These same people wouldn't be handing the mortgage company their profit if the house was worth 20% more now rather than the other way around. It is pretty pathetic what people expect nowdays.

Kinda makes you feel like a chump for buying less house than you qualify for, getting a fixed rate mortgage for a higher interest rate and actually making your payments on time even though there are other things you'd rather buy with that money. Sheesh.

qdog, What did the dj say to this woman?

He was WAY too polite...Said he didn't want to give an opinion or any advice.Though i think by saying that he kind of implied what i was thinking.."Are you KIDDING me lady?"

She may get her wish! If what they are saying on TV is only half true BOTH presidential candidates are saying they will do just about anything to help people stay in their homes. The deal Bank of America made with WaMu mandates, in cases like hers, to do just what she wants with a fixed rate of 3.5% with a possible reduction of principal. Personal responsibility went out the window.

This can't be another blind bailout. It needs to be case by case.

Thanks to forum poster mfbenson, I know that 12 Million is the number of households upside down. That's 16% of all homeowners. Some were just darn fools. Some are hurting because home prices have dropped so far. We don't know how many need to sell right NOW.

Do the 64 Million who DO have equity --including 24 Million with zero mortgages -- need to bail out EVERY underwater homeowner? Do the half of Americans who don't even OWN a home have to contribute too? EVERY taxpayer and his grandchildren?

Responsibility does exist, its just becoming exceedingly rare.

There is plenty of blame to go around for the whole mess. The reality of it is its probably better for the banks to refiance underwater owners, than go through the foreclosure process. In the end, it is cheaper to refinance than to sell at fire sale prices in an illiquid market.

In the spring, there were stories of investors buying 90 d deliquent subprime mortgages for 30 cents on the dollar. Then refinancing the original owners for 60 cents on the dollar.

I just saw a documentary on the great depression where small town locals would conspire to keep people from bidding at foreclosure sales, so the original owners could rebuy their house or farm for pennies on the dollar.

Maybe she was a WaMu or Coutrywide or OCC or Fed Reserve or SEC or Lehman or Merrill or Bear, or Citigroup etc. etc.employee...monkey see, monkey do....

Does anybody know what kind of housing is typically involved in the current lending debacle? Are we talking minimal-grade housing in inner city areas where little old ladies were duped into borrowing money which they would never be able to repay absent continuous (and profitable for the lender) re-fis based on future "appreciation"?

Or were the troubled loans (sub-prime, liars' loans or no down varieties) use primarily by middle class, suburban, exurban people who simply bought into the your-house-is-your-piggy-bank foolishness and purchased more house than they could ever afford at anything but teaser rates, or used re-fis for extracting so-called "equity", or simply played at being real estate/leverage sharpies and got caught on the wrong end of the bubble?

Does anybody know the answer to this?

Molly~

From what I have read, there is quite a mixture with many different players....as some of the hardest hit states are California, Florida and Nevada; it seems that there were of course the flippers as all three are attractive destinations.

Then there is Ohio...where many of the low income areas were hit hard. By contrast, our county, the wealthiest in NJ and the 4th wealthiest in the nation has seen very little rise in foreclosures over the average that happens even in a good market.

Certainly some of these folks KNEW they were biting off more than they could chewÂbut by and large, they were convinced by many of the lenders that the house would appreciate to such an extent they could easily refinance to better terms when need beÂ.and most average folks erroneously believe that if a financial institution is willing to give you the money, they must believe that you could pay it backÂ..or else why on earth would they lend it?

They did not know that once lended, the lender made buckets of money, and then the debt was passed on, never to cross their path againÂso they didnÂt care if they lent it to someone who could not pay it back.

One canÂt blame the borrowers for believing the lenderÂs spielÂÂas home prices were indeed skyrocketing.

It is the same "philosophy" used by Wall St with which they duped investors regardless; then when things turned sourÂ...they sliced and diced the financial instrument once again, and the toxic waste was rated tripe A to be sold to the next unwitting investor.

In addition, the lenders lent without any risk assessment practice in place. At the height of the Ponzi scheme, my dog could have been issued a mortgage. No income checkÂ.no down payment, etc.

The gargantuan Wall St. appetite for this essentially worthless crap led the lenders to continue the practiceÂÂ..even to the point where they would misrepresent terms to people who could easily qualify for a 30 year fixed rateÂas the option ARMÂs etc. generated more money for them.

Consequently there are many out there who are now stuck due to bait and switch at the last minute. AndÂas the lenders hire the appraiserÂthey controlled that as wellÂbecause an appraiser who wonÂt play ball and appraise at a set number gets no more businessÂ..and then is out of business. This helped keep price inflated well AFTER they actually started to fall.

Now of course, those folks who played by the rules, paid their nmortgage on time...but lost thier job or jobs due to this scheme, who may need to tap home equity for essentials such as food or medical expenses are out of luck.

In additon, so many 401K's are in the toilet that they are not even an option for those in trouble..and of course there is the penalty for early withdrawal.

Then the financial institutions exacerbate the consumers plight by lowering their credit limit simply because of where they may SHOP.

Bottom line? If the lending practices had adhered to proper risk assessment, far, far, far fewer folks would have been approved for a mortgageÂ..meaning far far, far, less money would have been made by all of the financial institutions involved in the schemes.

The financial institutions created a false marketÂand now most everyone is paying the priceÂ..except of course for all the head honchos who walked off with their millions.

Apparently, Ponzi schemes are illegal for all, except of course the execs on Wall St.

Molly,

There's some of everything you mentioned. For instance, Thornburg Mortgage made soley jumbo pay-option ARMS to just prime borrowers. Their portfolio is sound but they still bit the dust because they were unable to sell those loans in the secondary market.

Many people with largely commission incomes went for 'creative' financing but they are not all subprime or even alt-A borrowers. Then there are those that had the income but didn't want to report it because they fudge on their taxes so they grabbed 'creative' mortgages. (Yep, happens all the time).

There are tens of thousands of true subprime borrowers (as judged by credit scores...not income levels). Many are lower level homes but there are also many McMansions that were purchased by subprime borrowers. They have the income but not the credit worthiness.

Then, there's the people who had no business owning a home due to credit & income levels.

Some would like to blame all of the problems on the stereotypical subprime borrower with little income & a poor credit history...CRA Act type borrowers. Unfortunately, it's not accurate. These bad loans span the spectrum of income levels as evidenced by the foreclosures in chisue's $1M+ suburb (38 foreclosures & counting).

Actually, blaming CRA really doesn't make a lot of sense, IMO. The likes of Countrywide or American Home, for instance, were never bound by CRA. Ahem. After the fact, everybody looks for somebody or something to blame. We have a need to point a finger & say, "Ah ha, that's the reason!" When, in actuality, there are many reasons that collided into this debacle.

There's no "one size fits all".

/tricia

Logic - the point you make about appraisers "hitting the number" comes up again and again as this all unfolds. Yesterday, during testimony at the Senate Ag Committee hearing on "financial derivatives", one panel member said 40 percent of the subprime and alt-a mortgages in default showed evidence of fraud. Number one fraud - over appraisal.

There's an excellent article in todays online Washington Post detailing all the missteps that took place over the years. Its not a quick read!

I'm going to add my two cents to the mix of reasons why & how we ended up sitting here in our devaluing homes reading our pathetic 401(k) statements. It's a long story & didn't happen over a short period of time.

Inflation in the US accelerated to 4.5% just a few months ago. That was the fasting rate in 18 years. It wasn't just a US phenomenon. In Europe, in Asia, & in North & South America inflation was accelerating to uncomfortably levels. The Fed began the tightening cycle several years ago & eventually central bankers around the world were raising rates. But recent inflation was NEVER the result of excesses in banking. At least, not in traditional banking. Inflation came from excessive credit creation outside the commercial banking arena & when this lending dried up, the seeds of deflation were sowed.

About 15 years ago, Alan Greenspan suggested the Fed was losing control of the banking system. Explosive growth in non-bank lending & electronic money meant that the money supply the Fed measured & controlled was an increasingly small part of the financial whole, according to Greenspan.

By the time Bernanke took over at the Fed, commercial banking was no more than the tip of the financial iceberg. The 5 big US investment banks (Bear Stearns, Merrill Lynch, Lehman Bros, Morgan Stanley, & Goldman Sachs) asked for & were granted permission to increase their leverage well above the old limit of 12 times capital. Finance companies like GE Capital grew enormous & mortgage giants like Countrywide were flying high while the GSEs were standing still. Hedge funds added even more leverage to the system, not necessarily lending directly, but buying bonds from other lenders, thus freeing them to lend more. Derivatives contributed still more leverage with tiered- structures of amplified risk, often immeasurable.

The financial system in the past decade was uncomfortably like the pre-1914 era when there was no central bank as only a small part of the system was under the Fed's thumb. The Fed was never powerless, of course, but the Fed was much weaker than it used to be. It devoted tremendous resources, for example, to fighting the GSE mortgage credit engine after it saw it couldn't control it in the mid-90s. But, Greenspan appeared nonchalant about derivative growth.

The weaker position of the Fed had two important consequences. First, policy makers had to push hard to achieve measurable results. Significant changes in the Fed funds rate had a fairly limited impact on the financial system & the economy. The rate cuts from 6.5% to 1% between Jan. '01 and June '03 had little direct impact on the economy. But there were secondary, unintended, effects from the changes in the funds rate that turned out to be more important in the long run. This is where the second consequence comes in: the Fed's easing policy caused intended results in the relatively small commercial banking system but it also caused unintended slower-acting changes at non-bank lenders especially the mortgage companies that turned out to be far more stimulative than expected.

The housing boom & bust were both the result of secondary responses to Fed policy that were so far outside the Fed's direct influence they never even showed up on the Fed's radar. Even now, Greenspan argues the 1% Fed funds rate between June '03 to June '04 had nothing to do with inflating the housing bubble because there were sub-6%, 30-year mortgages that people would have used if ARM loans were not as cheap as they were. It seems beyond his comprehension that home buyers would opt for adjustable rate mortgages with teaser rates that stretched them to the limit of their ability to pay or that lenders would give them these loans. But, of course, that is exactly what happened. Even a 5% fixed-rate loan would have put the homes many people opted to buy beyond their reach.

In the early 90's, the Fed abandoned M2 as a policy guide but not because they didn't believe in monetarism. Greenspan & most of the Committee were Monetarists. They stopped using M2 because there was so much money outside the banking system that the relationship between GDP, inflation, & M2 broke down. The Fed had no choice but to fly blind conducting policy with no broad theoretical policy guide.

The deepest roots of the credit & banking crisis are not the housing collapse as Henry Paulson suggested. They are the combination of excessive leverage, volatility, & intense accounting confusion accelerated by marking assets to illiquid markets. Levered investors cannot survive a sharp drop in asset prices in an accounting system that: a.) front loads losses to destroy capital at the front of the credit cycle and b.) no regulator had prepared for. (oops!) Remember when Countrywide's Mozilo argued on CNBC that a Fed plan to ban exotic mortgages was a bad idea because exotic mortgages were standard fare in California?

Deleveraging means less credit is available. Because inflation comes from too much credit & deflation comes from too little, we are now caught in a deflationary downdraft. Headline CPI, not core, the headlineshould be under 2% by the end of 1Q '09. By the end of 3Q '09 it could be below zero. This is based on the decline in food & energy already seen in the commodity markets which will show up in retail pricing over the next six months, or so.

Core inflation should fall too both because demand is weakening & because food & energy commodities are not the only ones falling. Almost all industrial commodity prices fell in 3Q '08.

OK, prices are going to fall. So what? Won't lower prices reinvigorate the consumer? They will to some extent although because the drop in commodities was caused by weakness in the economy it cannot restore growth to what it was. Meanwhile, if deflation lasts it pushes real interest rates up.

Right now, the Fed funds rate is highly stimulative. Or, at least it would be if the markets calmed down enough for people to put capital at risk again. As inflation falls, however, the stimulative power of the low Fed funds will be undermined. And, if inflation turns negative, a negative real Fed funds rate will no longer be achievable.
To reverse the slide in the economy & in prices we need credit growth. The Fed is on the right track. Bernanke was late to the party but at least he's checked his coat at the door! Until this past weekend, Trichet was still in the parking lot & Darling just brushing off his hat!

The banking system is globally integrated so we need a global solution. Paulson is on the right track with TARP because it will replace tarnished bank assets with cash. Bernanke is on the right track with rate cuts that began last year with the liquidity programs for banks & primary dealers and the government sponsored entities and with the commercial paper Financing Facility. But, I'd sure like to see an entire week pass without any new programs! Money markets will not thaw though until all the big banks in the system trust each other.

All of the noise about appraisers, over enthusiastic REALTORS, scams/frauds, loose lending practices, & irresponsible borrowers is just thatnoise masking the underlying cause of so much of our financial system being outside the control of the Fed.

OK, somebody "Talk Me Down"!

/tricia

Can't, I'm out on the ledge with you. You're exactly right, Tricia, it was and is the shadow banking system. And it is not only beyond the Fed, but beyond control of all of the central banks. Nobody knows how deep is the vortex.

So, buying TIPS isn't a good strategy...if inflation is falling. Let's see, that leaves: gold, closed-end funds, foreign currency? (Not to forget the few silver dollars DH's late father kept only for their silver content.)

so she thinks the banks should refi her for free,mark down the value of exist mortgage to reflect market conditions, AND waive the 40k needed..

That's pretty much the plan that McCain suggested in last week's debate.

tricia, EXCELLENT analysis.

However, I think that all of the factors that contributed to this mess can be categorized as "But for"...take any one component out of the scheme, and the outcome would have been different. Some to a small degree...some to a tremendous degree.

The bottom line is that the scheme was engineered by Wall St. and they made certain that enough palms were greased to look the other way.

As I have always maintianed, Wall St. was and is the root of this evil, with Govt' blessings...and everyone else was merely pawns in the game.

It is really quite simple in terms of cause..just look at who benfited by millions in this scheme...who STILL has the millions....and look at those left holding the bag.

Just because someone is upside down it doesn't mean they need a bailout. Lots of people who are upside down can still make their mortgage payments; then just can't sell and bring cash to the table. How about if they make the payments and stay in the house til the market value rises?

Yes, job transfers and other factors may force a sale when the owner is upside down. But barring those, why not just wait out the market?

As for those who are getting a low rate so they can make the payments, I think their loan period should be extended--tack on another 5 years or something.

Several things about this upset me. I was one of the people needing a non disclosure loan to get a home. Long complicated story behind that but I deserved a chance and my credit rating was well above 700 so I was a decent credit risk. I hate to think that they will totally eliminate all non disclosure loans because they can help some people.
But... when I got my loan I was well educated on the loan process and knew exactly what I was getting into and knew for sure that I could repay the loan. I have never been late with a house payment in about 30 years. We bought a home that our income would let us repay. Many of the people in this mess did buy way over there heads and were duped by the lenders. Maybe, there should be something in this new plan to teach the idiots that took out the bad loans more about credit and how it works, especially for home buying.
Also, why should the people that had overinflated ideas of what they needed or wanted get a bail out and the rest of us that have worked so hard to pay our bills be left out? That is kind of like punishing your well behaved child for the panks of the more poorly behaving child. It is totally unfair!!! Have you heard the logic that we (the home owners not in default) will benefit because our home values will be higher than if we foreclose on all of the bad ones? That is a true statement but still I would like to have a more luxurious home and be forgiven for getting in over my head because I would benefit more from the bail out than the guy who worked hard and spent wisely!
Everyone is paying for this mess one way or another but it would be nice if the ones that played by the correct rules got a penalized less than the ones who created the problem.

treasureforu, I wish there were more people like you out there. We, too, bought a home we knew we could afford and pay for.. It is unfair to penalize all of us that have done it right.. Sadly, you are right we will all pay for it in some way or another.

I just watched 20/20 and it was a real eye opener. This started many years ago. They showed a clip of Clinton talking about helping the lower income people to buy a home.. We are not rich by any means but have managed to do it. Anyone should be smart enough to sit down with a pencil and paper and figure out what is coming in and what is going out... No one forced me to sign my name on the dotted line and I am asure no one forced anyone else either..

Both homes on each side of us have been in foreclosure and I can tell you it was due to over spending and the men didn't keep a job but for a short while. The one was left with a $150,000 debt owed. The woman bought it when her Dad died for $60,000. They were only there 4 years. They had all the bells and whistles.. I can't feel sorry for either one of them.. Sadly there are a huge amoumt of homes sitting just like these..

Susie

What upsets me about this election is that nobody is talking about sacrifice. I know that would be the kiss of death for any candidate, but I would love one to speak the truth to the people.

We need to stop having credit card debt and start paying our cc bill in full EVERY MONTH. We need to either pay more taxes to fund this expensive war or to end it. The only people who are sacrificing are the soldiers over there in harm's way.

During WWII, they sold bonds to fund the war. This president doesn't mention sacrifice at all. He just keeps borrowing to pay for a foolish war. Shame on him!

"And it is not only beyond the Fed, but beyond control of all of the central banks."

Retail level mortgage lending is regulated at the state level, and some states have little to no requirements.

The federal influence is at the GSE level, in defining 'conforming; mortgages.

What brokers and banks do at the local level is not well controlled.

Jumbo mortgages are by definition 'non-conforming' and never enter the federally influenced secondary market.

At best the SEC could make issues if disclosures of bonds backed by higher risk mortgages are offered, but if the notes are offered for sale individually (not securitized) there is nobody watching. Caveat emptor.

Wall Street wanted the promise of higher returns, and forgot that risk increases with higher returns.

logic-"The financial institutions created a false market�and now most everyone is paying the price�..except of course for all the head honchos who walked off with their millions. Apparently, Ponzi schemes are illegal for all, except of course the execs on Wall St."

Right again.

triciae-"The financial system in the past decade was uncomfortably like the pre-1914 era when there was no central bank as only a small part of the system was under the Fed's thumb. The Fed was never powerless, of course, but the Fed was much weaker than it used to be./The banking system is globally integrated so we need a global solution./Money markets will not thaw though until all the big banks in the system trust each other."

The Fed powerless? I don't think so. I think the big banks know exactly what they are doing. Its a shame we can't give them some 'cake' to go with their bonus's and spa treatments (AIG).

"Some people think the Federal Reserve Banks are US government institutions.
They are not... they are private credit monopolies which prey upon the
people of the US for the benefit of themselves and their foreign and
domestic swindlers, and rich and predatory money lenders. The sack of the
United States by the Fed is the greatest crime in history. Every effort has
been made by the Fed to conceal its powers, but the truth is the Fed has
usurped the government. It controls everything here and it controls all our
foreign relations. It makes and breaks governments at will." -- Louis McFadden(1876-1936)
US Congressman (R-PA) (1915-1935),
Chairman of House Banking and Currency Committee. Poisoned in 1936. Source: June 10, 1932

dreamgarden,

You're so quick to jump that you fail to slow down enough to read what you're condemning...

I WROTE (and YOU quoted)..."The Fed was never powerless, of course, but the Fed was much weaker than it used to be."

Note the use of the word "never". I stand by my statement.

/tricia

Most people are practical in their own interests and idealistic when it concerns others.
Its very easy to blame a homeowner whose home value tanks, or he looses a job, gets a divorce or simply cannot pay because the mortgage rate adjusts.