments, analysts at Standard & Poor's Corp. said last week. As a result, the delinquency rate on option ARMs already is jumping and is likely to keep rising sharply, S&P said."

Why was there a bubble in mortgage lending? Because mortgage lending, particularly products like option ARMs, was wildly, shockingly profitable. According to John Diamond, a Chino broker, while a broker might earn $4,500 for selling a $300,000 fixed-rate loan, the commission could total $12,000 on an option ARM of the same size. "These loans drove the whole industry from late 1999 through late 2006," Diamond said. "It was just about the only thing any broker wanted to sell."

Don't blame just the brokers. Borrowers wanted these things.

Your thoughts? Comments? Insights? E-mail story tips to peter.viles@latimes.com.

Comments

[TakeFive]

...oh yes, there will be blood...

For those that haven't seen it, here's the reset chart showing when the option ARMs kick in:

Tiny url: http://tiny.cc/reset

http://www.californiahousingforecast.com/display/
ShowImage?imageUrl=%2Fstorage%2Fivy%2520arm%
2520reset%2520schedule.png&imageTitle=812856-86
7041-thumbnail.jpg

[Ragnar]

I read the LA Times article on option ARMs. I cannot imagine signing anything without reading it first. Even if it's long and mega-complicated I will always read before I sign.

Option ARMs exist not only because they are profitable for lenders, but because there is consumer demand for them. It totally fits the American attitude of getting as much of something as you can for as little effort as possible. In this case, "maximum house for minimum monthly payment," which quite frankly, is a terrible way to live, no matter what your version of the American Dream is. But I guess this just comes from someone who does not like debt all that much and overpays as much as responsibly possible to pay off loans as quickly as possible.

[dynomite1]

Why not track some of these subprime loans back to their origins and put some people in prison ? I do not believe that the majority of these loans were legal in the first place. In many cases, lending guidelines were ignored or not followed.

[Cal]

"Don't blame just the brokers: borrowers wanted these things."

Well, they wanted a low payment.. many simply didnt realize what was really going on.

A person can sell you a "3% payment rate" and 99% of the people out there would think that means they get a "3% interest rate". They then see the payment they have to make each month being so low and think they've gotten a great deal. The realization comes later that their mortgage balance is going up and the actual interest rate they are paying is quite horrible relative to what a 30 year fixed loan was going for.

Interest only is a pretty toxic feature, negative amoritization is a VERY toxic feature. You dump that on the masses with lax underwriting and giving extremely high fees (YSP) to brokers for selling them.. it is no wonder they are so prevelant in the marketplace. Option arms were a huge part of the refi boom that started to slow in 2003, so lenders decided to offer them for purchases to keep volumes high. They thought they were being "safe" by offering relatively low Loan to Value ratios of 80%, but the brokers would put a second behind the first (a "silent second") and get 100% CLTV financing for the borrower.

The fact that they were so prevelant in refi means that there are homeowners who went through the boom and whose mortgage balance went up. Now that the boom is turning into a bust and these higher balances are coming due (due in the sense that once they hit their cap the minimum payment becomes Interest only at least which is still a tremendous jump over the negative amortization payment) there are huge swaths of resale housing tracks that will act like new home tracts during the bust. Low equity positions unable to deal with any financial strain by tapping home equity. Foreclosures will abound.

The bond holders were stupid for buying them, the lenders were stupid for offering them, the brokers were stupid for pushing them and the borrowers were stupid for not understanding what they were getting. Plenty of blame to go around.

I think Kate in the Valley has a friend in one of these loans who didnt realize they were in such a loan.

[Rich]

When I was going over the menu of mortgage options with a broker recently I was surprised to see some options like interest-only ARMs still available. I did some research and discovered that all sources described them as being intended mainly for buyers with significant other investments yielding better returns, or for certain buyers with irregular compensation like bonuses that would find it more convenient to pay principal as the funds become available. So there you have it, the 25% sounds like the number of borrowers who might make payments against principal on these type of ARMS (I realize these are not the only type of ARMs). The other 75% probably don't fit the profile but made a choice--apparently taking risk to get more house than they would with other types of mortgages. So perhaps, out of fiduciary responsibility to their shareholders, lenders should consider offering ARMs only to borrowers who can document that they fall into the category of intended borrower profiles for that type of loan? I don't want to see people's choices be taken away, but keeping investors happy enough to stay in the market is, as we have seen, vital to our own interests as borrowers...

[National Bubble]

I love it when real estate experts say this is all about subprime loans.
Anybody who lived in SoCal or Florida during the boom can tell you that the housing bubble was not just about subprime borrowers buying houses they couldn't afford.

It was also about prime borrowers getting interest only loans to be able to afford buying in high price areas using no documentation loans.
It was also about realtors scaring buyers with the "buy now or risk being priced out of the market" phrase.
It was about Alan Greenspan telling people that the use of exotic mortgages was a great idea.
It was about the Bush administration pushing the "ownership society" lie where everybody can and should own a home.

All this has very little to do with subprime loans and everything to do with greed in an "instant gratification" society based on debt and leverage.

http://www.NationalBubble.com

[Kathy]

Why did the writer of the piece use the euphism "fudged" instead of the more objective term "committed fraud" in the piece? Where are the editors? Someone commited a crime in these transactions and that should be stated unequivocally.

[Steve]

Classic example of blind faith. These people are so surprised that the market has recoiled so much, but they weren't very surprised back in 2005 when housing prices had tripled in the span of four years and incomes had remained flat.

What goes up, must come down. The boom was unprecedented in terms of home appreciation, and the bust will be just as unprecedented in the opposite direction.

[Ace]

Cal said 'Well, they wanted a low payment.. many simply didnt realize what was really going on.'

Ok, that may be true in some cases but not many. The loan is called 'Interest Only' or 'Negative Amoritization'. How can someone not know what is really going on? People who took out these loans were either REALLY stupid or gambled that their house would continue to increase in value by 20 percent per year.

I do agree that these loan types are toxic. But no more toxic than credit cards, pay day lending, rent to own, or leasing a car.

[Cal]

From that LA times last december:
http://www.nashuatelegraph.com/apps/
pbcs.dll/article?AID=/20061222/BUSINESS/212220342

"In 2003, only about 8 of every 1,000 people buying a home or refinancing a mortgage in California obtained a pay option loan, according to San Francisco-based data tracking company First American LoanPerformance.

Last year, 1 in 5 loan applicants received one.

In the first eight months of 2006, even as the real estate market began to weaken amid fears of a downturn, the appeal increased again. Nearly 1 in 3 California loan applicants are now choosing them. The state boasts about 580,000 active pay option mortgages, about half the U.S. total.

After four years of escalating prices, they’re the only way some first-time buyers can get into the market. But another group flocking to option loans are homeowners who find themselves stretched. For those beset by calamity, these are the loans of last resort."

"But the day of reckoning is arriving early. By paying the minimum, Hertzberg has increased the size of his loan in a little over a year from $320,000 to $332,616. His lender, Countrywide Financial Corp., recently sent him a letter warning that when his loan hits 115 percent of its original size he’ll run out of credit with the company.

That will happen in about two years if he continues to take the smallest payment option. Then his minimum payment will automatically go up 150 percent, to $2,848 a month.

“If I could afford that,” he said, “I wouldn’t have needed this loan in the first place.”"

[Corey]

Rich, you've articulated my thoughts exactly. All along it was about rising prices, prices going so high that they became almost comical. The whole sub-prime fiasco is the icing on the cake.

Since our house was built in 2001, when we purchased it, our neighbor's house has sold twice over the years at prices more than double what we paid for our house. And that house is smaller with few upgrades. I look at these buyers and think to myself "These people are insane. That house is not worth that kind of money." Of course my long-time friend who also happens to be a realtor is quick to point out that the house is worth whatever someone will pay for it (feel like I'm back in an Economics course). But in fact, that statement assumes that buyers are rational and have perfect information, which clearly has not been the case.

I look at this whole thing as a kind of economic natural selection. People dumb enough to get sucked into bad loans or overpaying for their homes will be weeded out by this bursting bubble. That's when I and others like me move in and buy on the cheap as rental properties.

And since some of you are probably thinking "Wow, this guy's heartless," you're right. I have no pity for people who are too lazy to research the different kinds of loans that are available before they actually sign on the dotted line. Anybody can go to a library, get on the internet, and get informed about different loan products, just like I did. I'm no genius, but I do spend some time doing research before making the biggest investment of my life.

[Joseph]

Lenders committed "Suicide"....We would not be seen what we see out there in the market place if it wasn't for them...

They defrauded, with the help of the Idiots in "Wall Street". The masses who were so stupid as to believe that the peak would never come.

Novice Real Estate Agents who did not know what the heck they were doing...

Financial instruments are complicated and you need honest professionals to help you understand them and make the right decision...

Regardless, California prices are not going to crash...The bottom will come till about 5-7 years...Prices will keep going down little a at time.

Coming soon: www.asktherealestateguy.com

Even with the "Obvious Bias" I see on this blog, I tend to like it.

[gary]

It was ll predicted long time ago by porgressive economist, Dean Baker. Here's a good read for all. http://www.inthesetimes.com/site/main/article/
bursting_bubbles

[Raul Garcia]

What we are wittnessing is the collapse of the worlds' largest ponzi scheme, promoted and set into play by the Bush administration.

Instead of recieving bonuses, those involved should be receiving hard jail time.

[Justin McCarthy]

Did a lot of these Option ARMs in the bay area. I always explained fully indexed (true) rate and the fact that it was variable vs. the teaser rate. These propgrams were complex to the buyer with various built in selling points that could strike a chord with a range of borrowers. The guilt of the broker really depends on the level of explaining that they did to the buyer: There were a lot of "trap doors" on a loan like this and required buyer to understand more than just the minimum paymnet. When indexes (like MTA, COSI or COFI) were down in the 2% hood, even if the margin was 3.7 on top of this, it didn't appear too risky. Now these indexes are near 6%. Minimum payment stays the same, but true rate is through the roof which accelerates neg am feature and brings closer to the recast point in which all bets are off and borrower pays fully indexed P & I payment while they're upside down. Also, in my experience many borrowers were reluctant to do these loans on their primary, instead using them to buy 2nd and (sometimes several) investment homes in order to have a break even cash flow while renting them out. They gambled and figured that even if they took 5% negative equity on a given property, but could carry it with a break even cash flow, they would come out ahead if housing market continued to yield 10-20% price increases. Many of these borrowers knew exactly what they were doing and relied on being able to walk away if market went south. I would bet that there's a higher proportion of investment homes in CA that have these toxic loans, making them even more of a foreclosure waiting to happen.

[Westside Bubble]

Good article in the Times, but hardly breaking news to followers of the housing bubble.

How much do The Times reporters talk to you, Pete? Or do they let you be the leading edge, and only take up a subject when it's escaped the blogosphere?

[anon]

Raul,

Bingo!

The biggest pump and dump in the history of the world created by the most corrupt regime in US History.

That's all you really need to know about the "bubble".

[MyLessThanPrimeBeef]

Seems like a classic Al Quaeda operation - first you give 'em one bubble, then as they busy themselves trying to put that one out, they let loose another devastating bubble, inflicting even greater damage.

Now, most of us Americans are being terrorized daily by the resulting carnage and the specter of more financial obscenity from people we thought were on our side - bankers, lenders, brokers, government regulatory agencies and Wall Street rating firms.

[Joseph]

Raul, Anon,

Keep your Partisan-Politics out of this blog...This Financial mess has been in the making for years under both Democratic and Republican Administrations...

Sub-prime loans were popularized in the early nineties...Government Grants (For Downpayments) were also introduced in the early nineties...

Stick to the facts....

[Rob]

I have to laugh every time I see Bush conspirators out here....

"and then God winked to Bush and the eye named Katrina made them go away, and it was good. Then God waved his hand to Bush and the light returned, and it was good....

[amir]

It's really hilarious to me how everybody and their aunt is blaming Bush. I didn't see Democrats fuming about high real estate prices or trying to regulate mortgages. The opposite was true, they were glad people of modest means were buying bigger houses. Politicians are all the same, they only deal with problems when they're too big to ignore.

This is free market capitalism. Borrowers wanted to buy houses they couldn't afford and lenders and banks agreed to lend them the money. Both will pay a horrible price while spending their money building and upgrading housing for the rest of us. Thanks guys!

The same happened with the internet bubble. Billions were invested by stock investors and wall street into research and development. Of course, most of that wealth disappeared, but it created a new world of technological possibilities for the rest of us. Thanks guys!

Of course, this very logical response will not work for the masses that will blame someone, anyone, but themselves.

[Ben Brown]

A new law needs to be written where a borrower in an emergency can initiate a minium payment at the FED discount rate (say 4.5%) with all interest frozen for a period of up to 3 years. If you owe $500K you pay $1875 month fixed plus taxes and insurance. This very modest provision would essentially exclude so-called Liar loans because they probably couldn't even make that payment. This would protect the honest homeowner/borrower and insulate the lender. Large corporations borrowing 100's of millions have these kinds of provisions. Why can't Jane and John Homeowner have the same protections?

[William Jones]

I hope people look at the chart that shows when the Option ARMS reset. What's interesting to note is how many will reset in 2010 - about 2.5 years from now!

Things actually look pretty good for the next six-eight months or so, which could prompt a false sense that, "Hey, we're through the worst of this" and actually ignite a "sucker's rally" in housing. Do NOT believe it.

[Enlightenment]

This chart was released early in 2007 and it is very obvious there are multiple flavors of ARMs and multiple waves that will crash down on the housing market. This graph is very important, so look at it very closely. This is why people have been saying this mess might not be over until 2011 or later.

http://www.irvinehousingblog.com/wp-content/
uploads/2007/04/adjustable-rate-mortgage-reset-
schedule.jpg

http://www.irvinehousingblog.com/2007/06/25/
houses-should-not-be-a-commodity

[Jimmy]

The option arm is a great product. In my case, I was able to purchase several homes by the beach ten years ago. Sure, my balance rose for a while, but I was able to purchase in some of the most expensive zip codes in SoCal. Now, my payments have risen, but no problem, so has my income. Plus, I have made millions and millions from my beach homes. It would be a shame if these products became unavailable. Without them, I would either be renting, or living in some older, undesirable area because I would have had to put 20% down on a fixed mortgage. Please, keep these products. They help people who want to take a chance to live the American Dream.

[RealityHitsHard]

Frankly, I feel stupid and embarassed. We refinanced about one year ago to get out from under one of these ARMs with a reset after 2 years. I was happy that we finally got a 30 year fixed loan. After reading the recent article in the L.A. Times on Option ARMs I did some research and found out I was given an Option ARM by the broker that helped us. I feel stupid yes, however I'm not a stupid person. The broker that gave us this option new what he was doing; he was trying to push what would give him the most commission. I was conned into believing everything he told us. I take responsibility for not doing my homework, however the dishonesty and greed just amazes me. My heart sinks at the thought of losing this house. It is what it is, you live and learn.

[Uncle Billy]

For all those who don't believe that a lot of folks were scammed heavily with option arms, feed on this:

Borrowers with good credit, and full doc loans in general were given loans based on libor, mta, cofi etc. with a spread of 2 percent over these indices. There is tell of subprime and alt-a borrowers given spreads of 6 points over these indices. As the indices are centered about 4.75% currently, the prime borrowers are at about 6.75-7.5% depending on how much they were gouged. The more naive borrowers with their much larger hidden spreads are going to be at a whopping 10-11%.

Ay Dios Mio

[toby]

Why is it that where there's a Bush, there's a Banking crisis? Is Neil apart of this one too?

[shockg]

Vile Peter, repeat after me " I am a biased housing crash cheerleader who can't get my facts straight"

[sunsetbeachguy]

I see the trolls/permabulls from the OC Register blog are filtering over to the LA Times blog.

They sure are angry. Which menas they are only at step 2 of 5 on the Kubler-Ross grieving model. Bargaining is next, followed by depression and lastly to acceptance. The housing bubble is bursting.

Next stop reversion to the mean.

Peter:

Keep the moderation up, OCR's RE blogs really jumped the shark after moderation stopped.

[David Raether]

As recently as 2002 (just five years ago!) the average cost of a mortgage was 35% of median household income in Los Angeles. We had a normal marketplace with normalized transactions based on solid lending standards.

Last summer, the average cost of a mortgage as a percent of median household income was 65%.

We've had five years of an abnormal market.

Prices have to come down to a point in which a normal family income can afford a normal family home.

So... do the math: how far down does that mean this market have to go?

Pretty simple calculation, isn't it?

[Ann]

LAT is a litle behind the news curve on this one.

The Credit Suisse chart has been floating around for over a year.

Marketwatch covered the implications of Option-ARMS and Hybrid-ARMs (Option for 3-5 years with a reset into an ARM with principal repayments) nearly a month ago.

http://blogs.marketwatch.com/greenberg/2007/12/
straight-talk-on-the-mortgage-mess-from-an-insider/

Scary data in that article.

"75% of Option ARM borrowers make the minimum monthly payment. Eighty percent-plus are stated income/asset. Average combined loan-to-value are at or above 90%. The majority done in the past few years have second mortgages behind them. "

NINJA-Liar's loans...... 80/20s with the the primary loan an Option ARM......high LTV to start with.....

"The 3/1, 5/1, 7/1 and 10/1 hybrid interest-only ARMS will reset in droves beginning now. These are loans that are fixed at a low introductory interest only rate for three, five, seven or 10 years — then turn into a fully indexed payment rate that adjusts annually thereafter. They first got really popular in 2003. Wells Fargo led the pack in these but many people have them. The resets first began with the 3/1 last year.

The 5/1 was the most popular by far, so those start to reset heavily in 2008. These were considered ‘prime’ but Wells and many others would do 95%-100% to $1 million at a 620 score with nearly as low of a rate as if you had a 750 score. No income or asset versions of this loan were available at a negligible bump in fee. This does not sound too ‘prime’ to me. These loans were mostly Jumbo in higher priced states such as California."

The prime ARMS are over double in number the subprime ARMs.

http://online.wsj.com/article/SB11969621600071
5924.html?mod=hpp_us_whats_news

------

On another note, please relay something to the LAT guest columnist Sarah Miller who wrote: "If you can't say something nice ..." at http://www.latimes.com/news/opinion/commentary
/la-oe-housingtalk28dec28,0,1667536.story?coll=la-news-comment-opinions

She moans and whines that she doesn't want to hear people talking about housing prices are falling and those that who bought at the top of th emarket with risky financing are fools who will soon be parted from their money because of falling prices and values.

Please relay to her:

Do NOT whine.

Do NOT complain.

You and your ilk did NOT do unto others as you now wish they would do unto you. In fact you boasted long and loudly about how much your house and 'appreciated' and preened about 'how clever you were'; shrieked the 'buy now or be priced out forever mantra'; and said those who opted to rent when buying the same house cost more than renting it were 'fools'.

Pretty obvious that Miller was expecting never-ending appreciation at unheard of rates to in order to:

(1) Use a HELOC to pay for the kids' private schools
(2) Fund retirement by 'flipping' at the right time
(3) Generally maintain her lifestyle through real estate speculation and HELOCs

In the end she she compares hearing the economic realities about the housing market to getting a cancer diagnosis with this comment:

"If I am indeed screwed, I would prefer that whoever brings this to my attention does so with less obvious relish. I would rather hear someone assess my risk of cancer and, truly, it would be about as appropriate."

Sorry but (1) having cancer is an involutary situation. Making stupid financial decisons is completely voluntary. (2) She undoubtedly did not refrain from 'relishing' the paper value of he house in 2003, 2004, or 2005 and doing so long and loudly - kind costs her any sympathy.

"

[Raul X. Garcia]

Cognitive dissonance, figured the would come into play here.

Bush is the one who went to the Fed to lower the rates, selling home ownership as the American dream to boost a faltering economy and help finance his buddies at Haliburton.

What a sad state of affairs and such denial. The purchase of rope and plastic bags, duct tape and pistols must be at a all time prime.

Hope people use the suicide hot line before they go for the 'big sleep'.

Good time to invest in 3M and Smith and Wesson.

[AJ]

Amir,
You are right on.
Everybody was jumping on the band wagon/train when it was financially lucrative. Now everybody is jumping off the train and blaming anyone they can find. This is a train wreck and needs a forensic eye to figure it out.

[AJ]

Ben Brown,
I appreciate your comments. But is unbelievable to even imagine that any financial institution would even consider it.
Number 1: If it is an emergency where is the money for the taxes and insurance. remember there used to be "escrow" for this same reason.
In the old world the lender would require usually six months in reserve.
Number 2: Why? for three years? Crazy. They are not going to do it.
If the borrower is in default there is probably a very good reason. They never could afford the house from the beginning. Whose to blame? That should be judged on a case by case system. Don't generalize. Although there is a tendency to judge the borrower alongside the lender these days. For truth or lending... what a concept!
AJ

[producer08]

What do you think of the fractional ownership component, it is starting to pop up on a lot of highend home properties, example for 2MM you can live in a 12MM estate all taxes fees maintence paid for, you can live there for 2 months out of evey year.

Do you think this new idea will keep the prices up ?

[Robert S. Hoover]

Someone wrote:
>The biggest pump and dump in the history of the world created by the most corrupt regime in US History.<

Actually, the key elements were in place before the present Administration took office. But the rest of it is true enough. It is neither honest, honorable nor ethical but easy virtue -- at every level -- has simply become a cost of doing business in America. In effect, laws, rules and regulations have been reduced to a commodity. Anyone bright enough not to pee on their shoes understands that such a system is bound to implode.

[Kathryn]

One thing is that a lot of people in LA have the rental mentality, they don't want to own, they just want a house. Option ARMs gave buyers the option of not paying principal and being able to make the lowest payment possible.

I'm a practical midwesterner, when I bought my house, I put more than 20% down and wanted to pay off my mortgage as quickly as possible, so when rates went down, I refinanced, I got a 15 year loan and pay extra to the principal each month. I can't tell you how many people warned against this, saying that I was going to be house rich and cash poor. So many investment types don't think people should tie up money in a house and instead should invest in the stock market, etc. And in truth, it's much easier to walk away from a property you have no money invested in it.

I don't think brokers are entirely to blame. I think the borrowers got way too use to looking at the cost of a house based on the payment, not the total cost. It's just like with car sales, too many buyers just go for the deal where they can get into the car they want for a cheap monthly payment, regardless of how ridicules the terms of the loan are. As long as they get what they want and can make the payment, it's all good.

What loan brokers didn't tell borrowers was the other costs of owning a house. Most borrowers are getting hit with PMI, points, huge property tax bills, often large HOA fees, insurance, etc. Owning a home is not cheap, especially in LA. Lenders should require to do impound accounts for taxes and insurance. That would be a real reality check for many buyers.

[fly]

Today, I had a lady discuss with me her sad story about her LA realty adventures. She refinanced her LA house to the max, took the funds and moved to AZ. Now she cannot make the LA house payments and they are going to foreclose on it -she lives in AZ. There are a number of poor people, similar to this lady who have fallen victim to the fast talking bank agents and too good to be true schemes. I think it a good idea that Congress is trying to protect them. Maybe even taking all the houses away from the people who never refinanced, who did not cash out, who were not involved in fraud, and giving these poor people our houses. Or maybe forgiving all their RE debts, then let the Feds rescue the banks, then raise our taxes. That works!

[joeinlosangeles]

Personally, I wouldn't even think of buying a house in Los Angeles in the next nine months.

--Things actually look pretty good for the next six-eight months or so, which could prompt a false sense that, "Hey, we're through the worst of this" and actually ignite a "sucker's rally" in housing. Do NOT believe it.--

[Dominic Smith]

Figuring out who you can blame isn't going to get your money back. If anybody gets bailed out its going to be the lenders/investors who own congressmen and women.
Time to take a bath if you've come up holding the loosing hand in the money game. Seems to me only the mortgage brokers made out well on most of these transactions. I remember taking one hell of a bath when the tech bubble burst, I had discovered margin trading. Well, leveraged buying of a home sort of the same deal, isn't it? As one who owns a few properties and reads this blog and all the comments every day I have to say it's been the best education into the ins and outs of the real estate finance world. Sort of like learning what car dealers do to the marks that walk in the door, most of whom never figuring out they've been done.
Thanks Peter for this great forum.

[Patrick]

I often wondered how so many people could afford all these NEW homes at such young ages. I am in my mid-40's, college educated, and have never made the type of income that in my opinion would allow me to purchase a home. I was under the opinion one had to have a good income to purchase a home, didn't understand about those ARM's. Glad I didn't or I would be one of those people in crises today.

A lot of this can be blamed on the way housing is purchased and financed using "commissioned" sales people. The mortgage, and real estate industries need a change in business model.

[producer08]

check out this link

http://www.greenmarkinvestments.com/
wholesale_homes.htm?page=6&pagegroup=1

50 cents mansions asking price is 12MM ? I thought he was asking 20MM for it.

Now that site is a wholesale homes site, do you get a 50% discount when you buy homes at wholesale ?

If you buy a mansion for half off can you live in it ?

[jman]

My friend the LA based mortgage broker called all the lending in the mid-decade a huge "House of Cards". No foolin'!

[Duken4evr]

I agree with the previous postings about plenty of blame to go around. Lenders mislead people, buyers were foolish and it was lunacy for the financial markets to buy the collateralized debt objects (CDOs) created from these ill advised loans.

I read that there is about collectively about $1 in actual cash for every $30 loaned out . No wonder there is a credit crunch. We are in the early innings of this mess and there will be massive write downs at the financial institutions. We have seen this already, and it is just the beginning.

My attitude is to take what the market gives me and play it to my advantage. I sold my SoCal house, which I bought in 1996, in 2004 for a tidy multi six figure tax free profit and moved to a beautiful home in Colorado with a 135K mortgage and a six figure investment portfolio to manage. Given the storm coming, it is heavily in cash and bear market funds. This required changing jobs and it was a lot of work, but I think it was worth it.

The real estate bubble was foolish. I am doing my best to preserve the resulting windfall and profit from it. From where I sit, it amazes me any long term homeowner would stay in CA and watch their sudden increase in equity evaporate...

[poorpoorsarah]

Sarah. Sorry, you're going to lose equity. Now shut up and pay your upsidedown mortgage.

Not buy in 9 months? There is currently a year and a half's inventory out there. By summer it will be 3 years. Until that inventory is liquidated, you are overpaying for your So Cal shack.

[Michael Snyder]

Cal gets the "Hammer Award" for striking the nail square on the head. Commission myopia seems to have blinded many a broker who should have known better and as I've said, cash in your pocket plus a lower payment is a powerful pitch.
There's plenty of blame to go around but I tend to hold the professionals responsible for this mess. There's no way you can convince me a licensed loan broker wouldn't know these instruments were ticking time bombs. You will be even harder pressed to prove the people who bundled these loans weren't aware of their toxic nature or they'd be able to track individual loans to individual investors.
My "love" of the current administration is well documented but make no mistake; even a corrupt bunch of incompetents like the "Bush Brain Trust" couldn't cook this one up on their own. This mess had its' genesis in the Regan administration and didn't really gain legs before Clinton. King George just stood by and did nothing as his Wall St. supporters recouped their investments in his campaign. Now he's scrambling to avoid a depression on his watch.
Just as the mathematics of quantum physics expresses the essence of Zen thinking, there is no effective way to separate economics and politics.
Thomas Payne said, "The government controls our vices." And it seems the number one vice is unbridled greed. To regulate underwriting standards is a fools errand and the government prints the money anyway. Again Cal has the right idea in educating his clients. I'm betting he's the exception to the rule.
Most martial combinations contain at least three blows. Double bubble sticks to your mustache. What we're looking at here is the second blow in the combination. The knockout punch will likely come in the second quarter as credit card defaults fueled by crumbling equity rears its' ugly head.

Peter,
As I don't agree with many of my fellow bloggers, I'm sure the feeling is mutual. I enjoy the "edge" that brings to the conversation in this venue. There is real wisdom to be winnowed from the chaff in these threads and with the exception of threats and obscenities I believe everybody has the right to express themselves. It's important to remember in Nazi Germany everybody was "politically correct."

[Leavin' LA]

Congrats, Micheal! You invoked the word "Nazi", so this thread is officially over, thanks to Godwin's Law.

[Bianca Lohrey]

Perhaps too many people believed that the line "greed is good" from the film Wall Street. It never was it never will be...and oh, the price that all are about to pay. The domino effect is in the process.

[William Allen]

Bubbles have a long and colorful history. There was the South Sea bubble, tulip mania, 1929, the tech bubble. They all have the same characteristics which I will not repeat here. But by studying these bubbles, you can reliably make money on the way up and the way down if you have dispassionate personality.

There is plenty of opportunity to make up the money you may have lost during the burst on the way down with this bubble.

[Maggie Knowles]

There is good reason to point to Bush as a participant in this mortgage mess. I've pointed to it repeatedly in these LA Land Blog comments.

From the Washington Post, July 29, 2005:
http://tinyurl.com/2vg4yr
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Bush Picks Ameriquest Owner as Ambassador

On the same day that the White House announced that President Bush is nominating California billionaire Roland E. Arnall to be ambassador to the Netherlands, the company he controls said it would set aside $325 million for a possible settlement of allegations of predatory lending tactics.

Arnall's company, Ameriquest Mortgage Co., is being investigated by regulators in 30 states. A $325 million settlement would be one of the largest ever in a predatory lending case.

Ameriquest is the nation's biggest privately held mortgage company. The company, which is in negotiations with a group of attorneys general to resolve the investigations, said in a filing with the Securities and Exchange Commission yesterday that the amount "represents the company's best estimate of its maximum financial liability for a comprehensive resolution of this matter."

Arnall is the firm's principal shareholder. He, his wife and their companies have been the biggest political contributors to Bush since 2002.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
This report from the PBS show NOW titled "Mortgage Mess" connects the dots nicely, from the guys selling the loans, the buyers losing their homes, to the large lending companies lobbying to block consumer protection against predatory lending practices.

http://www.pbs.org/now/shows/346/index.html
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

[jane rahn]

For the past 2 or 3 years the real estate lobbyists spent more than any other group to get their agendas passed. Its hard to believe that no one knew what was going on. If you drive up the cost of real estate states can then raise property taxes, which they did and figured all this new revenue in their budgets. Its sort of like the way the big 3 have raised the price of cars but no improvement to the product.

[Uncle Billy]

William,

It's not just a matter of being dispassionate. We've become a nation / state / city of spenders that generally don't save. If peoples don't have any money to "make up the money" they are SOL. For those who do use their 401k's, IRA's, and CD's effectively, they would probably tend to be those that wouldn't risk it by moving that money into now tainted real estate, IMVHO

[Hula Girl]

She's baaa-aaack. I've missed your tirades Ann, and your long winded, condescending missives. I'm with Sarah Miller who wrote: "If you can't say something nice ..."

To paraphrase William Goldman, Nobody knows anything about anything regarding The Bubble. And I'll bet "Sarah's reaction comes from fear and uncertainty. How's that Lithium working out for you? Time to up your dose.

[William]

This was a crime plain and simple, from the lobbyists pushing for deregulation in the lending industry, to the realtors pushing outrageous loans to people who could'nt afford them and finally to the banks who packeged and sold the loans off while collecting their commisions. These people will not see the problem from their houses ! To the people who blame the borrowers ignorance and stupidity involved for getting into these loans, I sympathize and like to point out that many of the same loans were bought by Ira's and pension funds, that many people planing to retire will depend on in the future. My guess is that this is far from over and 2008 will bring more of the same. Please stop Blame Blogging and track the root of the problem and demand more of your Local, and State officials to pay attention.

[Uncle Billy]

Maggie,

Don't worry about Roland. He'll be drooling on himself soon, if he isn't already.

[Mitchele Vigil]

A Mortgage can be described in 25 seconds. A Mortgage, yes even an adjustable should be understood by anyone with a modicum of intelligence in at most a minute. This class of lies, lies which attempt to make it seem as though a Mortgage is some highly exotic, highly esoteric financial machination understood only by those of us with a PHD in mathematics is ridiculous in the extreme!

Americans as a culture like to blame others for their misfortunes, it is endemic to the societal genes.

Caveat Emptor is not passe, it behooves any individual to spend a moment or 2 reflecting, learning what exactly it is when they enter into any contract. Nonacceptance of this responsibility is ridiculous as well.

[Leavin' LA]

Mitchele: Excellent point. "I'm loaning you the money to buy this house. Your monthly payments are $X for the next two years, then they could be as high as $x. You have given me your house as collateral for this loan -- if you don't make the payments, I will take the house and throw you out. If you don't believe you can hold up your end of this deal, walk away now."

[Ben Brown]

AJ: You will recall I mentioned a "Law". Therefore, the banks would be forced to comply. A face to face meeting for those facing losing their home with the very predators that put them in this place should be a requirement within the documents. As it stands, contrary to what Donald Trump thinks, negotiating with the lender (without lawyer/vultures as intermediaries) is nearly impossible as almost all mortgage loans are pooled, packaged and resold.

[Odeh Aburdene]

Bubbles occur because we never learn from history. My professor of economics used to tell us that we must keep in mind the following: We live in a world of uncertainty and no tree grows to heaven. Despite this, we seem to believe the opposite and we never learn from our mistakes.

[Leavin' LA]

Ben: Isn't all this covered under the UCC somewhere?

[Hula Girl]

'Double, Bubble, toil, and trouble..'

Shakespeare saw it coming four centuries ago.

(Yeah, I paraphrased him.)

But the Bard was on to something when he wrote,

"Like a hell-broth boil and bubble."

[Joseph]

I happen to agree with "Kathryn", the Midwestern lady...

We have all made the "MISTAKE" of blaming everybody else, but the "Buyer"...who in the end may be the main "CULPRIT' in all of this.

I have seen it all through the years...People who wanted to buy, but did not qualify...They would just keep on looking for some Fraudulent "LOAN OFFICER" who would make them qualify...

When I first got into the real estate business 17 years ago, I used to feel sorry for people, but I have changed.

A lot people love to be told "Lies"...Just look at the "Tele-Evangelists" on TV>...You can become a "Millionaire" overnight by playing with people's greedy emotions....

It's a just a sign of the times...

[Michael Snyder]

leavinLA,
You missed Thomas Payne, Ronald Regan, Bill Clinton, George Bush and an oblique reference to King George III. Does Godwin's Law give extra points for drawing parallels between quantum physics and Zen?

[Ann]

She's baaa-aaack. I've missed your tirades Ann, and your long winded, condescending missives. I'm with Sarah Miller who wrote: "If you can't say something nice ..."

To paraphrase William Goldman, Nobody knows anything about anything regarding The Bubble. And I'll bet "Sarah's reaction comes from fear and uncertainty. How's that Lithium working out for you? Time to up your dose.

Posted by: Hula Girl

Ah yes....Hula Girl....the one who claimed that Countrywide was being sued when in fact the defendant was a separate mortgage broker who the Illinois Attoney General was suing for fraud, and then HG proceeded to berate the individuals (one of whom ws a college prof) iwho had complained about the fruad to the State AG for 'not reading their documents' and then Hula proceeded to boast about how she could read an understand things although she had lousy SAT scores - and yet she couldn't even get the 1 page story straight that was reported in the NYT......strange

Guess her reading comprehension has not improved and she hates to have to read that really long and detailed analysis at Marketwatch with all those statistics and data....... so complain, insult and othersiwe be childish because someone called her on her competely erroneous description of the Illinois case in a post (and her obviously unmerited boasts about her reading comprehension skills.)

So sad.

[Richard]

There once was a time when a lender made a loan the borrower could not payoff or lacked the income or ability to pay, such a loan was classified by the feds as illegal and the lender forced to write it off.
But today anything goes! Lender knew the borrowers could not afford the increased payments that were to come several years down the road, but made the loan anyway! Thus we created a house of cards and it is now falling apart! And yet the feds prosecuted no one, forced no one to write off these loans, and are now asked to bail out the corrupt lenders!
I am reminded of Bank of America whose employee and attorney attually lied to a court, the judges, and to themselves to cover up the fact the Bank had violated a contract for which is was liable> Bank of America is still open, the lawyer is still practicing law, and the employee was probably given a bonus!

[Rob McMillin]

"What we are wittnessing [sic] is the collapse of the worlds' largest ponzi scheme, promoted and set into play by the Bush administration."

Huh. Social Security was promoted by FDR, and that's gotta have the subprime fiasco trumped by a trillion dollars or so.

[Todd in WeHo]

Note to government officials and any home "owner" waiting for the proverbial knock on the door: stay in from a drive in your 84-month loan term luxury SUV, turn off your new plasma TV, lie back on your sofa (with no payments until 2011) and make these last few days at least a bit productive by thinking about where you fit in to Herbert Spencer's 19th century thoughts of "survival of the fittest."

[Hula Girl]

Ann, apparently YOUR reading comprehension needs some work.

What part of ..

"Your (boring) long winded, condescending missives. .. "If you can't say something nice ..."

Don't you understand?

I challenge you to keep your retaliatory remarks to 25 words or less.

[Rob McMillin, are you serious?]

Social security worked just dandy for its entire history, until Greenspan encouraged Reagan and Congress in 1982 to adopt a dedicated payroll tax (regressive, so that it would hit lower paid workers much harder than higher paid workers), to "save" Social Security. This dedicated tax stream was supposed to provide a politically secure revenue stream for Social Security, creating its own surplus to prevent the inevitable drawdowns that would occur as the Baby Boom generation reached retirement age.

The "fraud" in Social Security is that the government kept using this payroll tax to fund other non-Social Security obligations. This is all well and good, UNTIL Social Security needs to use its surplus. This is the entirety of the crisis. If you just took the projected disbursements from Social Security, and the projected tax receipts, Social Security would not be in crisis.

The only crisis we have has been manufactured by people like Grover Norquist and Rush Limbaugh, who have publicly stated that they want Social Security to be killed. In fact, the entirety of the Bush tax cuts were funded by the Social Security surplus.

You could think about that next time, or read a book, rather than just listen to Rush and watch Fox News. Or you could just spout nonsense about SS being a fraud. The only fraud going on here is a classic bait and switch by Greenspan and his ideological allies: put in a regressive tax to fund future Social Security obligations; then use that tax's surpluses to fund tax cuts for the rich (who now pay, on average, a much lower rate than the average American, as noted by Warren Buffett); then when Social Security may actually look like it needs to draw down some of the surpluses it has, claim a "crisis" and say there's no money there.

It's class warfare, to the extreme. Take from the poor, and give to the rich.

As for the mortgage crisis, how many of the "I told you so" crowd here have actually bought homes? My wife and I are sophisticated buyers; we're both lawyers, we knew exactly what we wanted (30 year fixed, no bells and whistles), and our experience was the following: 1) our mortgage broker kept trying to push exotic ARMs on us ("they have a much better rate"), even though we insisted on a 30 year fixed; 2) when presenting the exotic ARMs, our mortgage broker described them in the simplest possible terms, which were also the rosiest ("it's a much lower rate, and besides, you're not planning to live there for more than a couple of years anyways, are you?"); 3) when we sat down at our closing, we were presented with thousands of pages of documents. When we started reading them, the title company attorney told us we could keep doing that, in which case we would probably need to be there all day and come in the next day as well, or we could just take his word for what the documents we were signing did. We did the latter, just taking a quick skim of each document to make sure it looked like what he was describing. But of course the fine print on any individual document could have contained terms that we didn't know about.

From talking with friends, I think our experience was very typical, and I can only imagine what it's like for less sophisticated buyers. The mortgage market is extremely confusing, the contracts are not simple by any means, and now we're learning that brokers were given ENORMOUS incentives to push the riskier loans on buyers. Is it any surprise that so many of these high-risk loans were pushed onto the American public, with a correlation to the less sophisticated buyers?

[Dominic Smith]

Rob you are a lawyer and you feel you would have been there all day?
I always read every document (though I might scan a bit, there is nothing you sign that you don't go home with a copy of should you care to know what's in your legally binding contract.
As for your take on Mortgage brokers, Yow, they are as you describe, up to anything they can do for higher commissions at your expense. Give the fellows down on the car lot a run for their money. Thanks to forums like this though, if we read regularly (including comments) we ought to be pretty ready for about anything thrown at us. Add mortgage brokers and Realtors to how I already feel about priests and ministers. Everybody seems to have a racket.

[Joseph]

Both political parties are rotten!

I don't understand how intelligent people are playing the blame game...to be more blatant...blaming the Bush Administration for the real estate Fiasco....

Attorneys should take some classes in economics.....We could probably list 25 different causes as to what happened...

This has more to do with the "Globalization" of the economy...which is unavoidable....

[Hula Girl]

Rob, you're right. It would take more than a day to digest mortgage contracts drafted by lender's legal counsel and designed to protect THEIR interests.

I'll bet if a buyer brought in their on lawyer they'd be advised not to sign. The clock is ticking when it's doc signing time: the buyer's house has or will close escrow, the move is imminent..the Broker, says it's boiler plate, pushes the documents across his desk and it's Sign, Baby, Sign.

I hope a team of attorneys and forensic accountants reviews every single contract. I also hope for Peace on Earth - and we all know how that's working out.

[jk]

Rob,

Thanks for the lesson. When I buy my house, I will be reading every document. I don't care if I have to come back everyday for a week!

[Jeff]

The house has your name on it. 99% of you are making the biggest investment of your lives by purchasing the house and you are telling me that you were hoodwinked by a commisioned broker? Bush bears some responsibility, the banks and the brokers as well, but the biggest share belongs to the person who signs on the dotted line.

[Sharon Burton]

Here's what I think happened with the real estate bubble:

In 2000/2001, the economy crashed, capped off by Sept 11th (I owned a consulting business for the previous decade, I'll never forget 2002, the year that didn't exist). All indicators at that time showed the economy was crashing.

I think the gov looked around and decided that if the real estate market could take off, lots of people would have jobs; not just realtors, but all the associated markets like car companies, furniture companies, and so on. So interest rates dropped, making loans (and all sorts of loans) more attractive.

I suspect the thinking was if this area of the economy could recover, it could support the rest of the economy while the rest recovered. By the time the real estate market crashed, the rest of the economy would be back on it's feet and could probably support real estate crashing when it eventually crashed.

Out of this, many odd ways to finance a home were winked at by the government. These loans were bundled together with other things and sold to companies that didn't know the portfolio included these odd loans. Lots of people were employed, lots of money floated around the country, the stock market recovered and grew. The rest of the economy had time to get back on it's feet and it did recover. Everyone was happy.

Then the crash came. The government is not that interested in bailing people out because I think they're trusting the rest of the economy will support the crash. And it might have, were it not for the sudden increase in fuel costs.

Between the real estate crash and increased fuel costs, most households are looking at their budgets and seeing the seams starting to rip. Credit card defaults are starting to soar, people are defaulting on their homes. Buying groceries costs a lot more than it did a year ago, despite what the government tells us.

I don't have a solution but I think this is going to get worse and for the average person, that's scary. We're under-mortgaged in a house that's 100 miles from where I work but we can't sell and move because no one is buying. We have no credit card debt. But we still worry.

[Todd]

Selling agents are more kniving than ever.

I was forced out of a house I was renting when a Coldwell Banker agent had a buyer that could almost qualify for a loan, but it was a stretch, so the Coldwell Banker agent instructed the buyer to keep my deposit and use it to help with payments, as well as other really underhanded shinanigans.

[Zeppo]

Please forgive me if I sound heartless, but most of the mess boils down to greed, mostly on the part of buyers.

The philosophy went something like this:

Case 1: It is 2004. We are first-time buyers.
Property Prices are skyrocketing. All of our friends are making money investing in real estate. House prices will appreciate by 50% over the next couple of years, so let's jump in and play the game.
OK, we can only afford payments on a $400,000 house using the standard, 30-year fixed conventional loan approach, but our friends the Smiths, who are in the same income bracket as we, just bought an expensive house with less than 20% down, and fairly low monthly payments, using an exotic ARM vehicle. So, instead of buying the $400,000 house that we can afford with a conventional loan, let's buy an $800,000 house using that exotic ARM approach and watch its value rise by 50% over the next couple of years. If the loan resets to a much higher rate (that we can't afford), we'll just sell the house and reap a very handsome profit, free of income tax.

Case 2: It is 2005, and we have accrued a lot of equity in the house that we have owned and lived in for the past 8 years. Property prices are skyrocketing. All of our friends are making money investing in real estate. House prices will appreciate by 50% over the next couple of years. The equity in our house is just sitting there, whereas we could put it to work, investing in real estate. Let’s refinance and take as much equity as we can out of our house, and invest it in a second home. We’ll hold it for a couple of years and sell it for a big, fat profit and the only taxes we’ll have to pay are the 15% long-term capital gains. Considering the appreciation rate of real estate, that’s a lot safer, and a better alternative to investing in the stock market. Since we are going to get a 50% appreciation rate on our new investment, let’s make sure we buy the most expensive property we can. We will need to find a lender who doesn’t scrutinize our income very carefully, if at all. We also want a lender who will loan us the absolute maximum amount of money so as to enhance our profit. Since we will be selling the property in two years, a fancy Option ARM will work nicely.

Cases 3, 4, 5, Ad Infinitum: Speculators who buy pre-construction condos for the sole purpose of flipping the unit at the time construction is completed (two years in the future).
The list goes on and on.

My 2 cents:
Getting rich is the American Dream. For the majority of the populace, the only chance of doing so is via the real estate market. Some realize their dream, others do not. Timing and luck have a lot to do with it. There are no guarantees. When you take on a large amount of risk, the chances are you will either get rich or go broke. That’s life.