Huge New Trouble for the Housing Market

By Ethan Brown, Section Economy
Posted on Sun May 31, 2009 at 08:17:00 AM EST
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Mortgage rates were way, way up last week and because of the rise in rates for 30 year loans the appetite for ARM loans is apparently back, big time.

Borrowers who can't afford the new, higher rates for traditional mortgages are looking at ARMs again and banks are happily handing them out, according to the Field Check Group: [More...]

"Over the past few weeks as 30-year fixed rates have soared, some application volume has moved to a few lenders offering hybrid intermediate-term 3/1 and 5/1 interest only ARMs because of their preferred rates and low monthly payments. Just like during the bubble years, a 5/1 interest only is about 100bps lower in rate than a 30-year fixed...these are the loans that got the housing bubble really going in 2003. From here, the housing bubble was born."

So on top of the ARM resets which will peak in 2011 there might yet another wave of resets in 2012 and beyond because ARMs are yet again in vogue.

It's hard to think of an apt metaphor for the banks but a drunk driver who still has his foot on the accelerator days after a crash might work.

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Huge New Trouble for the Housing Market | 28 comments (28 topical)

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more like, (5.00 / 2) (#1)
by cpinva on Sun May 31, 2009 at 01:42:00 AM EST

a drunk still drinking, long after lapsing into unconsciousness.

they'd offer these loans to trolls living under a bridge (just like the credit card companies), because they're quick, offer nice fees to the originator's, and get bundled and sold off to someone else.

best of all, the store still isn't being minded by anyone..

if willie sutton were alive today, he'd be in the ARM business, it's way more profitable than robbing banks.

And when banks can be bailed out (5.00 / 2) (#2)
by Militarytracy on Sun May 31, 2009 at 03:21:41 AM EST

after making such loans it is a fab deal for the big cheeses. Make money on the fees, make money on the derivatives....and then Obama runs in showering money on the bank foundation before it collapses and then we get to do it all over again tomorrow. And in my youth, a bunch of pessimists claiming to be scholars polluted my mind with lies such as there is no such thing as a perpetual motion mechanism.


Don't forget that without any fear (5.00 / 3) (#6)
by inclusiveheart on Sun May 31, 2009 at 08:20:17 AM EST

of having the mortgages crammed down, the banks aren't really on the hook in the end for any of the losses either - it is the "irresponsible borrowers" who owe the money on the mortgages that are underwater at the end. Of course, the banks wll argue that they project that the property values will rise in line with the value of the mortgages, but it seems to me that in an economy where we are just trying to catch up trying to restore the jobs market and one in which real wages were already stagnant or even behind before we started losing jobs, the housing market is still over valued.

This is a ridiculous situation that could have and should have been addressed by now. Of course, since derivatives and mortgage backed securities are still largely unchecked, get ready for that all exaggerating the problem the way it did in this last round. Ugh.


And yes (5.00 / 1) (#10)
by Militarytracy on Sun May 31, 2009 at 08:46:15 AM EST

Even though I believe that borrowers are just as responsible for the loans they take out as the banks are that make them, without any responsibility that the banks must take for creating loans that can't be paid back they have NO incentive to not stop making such loans to profit from the fees. The reason why I am anti cramdown though is because it discriminates against people who were very careful during all this craziness, like me. I can clearly see the insanity of mass marketed A.R.M.s and because I KNOW I'm responsible for the loans I take out I wouldn't dream of touching one for anything like a mortgage. Many many moons ago I worked for a civil engineer who used such a thing right after a pretty devastating divorce in order to purchase a bacholor pad that would be seeing him through to his new life. He of course refinanced two years later to a fixed rate and there weren't any indicators in his life signaling he wouldn't be able to do this. I believe that A.R.M.s have their place in the finance world but aren't for mass consumption.


Well, given the fact that the most (none / 0) (#15)
by inclusiveheart on Sun May 31, 2009 at 10:18:38 AM EST

unethical of the lenders (and some of the "ethical" ones too) were appraising houses at values that were very generous - because the more they lend, the more they earn on the loans - I am not anti-cramdown. I don't think it is a solution for every situation, but I do think that the banks need to feel some of the pain for their irrational exuberance too. I would like to see bankruptcy judges be able to reassess mortgages again. And I really believe that the people who are in a daily business of lending actually have more responsibility than the borrowers in seeing that the loans they make are as sound as they possibly can. I expect more in terms of due dilligence from the pros in any industry than I do from the novices. Also, it is important to remember that the individuals who have gotten in trouble on this front will 99.9% of the time feel the pain of their error under out current system. Individuals are punished pretty severely. The banks and their management seem to have felt the pain at a rate of about .1% of the time imo. The banks clearly need to feel some element of risk or they will continue on until they nearly (or actually do) collapse the entire economy again.


Do you have any idea what my poor husband (none / 0) (#16)
by Militarytracy on Sun May 31, 2009 at 10:40:46 AM EST

went through to get me to agree to buy a home in the midst of this insanity. Everybody was buying a home. He was working very hard and had created an income that qualified him to be able to buy a home, but I knew that the housing market was inflated......everyone knew it was for God's sake, only the willfully blind who didn't want to know it didn't know it. We still shopped though and we just happened to find this house that we both loved. It was not new, it was not a McMansion......it would have a payment we could work with if instability hit us. The previous ownders had gotten themselves into a financial jam owning two homes and they needed to sell this one as fast as possible and so had discounted it down from the bloated inflated market and because we were prequalified with a down payment in hand that I had worked hard to save for (and about half of it was Iraq War combat pay) we got it. Combat pay was great at first too, you should have seen the crazy things I saw spouses who were stateside buy while the other half was on the other side of the world with their lives in extreme danger every single day and showering with babywipes and not having enough bottled water. I thought it was some of the most callous selfish behavior I had ever seen but hell, the whole country was in a spending frenzy. I wanted something my whole family could benefit from to show for the sacrifice this whole family made. I wanted my husband to have something to show for over a year of placing your life in extreme danger. I have a lot of work put into avoiding all this insanity and I won't simply feel sorry for everyone else who was willfully blind. The truth about the situation we were in was written all over the place if you wanted to know it, face it, deal with it, but just like addressing global warming nobody wants to have to end all of the fun so they'll just drive off the cliff having fun and then the universe is supposed to feel sorry for them. Remember I'm Buddhist....I flunk if I'm not living a life about truth and balance.


A couple of things... (none / 0) (#22)
by inclusiveheart on Sun May 31, 2009 at 07:49:51 PM EST

You were buying in a part of the country in which the market fluctuation was a bit weird, but not like the market I am in. I did not buy where I am because the upswing was insane compared to the average salaries. Most people looked at this access in their regions even where it was insane and they believed the President of the United States and the economists when they said the economy was sound. They believed their houses would realize their mortgage values. I have a hard time blaming them. I tought I was insane for doubting at a certain point, but I stayed out because my gut told me to. Well, my gut and the fact that in a government town where the large majority of people don't make anymore than the $400,000 that the president makes the house down the street went from $150,000 in 1998 to $1.2 million in 2006. That was crazy. I know the houses in Al and other southern states didn't do that. In any case, the feeding frenzy was not something that an average buyer should have been responsible for figuring out. The feeding frenzy was for the overall market long-term investors like the lenders to figure out - because in a normal world they would calculate the potential for a house that was worth next to nothing in a place where nothing much has changed other than the frenzy - particularly salaries - to fall in value when the frenzy was over. A sane institution looking at the long-term would be limiting the ceiling of the loans for certain types of houses and wouldn't allow people to buy cars with their mortgage money - they'd insist that the second mortgage or home equity loan be spent on the home to improve it. Really, this isn't about the borrowers as much as it is about the lenders finding any way they could under the sun to lend more money - regardless of whether or not that money was going to be wisely invested to pay them back. Big surprise that the brand new cars people bought with home equity loans which lose what half their value the second they are diven off the lot did not serve anyone well in this finance game in the end - not the borrowers - not the lenders and not the general economy. Granite counter tops as silly as they are at this point and expensive refridergators are actually the "durable goods" that home equity loans should have been limited to. The banks should have at least done that. Anyhow, this isn't about you or me. It is about a systemic failure. If it was just about "bad apples", it would never have been this bad.


I'm not saying that consumers are (none / 0) (#25)
by Militarytracy on Mon Jun 01, 2009 at 08:01:08 AM EST

bad apples but they are half of the system failure and just as responsible. It is also the same argument that Detroit put forth about why they didn't have energy efficient cars to sell us. Overnight that was where the demand shifted to but during the frenzy times everyone wanted to drive an Expedition even though it was a gas guzzling tank running around with three people in at after school let out. It is time for Americans to wise up and have to be responsible for the choices again, and I include the banks in that as well. I am for full responsibility across the board. I see no victims other than our children if we don't learn some self control and learn the difference between a need and a want. I don't have granite counter tops either :) I was never certain that they would wear well. We have mauve formica. I hate them but they don't need to be replaced yet and they match some stained glass that the original owner put into some of the cabinets. If this market had been crazy we would have rented. I may have continued to shop though. We may have been buying now, but I would have not purchased in a crazed market and I don't believe the opinions of talking heads or politicians over experts who are putting forth the data to prove their points. And I disagree with you about this not being about me because this is about me and the system I live in and contribute to.


My core belief here is that (5.00 / 1) (#26)
by inclusiveheart on Mon Jun 01, 2009 at 08:51:53 AM EST

the responsibility should be shared and I don't think that it is being shared under the current rules and within our system as it is set up right now. I believe that if a borrower can prove that a lender misled them in any way shape or form in the process of putting together their lending agreement, then the lender should be subject to sanctions on the deal. When I said that this is not about you - I meant that in the sense that you are smarter and more sophisticated than the average bear as a consumer. I am not saying that I don't believe that borrowers have any responsibility, but there are a whole lot of people paid big bucks, with excellent academic credentials who run the financial industry and honestly I expect more from them than I do from the lady working as a cashier at the Jiffymart who is trying to buy a house.

I also believe that the lenders have shown little restraint in their lending policies and that that lack of restraint has hurt us all. It is the predatory aspect of a good portion of the loans as well as the lack of restraint that I put on the lender's in this case. I believe they should feel some pain here.


Now I see where we converge (5.00 / 1) (#27)
by Militarytracy on Mon Jun 01, 2009 at 09:51:12 AM EST

because we do. Yes, when we find that lenders have misled, those who are now hurt and damaged need to receive whatever aid to save them from more ruin and destruction. If the borrowers were encourged to "create" anything on their apps, if the lenders commited fraud or lied to the borrower in any way, didn't investigate the loan apps, then cram it down......whatever it takes and the lenders should take on all loss in such a situation. I'm just as sick of the SOBs getting away with murder as you are. And unfortunately Obama completely removed from the side of the equation anything that would encourage sound loan practices when he bailed them out and lied for them declaring them solvent to "deal with" what all the failing mortgages were doing to their solvency!


It is really important to remember (none / 0) (#28)
by inclusiveheart on Mon Jun 01, 2009 at 10:21:01 AM EST

that a lot of the lending frenzy was driven by the secondary market for mortgage backed securities; and that bad morgages became a hot ticket item.

If you haven't read this article, you should. It is long, but it is extremely informative about what the real crux of this meltdown was and "irresponsible borrowers" were in my opinion merely pawns in a much larger chess game. Or maybe better stated - the dice in the game of craps that went so terribly wrong.

The End

It is long, but well written and so far the only road map of what happened from the time a house closed through to why so many people can't even figure out who they owe their mortgages to at this point.


I understand that the consumers were (none / 0) (#29)
by Militarytracy on Mon Jun 01, 2009 at 10:49:24 AM EST

pawns, but we always are pawns in the game of capitalism and it is time to grow up and remember that. Since the beginning of the Clinton prosperity and the wide open door to ripping off everything that was gained that Bush's lack of enforced regulation brought us to - there was never any excuse or need for consumers to be willfully blind and just play along because everyone else was. I will not go that route with cram down. If each individual borrower has evidence of being misled or if evidence of failure to investigate apps is found or evidence of application fraud is found on the part of the lender then let the cram down take place in a bankruptcy. Let the investigations begin......but Obama probably won't allow that either.


: Worth noting that in the article I cited (none / 0) (#30)
by inclusiveheart on Mon Jun 01, 2009 at 07:45:57 PM EST

as well as others I have read, a portion of these "irresponsible borrowers" didn't actually exist. They were making up subprime loans to sell into their mortgage backed securities. I'm just sayin' that the professionals aren't feeling the world of hurt that I really believe they should be feeling.
And while we know who these professionals are, there is this compulsion to blame a nameless, faceless sea of "others". Honestly, I don't see much difference in the approach to the financial woes and how people seem to be arguing that those who ordered torture should be left alone while we blame a sea of nameless, faceless "contractors" and "CIA operatives". All very convenient in avoiding having anyone except the lowest on the totem pole be held even remotely accountable for systemic failures.

Obamadmin asleepp at the wheel (5.00 / 1) (#4)
by pluege on Sun May 31, 2009 at 06:54:02 AM EST

Where's government regulation in all this.

Government of, by, and for banksters.

They've indicated that they are (5.00 / 2) (#7)
by inclusiveheart on Sun May 31, 2009 at 08:25:14 AM EST

likely to pull back on the regulations that they said they were going to try to enact.

They aren't asleep. They're driving white knuckled with their foot on the gas afraid to put the brakes on. Any aspirations that they had in emulating FDR (which I always thought to be largely dubious especially in the area of finance anyway) are pretty much out the window imo. FDR would not have feared putting the breaks on - he didn't fear it.


: By buying homes now (none / 0) (#21)
by BackFromOhio on Sun May 31, 2009 at 03:35:19 PM EST

contributes to the asset value of prior mortgages still on the books, so of course banks want to be in the mortgage business again

Does anyone wanna, you know, (5.00 / 2) (#5)
by TruthMatters on Sun May 31, 2009 at 07:59:52 AM EST

say the PEOPLE who are seeking these again are at fault.

it's one thing to say they had no clue in 2003 but come on, no one has an excuse anymore to say "oh I didn't know what ARMs were".

If people are actually seeking these again, then its not the banks fault for handing them out.

in 2011 and 2012 if these same people come back and start saying they had no clue, in no way is that the banks fault.

EVERY single person who is taking an ARM mortgage in 2009 is responsible for what happens to themselves, not the banks.

ARMs (5.00 / 1) (#9)
by Molly Pitcher on Sun May 31, 2009 at 08:39:16 AM EST

Am I at fault? Exactly one year ago I took out a replacement interest-only ARM, knowing a recession was coming. For a reason: I intend to sell in 4 more years, and the amount of principal accumulated would be tiny. But the money I had saved on interest on the first ARM went to reduce the loan principal when I refinanced. Yes, I think I am responsible for what happens to me since I can easily make payments--and I like having this option.


: In your case Molly (none / 0) (#14)
by Militarytracy on Sun May 31, 2009 at 10:08:18 AM EST

An A.R.M. is probably going to do what it is supposed to do. It is supposed to address situations that long term finance don't address well and the borrower needs to be able to indicate they can handle the risks that go with taking out an A.R.M. Sounds like you can do that. People attempting to buy a home and being able to get an A.R.M. in order to get that done when they can't meet the credit obligations of a 30 year fixed mortgage is total insanity if your goal in the loan is to profit from the repayment of that loan.

Earth to borrowers... (5.00 / 1) (#17)
by kdog on Sun May 31, 2009 at 10:42:32 AM EST

if the fixed rate is too high, don't borrow. Wait till the rate comes down, which it will if nobody is borrowing.

Money is all the banks have to sell...if nobody buys, the rate comes down. Just delay your gratification...a foreign concept these days, I know, but one we need to become accustomed to again. Our nation may well depend on it.

: we need to create a borrowers cartel... (none / 0) (#18)
by of1000Kings on Sun May 31, 2009 at 01:23:02 PM EST

n/m

a new confederacy? (none / 0) (#8)
by Molly Pitcher on Sun May 31, 2009 at 08:27:16 AM EST

"Historians have long noted the people who took power after Reconstruction took great steps to discredit those who ran South Carolina immediately after the South lost the Civil War."

"It's a not a reflection on the people who served. I'm not going to waste any time on it," said Lonnie Randolph, president of the South Carolina branch of the National Association for the Advancement of Colored People."

Some resurgence!

Now prime mortgage holders are failing (none / 0) (#11)
by DFLer on Sun May 31, 2009 at 09:21:49 AM EST

The mortgage crisis is spreading and hitting new heights: Borrowers with good credit now make up the largest share of foreclosures as job losses and pay cuts exact their toll.

O so good that pesky economy problem (none / 0) (#12)
by Jake Left on Sun May 31, 2009 at 09:41:31 AM EST

has gone away.

Which makes the better slogan for this crowd:

"Let the good times roll" or

"Play it again, Sam"

ARMs not inherently problematic... (none / 0) (#13)
by Ethan Brown on Sun May 31, 2009 at 09:53:51 AM EST

For buyers who plan to sell in a few years or can handle higher payments when the loans reset, ARMS can be a good product.

The problem with ARMs in the past was that they were recommended to far too many buyers (by Greenspan himself!) And ARMs seem like a terrible idea now as it's still far from clear when the housing bottom will come and, as DFLer notes, prime borrowers are now defaulting. So even if you're thinking of selling in a few years, you're likely to sell into a very choppy market.

I'm also hearing, FYI, that new federal laws like the Home Valuation Code of Conduct are a huge mess which will likely complicate the housing picture even further...

You assume everyone (none / 0) (#20)
by Inspector Gadget on Sun May 31, 2009 at 03:25:56 PM EST

pays attention to the news. People who are not immediately involved or looking at ARMs probably still couldn't tell you what they are.

Once again, Goebbels signs in. (none / 0) (#24)
by Rojas on Mon Jun 01, 2009 at 01:02:21 AM EST

I suppose one could ask just how many banks in South Carolina have robbed us? But then that might just bring up the question of if there are any independent banks are left in South Carolina at all. And I suppose one could ask if not why not? And if not just where are those few banks that are left located? And just what horses have those banks been backing for the last decade or two?
Nevermind, just look over there, the Ol' Confederacy's flexing it's muscle one again.

Site Violator! (none / 0) (#32)
by Zorba on Mon Oct 10, 2011 at 05:28:01 PM EST