Subprime credit crunch...

[MadelynIris]

Anyone else scared?

 

[financeguy]

I have reservations about central banks intervening by pumping funds into the money markets (using OUR money, I might add).

Economists call it 'moral hazard'.

http://en.wikipedia.org/wiki/Moral_hazard

"Financial bail-outs of lending institutions by governments, central banks or other institutions can encourage risky lending in the future, if those that take the risks come to believe that they will not have to carry the full burden of losses. Lending institutions need to take risks by making loans, and usually the most risky loans have the potential for making the highest return. A moral hazard arises if lending institutions believe that they can make risky loans that will pay handsomely if the investment turns out well but they will not have to fully pay for losses if the investment turns out badly. Taxpayers, depositors, other creditors have often had to shoulder at least part of the burden of risky financial decisions made by lending institutions."

 

[anitram]

For years I watched as builders put up ridiculous McMansions, 30, 40, 50, 60 miles outside of a major city in "suburbs" and people flocking out there on a zero downpayment so they could live in a house twice the size they need and have the privilege of spending 2-3 hours a day in a car commuting. They could of course either not afford the furniture, or got into further debt to cover that. And more and more houses just popped up on the horizon with people buying up.

So it's no wonder what's happened.

 

[Irvine511]

For years I watched as builders put up ridiculous McMansions, 30, 40, 50, 60 miles outside of a major city in "suburbs" and people flocking out there on a zero downpayment so they could live in a house twice the size they need and have the privilege of spending 2-3 hours a day in a car commuting. They could of course either not afford the furniture, or got into further debt to cover that. And more and more houses just popped up on the horizon with people buying up.

So it's no wonder what's happened.

 

[Bluer White]

The bubble is finally bursting. Has been for awhile. Too bad Average Joe homebuyer could suffer as much as the creditors, who knew better. Who's going to bail them out? All us taxpayers.

 

[MadelynIris]

I'm a little worried that we're not just talking speculators, stock market investors, or crazy people buying homes they can't afford.

We're talking banks -- banks that you bank at, having people in line 40 deep trying to withdraw their money because of fears the bank is collapsing.

You scoff do you?

Even etrade had scary things happen to it 2 weeks ago concerning this. Scared me to death. First time in my life, I'm going to spread $$ around to different banks. I never thought I'd have to diversify like that... but maybe I'll get some free toasters or something.

 

[martha]

What banks are having trouble? Are you expecting a panic? Accounts are federally insured to $100,000 anyway.

 

[MadelynIris]

Countrywide was the first. People running to pull their cash.

http://newsblogs.chicagotribune.com/marksjarvis_on_money/2007/08/answers-to-your.html

eTrade's stock dropped 50% in 2 weeks, causing a panic and people to freak out and start rumors...

http://www.marketwatch.com/news/sto...x?guid={A6FBDFF6-CF41-44AE-A131-46AAE70C14AB}

Panic mostly. Yeah, up to 100k.

 

[ntalwar]

Even though there's FDIC insurance, I wonder how quickly the money would be available in event of a collapse. Even money market funds have some subprime CDO exposure, which is frightening (I switched to a Treasury Money Market fund). The problem is not contained to the subprime mortgage market (psychologically at least), and has an impact on all credit markets, and by extension equity markets as well.

 

[AnnRKeyintheUSA]

A perfect example of how greed has backfired. A lot of those lenders thought they could take advantage of people with bad credit and little or no money down (which is a lot of us!!) by offering those kinds of loans. The lenders used 'teasers' and knew all along that the rates and the monthly payments were going to skyrocket, but they thought it would be to their advantage because the homeowners would either 'suck it up' and pay the higher amount, or lose their home to foreclosure where it could be sold again to someone else possibly at a higher price. What they did NOT count on was the sheer numbers of people who were unable to pay the higher price and houses all going into foreclosure at relatively the same time, leading us to this collapse.

Another way greed has backfired is all the recalls from China. All those greedy American manufacturing companies thought they could save millions by sending the work overseas where they could get off paying the workers much much less. But now they're facing huge losses in recalls and possible lawsuits due to the Chinese not being up to standard (poison pet food and toothpaste, lead painted toys, etc.) If they had their stuff made in the US under tighter regulations and paid the workers more which was the right thing to do, none of this would have happened. I hope they will all think twice about trusting China again.

 

[Infinity]

Greed existed on both sides of the issue. The lenders were greedy because they thought they can lend all that money at such high interest rates and expected that the borrowers (who had bad credit) would pay them back since the housing market had kept on rising. The borrowers were also greedy because even though they knew that they wouldn't be able to pay all those monthly mortgage payments, they thought they would be able to sell their house for a higher price tag very soon anyway.

I'm glad the housing/mortgage market crashed. I've been buying some good stocks at such bargain prices.

 

[ntalwar]

Another way greed has backfired is all the recalls from China. All those greedy American manufacturing companies thought they could save millions by sending the work overseas where they could get off paying the workers much much less. But now they're facing huge losses in recalls and possible lawsuits due to the Chinese not being up to standard (poison pet food and toothpaste, lead painted toys, etc.) If they had their stuff made in the US under tighter regulations and paid the workers more which was the right thing to do, none of this would have happened. I hope they will all think twice about trusting China again.

China also has dangerous domestic goods. They are still years behind the US in terms of product safety, and I don't entirely trust the American food inspection system either. I don't think it's related to lower wages paid, but rather to systems and inspections not being in place to prevent these incidents. We've had domestic scares here as well - e.g. the e. coli in bagged spinach. I believe Japan has a ban on U.S. beef, and recently China had a ban on U.S. chicken due to safety concerns.

 

[martha]

I don't think it's related to lower wages paid, but rather to systems and inspections not being in place to prevent these incidents.

But many of these companies import products from China because of the low production costs, which are directly related to the low wages.

 

[ntalwar]

But many of these companies import products from China because of the low production costs, which are directly related to the low wages.

Correct - I was saying that I don't see a strong link between low wages and inspection systems/quality control. The Chinese government needs to do more.

 

[AnnRKeyintheUSA]

The borrowers were also greedy because even though they knew that they wouldn't be able to pay all those monthly mortgage payments, they thought they would be able to sell their house for a higher price tag very soon anyway.

That's not greedy, they were doing it to survive because they couldn't afford a home any other way. They didn't plan to not be able to pay the house payments, they didn't know they were going to go up the way they did. That would be very stupid, no one did that. The companies took advantage of poor people hoping for home ownership. It's terrible to not be able to afford a home and only be able to rent dives.

I'm glad the housing/mortgage market crashed. I've been buying some good stocks at such bargain prices.

Then you're greedy, and even worse taking pleasure in the pain of others. And if you're into stocks, you are well off enough you couldn't possibly understand the desperation of the poor when they were taken advantage of with those tricky loans so don't judge them unfairly.

 

[AnnRKeyintheUSA]

Correct - I was saying that I don't see a strong link between low wages and inspection systems/quality control. The Chinese government needs to do more.

But they're not going to, they don't even care about their own people, so it's best not to even deal with situations like that. Bring the jobs back home and pay people a wage they can live on by US standards of living.

 

[Vincent Vega]

You can't take the blame from the borrowers entirely.
Yes, the lenders neglected their responsibility to inform about the risk, because they knew they were taking advantage of people dreaming about their "own four walls", and they did it because they could sell those debts to the hedgefonds etc.

But still, everyone knows that interests go up and down, and estate prices go up and down. And you have to be able to compensate those losses.
Building homes with zero own funds is risky, as you can see here, and when you plan on building your own house you have to take into consideration all these factors, plus a few others like a drop in income for example.

And if you can't afford your own home, then, alas, you have to rent one.

 

[martha]

That's not greedy, they were doing it to survive because they couldn't afford a home any other way. They didn't plan to not be able to pay the house payments, they didn't know they were going to go up the way they did. That would be very stupid, no one did that. The companies took advantage of poor people hoping for home ownership. It's terrible to not be able to afford a home and only be able to rent dives.

Many many many of these people are people who owned a home and cashed out their equity to buy toys, hoping that the values would stay high. Some are like those you describe, but even many of them signed fraudulent papers.

Before you wring your hands till they hurt, do a little research.

 

[melon]

I'm a little worried that we're not just talking speculators, stock market investors, or crazy people buying homes they can't afford.

We're talking banks -- banks that you bank at, having people in line 40 deep trying to withdraw their money because of fears the bank is collapsing.

You scoff do you?

Even etrade had scary things happen to it 2 weeks ago concerning this. Scared me to death. First time in my life, I'm going to spread $$ around to different banks. I never thought I'd have to diversify like that... but maybe I'll get some free toasters or something.

There is little worry about this happening. First off, FDIC insurance doesn't mean a free pass for banks to be as irresponsible as they want. There are specific liquidity requirements that banks must maintain at all times, and if banks drop below certain thresholds, the government literally is able to replace a bank's entire management at will. Secondly, a smart financial institution knows how to diversify its exposure to risky ventures like this. And, as such, they have. Sure, many of them have lost money here now...but they also know that this is the nature of the business, and nobody shed a tear for them when they were making lots of money off these same types of loans over the last few years.

The most realistic concern is on par with financeguy's post on "moral hazard," where banks knowingly engage in financially risky behavior with the knowledge that the government will bail them out. As such, it becomes a very expensive annoyance for the average individual. Perhaps this should be addressed in the future, with caution being taken not to have "overkill" regulations that can hamper future economic growth. It's a difficult balancing act, that's for sure.

As for FDIC coverage, it's not as simple as a flat $100,000 for all deposit accounts. Joint accounts, I believe, get $100,000 per person (i.e., a married couple's account would have a total of $200,000 FDIC coverage). Additionally, I believe that CD-based IRAs (not investment based) get wholly separate FDIC insurance. Nonetheless, if you are in an asset class where FDIC coverage is important, you should talk to your bank and/or financial planner as to how you can maximize your FDIC coverage within a single bank. And if you still have too much money, by all means, spread your money to other banks. I think it would be foolish not to. Of course, it should be mentioned, non-bank investments like annuities and mutual funds (including mutual fund-based IRAs) are never covered by FDIC insurance for any reason, even if you opened it through a bank.

 

[martha]

I love my credit union.

 

[Infinity]

That's not greedy, they were doing it to survive because they couldn't afford a home any other way. They didn't plan to not be able to pay the house payments, they didn't know they were going to go up the way they did. That would be very stupid, no one did that. The companies took advantage of poor people hoping for home ownership. It's terrible to not be able to afford a home and only be able to rent dives.

First of all, when I said greedy, I was talking about all the speculators who took out unaffordable loans to buy homes for a quick profit. And most of the loans that have defaulted during this crisis belonged to these speculators.

Secondly, yes mortgage lenders can be confusing with their lending policies. But I would NEVER take out a loan without fully understanding the terms and conditions of my loan. A lot of the defaults came from Adjustable Rate Mortgages which were taken out by people who did not understand that the rate can and would go up, and yes they suffered.

And for the greed factor, American borrowers in general are greedy. Americans have trillions and trillions of dollars in household debt. People spend money on very unnecessary things and then go bankrupt. People spend more then they earn. It happens. Greed had existed with both the lenders and the borrowers over the past few years, and now they are all paying for it.

Then you're greedy, and even worse taking pleasure in the pain of others. And if you're into stocks, you are well off enough you couldn't possibly understand the desperation of the poor when they were taken advantage of with those tricky loans so don't judge them unfairly.

This is just wrong. How does that make me greedy? I'm not the one who took crazy high risks like those lenders and borrowers. What does me investing in these stocks have anything to do with me taking pleasure in the pain of others? All I am doing is buying businesses at undervalued prices. I'm buying stocks that have been beaten down more then what they should have. Obviously you know nothing about stock investing.

"Buy when there is blood on the streets." -Warren Buffet

And what evidence do you have that I am "well off?" This is such a common misconception, that if someone is a stock investor then they must be "well off." I'm not judging anyone unfairly. A person taking out a loan should do their homework on their loan. There is nothing wrong in renting and there is nothing wrong in taking out a smaller loan for a smaller home. As I said before, the borrowers were greedy in taking out such expensive loans and the lenders were greedy for giving out so many of these loans to people with such bad credit ratings.

 

[Infinity]

Many many many of these people are people who owned a home and cashed out their equity to buy toys, hoping that the values would stay high. Some are like those you describe, but even many of them signed fraudulent papers.

Before you wring your hands till they hurt, do a little research.

 

[financeguy]

http://business.timesonline.co.uk/t...ectors/banking_and_finance/article2457009.ece

 

[ntalwar]

But they're not going to, they don't even care about their own people, so it's best not to even deal with situations like that. Bring the jobs back home and pay people a wage they can live on by US standards of living.

Eventually I think they will start implementing stricter quality standards. China's export boom is fairly recent, and they are having some growing pains. The vendors also need to be chosen more carefully. Companies like Nike and Apple manufacture cheaply in Asia, and their products certainly aren't shoddy.

http://business.timesonline.co.uk/t...ectors/banking_and_finance/article2457009.ece

Interesting that it's more of a global problem than initially publicized.

 

[yolland]

What’s Behind the Race Gap?

By VIKAS BAJAJ and FORD FESSENDEN
New York Times, Nov. 4

High-cost subprime mortgages have often been framed as loans that catered to people with blemished credit records or little experience with debt. There has been less attention paid to the concentration of these loans in neighborhoods that are largely black, Hispanic, or both. This pattern, documented in federal loan records, holds true even when comparing white middle-income or upper-income neighborhoods with similar minority ones.

Consider two neighborhoods in the Detroit area. One, located in the working-class suburb of Plymouth, is 97% white with a median income of $51,000 in 2000. To the east, a census tract in Detroit just inside Eight Mile Road has a very similar median income, $49,000, but the population there is 97% black. Last year, about 70% of the loans made in the Detroit neighborhood carried a high interest rate--defined as 3 percentage points more than the yield on a comparable Treasury note--while in Plymouth just 17% did.

Last year, blacks were 2.3 times more likely, and Hispanics twice as likely, to get high-cost loans as whites after adjusting for loan amounts and the income of the borrowers, according to an analysis of loans reported under the federal Home Mortgage Disclosure Act. (Asians are somewhat less likely than whites to take out high-cost loans.)

Researchers and industry officials agree that there is probably no single explanation for the lending patterns, though the history of banks’ avoiding minority neighborhoods, the practice known as “redlining,” is a good place to start. (Experts have to resort to guesswork because the government does not require lenders to report information about borrowers’ credit scores, down payments and other details used in pricing loans.) Lenders say that in general higher rates are justified to account for the bigger risks posed by borrowers who have a poor record at paying bills on time and defaulting on debts. And a recent Federal Reserve study noted that neighborhoods where people tend to have lower credit scores also tend to a greater concentration of high-cost loans.

The study suggests that the concentration of high-cost loans is not caused by an area’s racial makeup, though there is a correlation, said Jay Brinkmann, vice president for research and economics at the Mortgage Bankers Association. But the Fed study also suggests that a big part of the reason may have to do with the lenders that minority borrowers do business with. The biggest home lenders in minority neighborhoods are mortgage companies that provide only subprime loans, not full-service banks that do a range of lending. It may be that these borrowers do not have access to traditional banks, because there are no branches near them. The Community Reinvestment Act, enacted 30 years ago, was intended to address redlining by forcing banks to make loans in lower-income areas. But the law’s provisions do not apply to banks in neighborhoods where they have no branches. “You could go into a middle-class area in Queens County that is white and there will be lots of banks on the shopping street,” said Alfred A. DelliBovi, president of the Federal Home Loan Bank of New York and a deputy secretary of the Department of Housing and Urban Development in the first Bush administration. “If you go to an area that is equal income and that is black, you won’t see many.”

Banks typically locate branches where they believe they will get the most deposits. A lower savings rate and a distrust of banks stemming from a legacy of redlining may help explain why there are fewer branches in minority neighborhoods, Mr. DelliBovi said. A bigger reason may be that in recent years many subprime loans were not sought out by borrowers but actively sold to them by brokers and telemarketers, said Calvin Bradford, a housing researcher and consultant. A majority of the loans were refinance transactions allowing homeowners to take cash out of their appreciating property or pay off credit card and other debt. Lenders made the risky loans, then often sold them to Wall Street investors. Many borrowers appear to have been swayed by brokers and lenders offering to look out for their best interests even when they had no obligation to do so.

“If we turn the clock back 30 years ago, we had redlining,” said Nicholas Retsinas, director of the Joint Center for Housing Studies at Harvard University. “In the last few years, we have had the opposite--an overextension of credit by lenders and an overextension by borrowers.” The country needs to find a balance, “a way to extend credit at a reasonable cost to people with impaired credit,” he said. The government, through programs like the Federal Housing Administration and the big mortgage purchasers Fannie Mae and Freddie Mac, must play a critical role, Mr. Retsinas said, adding that he worries that the efforts initiated so far are not robust enough. “There are lots of people trying to do the right thing,” he said. “But at this time I’m not very sanguine that we will deal with this in a concerted manner.”

Interactive Map: Subprime Mortgages as a Percentage of all Mortgages

 

[AnnRKeyintheUSA]

Many many many of these people are people who owned a home and cashed out their equity to buy toys, hoping that the values would stay high. Some are like those you describe, but even many of them signed fraudulent papers.

Before you wring your hands till they hurt, do a little research.

Oh, I do know that is true too, I know some of them personally. I'm not talking about them, I knew it was only a matter of time before they lost their asses and it's even deserving in some cases. I'm talking about the first time home buyers with bad credit who were taken in by the subprime loans because it's all they could afford.

 

[Infinity]

Oh, I do know that is true too, I know some of them personally. I'm not talking about them, I knew it was only a matter of time before they lost their asses and it's even deserving in some cases. I'm talking about the first time home buyers with bad credit who were taken in by the subprime loans because it's all they could afford.

There is nothing wrong in buying a smaller home that costs less $. If thats not possible, there is nothing wrong in renting. These people took out Adjustable Rate Mortgages becuase they were stupid, they deserve everything they get.

 

[ntalwar]

There is nothing wrong in buying a smaller home that costs less $. If thats not possible, there is nothing wrong in renting. These people took out Adjustable Rate Mortgages becuase they were stupid, they deserve everything they get.

I also blame corrupt and greedy appraisers and lenders who thought the boom would go on forever and had few standards for lending. The borrowers aren't the only ones getting hit. We are all paying the price (thanks to the Fed) with a devalued dollar, inflation, and a recession. I've hedged against this trend fortunately.

 

[MadelynIris]

etrade reporting more write downs on Friday. Stock in the 7s.

 

[Bluer White]

Hopefully E-trade and the like are taking their biggest write-downs in the fourth quarter. Financials lead the market...so until this works itself out it will be choppy. Let's remember that many of the large firms are well diversified, at some point soon these beaten down stocks will be great buys.

I'm not sure that the last rate cut was a good move. Combine it with $95+ oil and you start to have inflation concerns. The cut sets a bad precedent for lenders too...screw up and we'll bail you out.

I don't think the average homebuyer is 'stupid.' Naive is a better word. Most folks weren't looking to flip a home and make a profit. They bit on the lenders' sales pitch to finance that dream house, but when it sounds too good to be true...it probably is. And now everyone is feeling the pinch.