To paraphrase Alan Greenspan's remarks on March 17th, 2008, “The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the Second World War. The crisis will leave plenty of casualties.”
People are losing their homes and plenty of more will lose their jobs before the mortgage meltdown works its way through the scheme.
It seems easy to point fingers at greedy Wall Street titans for causing the sub-prime mortgage crises. they after all, put together the deals that allowed banks to underwrite mortgages and then offload these liabilities to investors. What plenty of fail to realize is that there is no shortage of blame to go around from homeowners buying more home than they could afford to real estate agents looking for more commission dollars. Mortgage brokers and bankers, the banks themselves, ratings agencies such as Moody's and Standard & Poor's, Wall Street, the Fed and last but certainly not least, the Federal Government.
How plenty of casualties? Experts are predicting that in the next few years, between 15 and 20 million homeowners could have homes worth less than what they owe. Walking away from a bad situation may actually make sense for people who mortgages that are 'upside down' considering the fact that refinancing is out of the query and home equity is nonexistent.
Let's start with the homeowners--the people who are now in the scheme or soon to enter the scheme, of losing their homes. a quantity of these people had never before owned a home and as such, may not have been prepared for the costs associated with homeownership. Basic financial literacy is sorely lacking in this country despite there being no shortage of budgeting and tracking programs readily available such as Quicken and Microsoft cash. The lack of financial literacy does not absolve these buyers of their responsibility. Every borrower receives a truth in lending disclosure statement. Here is a portion of what the act covers:
The purpose of TILA (Truth In Lending Act) is to promote the informed use of consumer credit by requiring disclosures about its terms and cost. TILA also gives consumers the right to cancel certain credit transactions that involve a lien on a consumer's principal dwelling, regulates certain credit card practices, and provides a means for fair and timely resolution of credit billing disputes. With the exception of certain high-cost mortgage loans, TILA does not regulate the charges that may be imposed for consumer credit. , it requires a maximum interest rate to be stated in variable-rate contracts secured by the consumer's dwelling. It also imposes limitations on home equity plans that are subject to the requirements of Sec. 226.5b and mortgages that are subject to the requirements of Sec. 226.32. The regulation prohibits certain acts or practices in connection with credit secured by a consumer's principal dwelling.
Much of the subprime mortgage crisis can be traced directly back to variable-rate mortgages. As is clearly stated above, “TILA does not regulate the charge that may be imposed for consumer credit. , it requires a maximum interest rate to be stated in variable-rate contracts secured by the consumers dwelling.” It also clearly states that TILA also gives consumers the right to cancel certain credit transactions that involve a lien on a consumer's principal dwelling. two has to wonder whether or not these homeowners:
1. Bothered to read the truth in lending act disclosure at all.
2. Understood what the truth in lending act disclosure meant.
3. Chose to ignore the information printed clearly the truth in lending act disclosure.
Clearly the public needs easy access to financial literacy courses. bad they don't see the need to make this a mandatory coursework of study in our educational scheme.
a quantity of months ago, as the subprime mortgage crisis was beginning to unfold, The los angeles Daily News ran an news story about a relatives in los angeles City, who had bought a home and were now faced with the prospect of foreclosure. The news story was sympathetic to this relatives, highlighting the fact that they're living the American dream and that this dream was about to come to an end. What I found to be distressing was the fact that clearly visible in the photo that accompanied this sympathetic news story was a costly flat screen tv hanging on the wall. Perhaps I'm naïve, but I can assure you that if I were faced with the prospect of losing my home and having my relatives put out on the street, there is absolutely no way that I would still have that costly tv hanging on my wall. It would have been two of the first things to be sold and some financial relief would be found by jettisoning what I'm sure was the costly cable bill.
Mortgage bankers and brokers have in the last one or one years been raking in cash by the bucket load in the form of commissions paid when mortgages they've originated, close. plenty of of these people have not needed to do much in the way of prospecting. Instead, their phones have run off the hook as people have jumped on the homeownership and refinancing and take out extra cash bandwagon, despite their ability to pay for their home. No-document loans were readily available without the borrower having to produce documentation that backed up their income. Clearly this practice can and indeed has, lead to substandard loan underwriting processes. Were a quantity of these mortgage bankers and brokers dishonest? Sure. Were all of them dishonest? I think not. To have a massive nationwide conspiracy, where thousands and thousands of people involved in the mortgage banking and mortgage brokering profession got together to generate this situation is basically not feasible. Yes, a quantity of the blame does belong with those in the mortgage industry, but they were basically a small cog in the huge machine that created this mess.
Let's discuss real estate agents. In 2007, they bought a home, and also sold a home. The agent they used to purchase our home was absolutely fantastic. In our opinion, they went above and beyond to make our deal happen. they answered every phone call, followed up on every concern and was the epitome of professionalism. they consider this individual to be a friend, and they have sent referrals her way that have resulted in her earning additional commissions. they will continue to recommend her to all who ask or mention that they'd like to buy or sell a home in our area.
The real estate agent, they used to sell our home, could not have been more different. they got our old home ready to sell prior to closing on our new home. they decided to list it as “For Sale by Owner.” In the event that they didn't sell this home on our own, it was our purpose to list it with an agent as soon as they had closed on the purchase our new home. Literally, from the day they put the sign in front of our home and listed it on a “For Sale by Owner” web-site they were inundated with phone calls from real estate agents. they were told plenty of lies and were constantly harassed; although they had already made it clear to every agent who called, and there were more to 60 who did; that they were willing to pay half the commission-the same as they would have received had they sold another agent's listing. they also told every agent that called that they had already lined up an agent to sell our home in the event that they chose to no longer sell it ourselves. Our deadline was the closing date of our new home purchase. they did have an interested buyer who shortly after our closing date decided to keep looking so they listed our home with a local agent so that they could concentrate on getting our new home ready for our moving date at the end of the school year. This agent showed our home a maximum of two times and got an offer which they accepted. they ended up getting $1,000 less than they had wanted in a declining Real Estate market. The agents who had called plenty of times to harass us called our listing agent on a quantity of occasions and they lied telling them that the house was under contract when in fact it wasn't at that time-clearly a breach of our agent's fiduciary duty. frankly an ethical agent would have continued to show our home until closing in the event that the deal fell through.
But wait, there's more. Our agent also acted as the buyer's mortgage broker. At the closing desk, they learned that they had signed documents from the buyer stating that they (our agent) represented them and they had signed documents stating that they represented us. they also learned that the buyer had effectively put down approximately 2-3% of the purchase price when financed closing costs were factored into the equation. Their first mortgage had what they thought was a high fixed rate and their second mortgage came with a rate in excess of 8.5%. Because the closing happened in August, literally in the midst of the first wave of the meltdown, if they didn't close on the day they did (August 31st, 2007), Citibank wasn't going to extend their rate. When my wife & i have bought houses in the past, it had always been a happy day. These people looked absolutely shell-shocked at the closing desk. I'm not convinced that they knew how much their monthly payment was going to be until closing day. they knew down to the penny well in advance having budgeted and planned everything on a spreadsheet. Were these people stupid or inexperienced and mislead by a greedy combination of real estate agent & mortgage broker? I'm confident that they are intelligent people but inexperienced and taken advantage of by an unscrupulous agent.
The banks are also culpable. Prior to bank deregulation, Savings and Loans provided mortgages to home buyers and kept these loans on their books. Non-performing loans had a negative effect on the S&L's profitability which of coursework caused tighter lending guidelines such as job stability and decent down payments in order for prospective home buyers to be approved for a mortgage. Way back then, a home buyer had to actually save up funds for a down payment 10 or even 20% before a bank would ever consider underwriting a mortgage. The checks & balances kept banks solvent and borrowers responsible. Although this approach worked, some cried foul stating that the regulated scheme was racist and discriminatory-and there certainly was some truth to this. Skipping forward to the present, banks made a bundle on mortgages over the past one or four years. For the most part, they allowed their underwriting criteria to be stretched so far out of alignment that someone could and indeed did, qualify for a mortgage despite their ability to pay. Some folks even applied for and received mortgages for over the property was worth. sometimes for as much as 25% over their property was worth!
Under the prior scheme, 125% mortgages would not have been possible because of coursework these loans were held on the banks' books and could have led to losses that would have had to have been absorbed directly by the bank.
So what went wrong? Under the current scheme, these loans were sold to the big Wall Street investment firms who repackaged them as collateralized mortgage obligations (CMO's), Mortgage Backed Securities (MBS's) and other similar acronyms. These instruments were then sent to the ratings agencies for their blessing and more importantly a letter rating. plenty of of these structured finance deals receive AAA ratings-the highest ratings available meaning that in theory, these instruments were least likely to default. How does two generate a 'triple A' or AAA rated financial tool out of sub-prime mortgages? Herein lies the magic. These Asset Backed Securities (ABS) are made up of different tranches or slices, each carrying a different risk and reward level. The first dollar of principle and interest is applied to the securities with the highest rating, and the first dollar of loss is applied to the tranche with the lowest ratings. The lower slices are designed to provide a security blanket that in theory protects the higher-rated securities. The investment banks that package or 'structure' these securities in order to earn fat fees when they sell them to investors are the same entities that pay the ratings agencies to rate these instruments. Clearly the possibility for conflict of interest is present. If investors and not the investment banks that stand to rake in millions in fees were to pay for the rating, the potential for this conflict of interest would be negated. Furthermore, the investment banks have a vested interest in convincing the ratings agencies of the credit worthiness of these securities.
So we've already pointed fingers at homeowners, some greedy, plenty of more I suspect, naïve or uninformed, real estate agents-one out of over 60 in my experience was a gem, mortgage brokers & bankers, banks, Wall Street and ratings agencies so who's left? The Federal Reserve and the Government of coursework.
The Fed as its known is responsible of the country's monetary owner and for supervision and regulation of banks. This is the definition of the Fed's roles in their own words:
Monetary Policy
The Fed is best known for its role in making and carrying out the country's monetary policy-that is, for influencing funds and credit conditions in the economy in order to promote the goals of high employment, sustainable growth, and stable prices.
The long-term aim of the Fed's monetary owner is to ensure that funds and credit grow sufficiently to encourage non-inflationary economic expansion.
What the Fed can do, is generate an environment that is conducive to healthy economic growth. It does so by pursuing a aim of price stability-that is, by trying to prevent inflation from becoming a problem.
The Fed cannot guarantee that our economy will grow at a healthy pace, or that everyone will have a job. The attainment of these goals depends on the decisions of millions of people around the country. Decisions regarding how much to spend and how much to save, how much to invest in acquiring skills and education, how much to spend on new plant and equipment, or how plenty of hours a week to work may be a quantity of them.
A stable level of prices is most conducive to maximum sustained output and employment. Also, stable prices encourage saving and, indirectly, capital formation because it prevents the erosion of asset values by unanticipated inflation.
Inflation is defined as a sustained increase in prices over a period of time.
· hurts people with fixed income-when prices rise consumers cannot buy as much as they could previously
Inflation causes plenty of distortions in the market. Inflation:
· discourages savings
· reduces economic growth because the economy needs a certain level of savings to finance investments that boost economic growth
· makes it harder for businesses to plan-it is diff
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