July 30, 2007

Eyes Wide Open: Looking For Lessons In Other’s Unfortunate Mistakes

SocketSite has never been about schadenfreude. At the same time, we've never shied away from asking and addressing the tough (and sometimes uncomfortable) questions. And yes, there are often lessons to be learned (or trends to be spotted) by observing other’s unfortunate mistakes.

Some observers say that many of those facing foreclosure should never have bought a house. To be sure, many consumers were seduced by the American dream of homeownership and so financially unsophisticated that they didn't apply due diligence. For Bay Area residents, more than a decade of consistently rising home prices may have led to a mob mentality of people overeager to jump into the real estate market, confident they would quickly gain equity.

Words we like: due diligence and financial sophistication (okay, and possibly seduction). Words we don't: mob mentality.

UPDATE: And not too surprisingly, the conversation quickly turns to borrower bailouts.

Living The American Nightmare: Foreclosures On The Rise [SFGate]
We Know You Can, But Will They? (Actually Accept It That Is) [SocketSite]

First Published: July 30, 2007 2:30 AM

Comments from "Plugged In" Readers

"Some observers say that many of those facing foreclosure should never have bought a house"

Very true. That said, the era of lenders allowing people to "overbuy" (and allowing unscrupulous agents/lenders/brokers to put people into inappropriate loans) is ending.

Many subprime lenders are taking huge losses due to their poor lending practices (this is now commonly known). But it is not "contained" to subprime (this is not commonly known). Alt A lenders are also hurting, as are some Prime lenders (mainly the Prime HELOCS and HELs and piggy back mortgages)

As example, right now American Home Lenders is in serious trouble. They failed to deliver on their dividend this last Friday after hours.

Why is that important?
- I have never heard of a company failing to pay their dividend on the day it was due, much less so at 1030pm AFTER the market is closed. (so it's unprecedented)
- They are mortgage lenders
- They do NOT do subprime. (only Alt A)

Also, the CEO of the largest mortgage lender in the country, Countrywide financial (Angelo Mozillo), projects that half of the current mortgage companies will go out of business.

Thus, if you are planning on buying a house soon, get your finances in order... rock solid. Credit is tightening for everyone. You will still be able to get a mortgage, but you'll have to prove you can pay it back, and you'll likely have to have some skin in the game (5-20% downpayment).

also, if any of you are about to sign contracts on a home that is being built, MAKE SURE the contract stipulates that you can get out of the deal WITH your deposit if you are not able to get funding for your mortgage. The bank can withdraw funding on your home loan at any time, even if you're "pre-approved" or "approved" for the loan.

Posted by: ex SF-er at July 30, 2007 5:33 AM

It is Schadenfreude not Shadenfreude.

[Editor's Note: Yes indeed (and good catch).]

Posted by: anon at July 30, 2007 7:34 AM

"shadenfredue"

Wow. So many spelling errors in one single word. Not even finished High-School I guess. But that isn't really needed to be in Real Estate.

[Editor’s Note: Talk about irony…]

Posted by: Anonymous at July 30, 2007 7:37 AM

The main problem for Countrywide and American Home Lenders is that they are both one trick ponies - this is their only business. They don't have other lines of business to rely upon like the big banks and financial firms.

One of my clients spoke about going through the home buying experience a few weeks ago. The owner was out of town, and so the closing date got pushed off a bit. The bank took advantage of this new closing date to ask for MORE paperwork for the mortgage. This happened twice - the closing date was pushed off a second time, and the bank started asking for more paperwork to scrutinize his credit. Whereas the mortgage lenders barely glanced at applications in the past apparently, they are now taking lots of time looking at the applications.

Posted by: Jamie at July 30, 2007 7:49 AM

I read this in SFGATE days ago, sad faces, sad story. Actually this kind of situation happens every 10 years, recent downturn was back to 1989. History keep repeating itself, people just never learned.

Thanks for those greedy agents and brokers who sold their clients to hell. They create panic atmosphere, fill up those holes will lies, "second loan will cover it", "year later will have fair amount of equity", "price always going up..."

Wait and see, more similar news are coming when thousands more of ARM reset in next 12 months. Price will be free fall, 30% to 40% price drop will happen in nationwide.

I don't see why BayArea is so unique that the estate market won't fall with the rest.

Posted by: Tom at July 30, 2007 7:50 AM

Maybe they should have read this 1995 Press Release from DataQuck

http://www.dqnews.com/AA1995OFA06.shtm

California Homes Being Sold at a Loss
by Real Estate Analyst John Karevoll
June, 1995

In 30.7 percent of all May home sales, sellers ended up getting less for the home than what they had purchased it for. That loss percentage was down from 32.4 in April and down from 35.4 in May last year, DataQuick Information Systems reported.

Loss sales accounted for a steadily increasing portion of the market from early 1991 until a peak of 42.7 percent was reached in September 1993.

Large newly-built homes that were bought during the 1989 to 1991 sales surge have been particularly exposed, but the problem has spread into other categories as well, said Donald L. Cohn, DataQuick CEO.

Posted by: badlydrawnbear at July 30, 2007 8:07 AM

It's going to be a slow fall, assuming salaries don't fall along with housing prices. There are plenty of people who will try to "time the bottom" and buy when prices drop 10%, propping up the market for months, if not years. Then prices will weaken again, say another 10%, and others will jump in, convinced that that is the new bottom, and so on and so forth.

I think it's much more likely that we'll have 10-15 years of slowly falling prices intermixed with stagnant periods.

Posted by: anon at July 30, 2007 8:17 AM

Hi--

Ok, so why is it the fault of the Agent/Mortgage Broker/Appraiser/Government that lots of folks are in over their heads and are facing foreclosure?

I seem to remember that if you are over 18 and are not mentally disabled you can enter into a contract of your own free will. While I agree that there are plenty of sleazy people in the Real Estate biz and it's related parasitic industries, the sub-prime "crises" boils down to one key item: Greed. Here's a suggestion to all you whiners: Quit blaming others for your lack of due-dilligance and take some responsibilty for your actions.

Also, when you got that piggy-back second did you skirt the bank's lending requirements and NOT get PMI? If you had PMI you would not be in the mess you now find yourself.

Yes, I am being harsh but it is the actions of a greedy few that are bringing down the rest of us.

M.R.

Posted by: MysteryRealtor at July 30, 2007 8:17 AM

what struck me most from the article was two things: 1) how hard the people profiled worked to pay their mortgage payments, even when they got way behind, and 2) how high their interest rate was. A few of the owners had 10% rates that were resetting HIGHER! While I agree that many of these buyers were irresponsible, the banks and investors need to take some responsibility too. I wonder how many foreclosures could be spared if banks were forced to reset these loans to 6%.

For example, the guy who had a 5K montly payment (with only 5K net income) was paying 10% and basically gave up when he got 3 months behind. If his loan was reset to an 10yr I/O fixed at 6%, his payments would have been about $2900. That's still steep for 5K in net income, but it can be done. The long fixed period gives them a chance to get right side up in the loan, or at least pick a better time to sell. The lenders/investors would take a hit, but since they didn't make a sensible decision on this loan in the first place and are facing losses anyway, it seems to make sense for them to reset the loan to a lower rate where someone can actually make the payments.

None of us are going to be well served with a ton of foreclosures.

Posted by: anono at July 30, 2007 8:34 AM

Mystery Realtor,
That's right... there were probably some realtors out there cautioning buyers to be wise and they probably lost business, just like the appraisers who refused to go along with the sham appraisals and the brokers who refused to do the "no income" loans, or look the other way on folks who really simply did not have enough.
But when the RE prices keep rising, it was hard to justify being cautious.
Lots of folks made money and I just hope they are putting their money back to use and helping out the economy, rather than having it stashed away in some offshore bank account.
Before everyone has sympathy for these buyers, remember, there were probably only a few that really did not understand what they were getting into. Others went in eyes wide opened, and probably even flipped a few homes and made money and maybe got holding the bag by flipping one to many times. And then others, well, they were just unlucky in the timing.
I forgot, lots of people on Wall Street made lots more money on these loans etc and goody to them, they even got record bonuses which of course help them to keep up the values of the market in Manhattan. Whew, thank goodness we don't have Wall Street out here (and no, don't want to start the thread of comparing NYC to SF).

Posted by: easy come easy go at July 30, 2007 8:36 AM

"Ok, so why is it the fault of the Agent/Mortgage Broker/Appraiser/Government that lots of folks are in over their heads and are facing foreclosure?"

I agree. it is the responsibility of the borrowers to understand the contracts they are signing. If they don't understand, they shouldn't sign. Thus, I do feel they should either pay the loan, or be foreclosed upon if they are unable to pay, UNLESS there was mortgage fraud involved. (unfortunately, there was a lot of mortgage fraud involved, yes even to mentally retarded people and dead people and so forth)


---
"Also, when you got that piggy-back second did you skirt the bank's lending requirements and NOT get PMI?"

Untrue. PMI is not required in an 80/20 transaction. This is because the first lender only ponies up 80%, and the second lender gets a higher interest rate for the higher risk associated with being a second loan. Thus, PMI not required.

"If you had PMI you would not be in the mess you now find yourself."

Untrue. Are you sure you're a Mystery Realtor? You don't understand what PMI is or what it is for. PMI doesn't protect the borrower. PMI protects the LENDER. If you put down less than 80% on a loan in the "old days", then the Lender would force the borrower to purchase Private Mortgage Insurance. Then if the borrower foreclosed later on they would STILL lose the house, but the PMI would have to pay the lender to make up any losses on the loan after foreclosure sale.

Thus, the PMI protects the LENDER.

http://www.mtg-net.com/sfaq/faq/pmi.htm

It's the same as an appraisal. An appraisal isn't done for the BORROWER. It is done for the LENDER, so that they know what the house is "worth" before writing a secured loan on such property.

---
But this is part of the problem. Real Estate agents and many mortgage brokers have positioned themselves as "experts" when they often times are not. Many do not understand the basics of capital finance and therefore misled (either accidentally through ignorance, or purposefully through greed) their clients. A common occurence was to tell people "Hey, you're only going to be in the house for a few years anyway, you should get this IO ARM and then if it resets while you're in the house you can just refinance!"

clearly, people are finding out that it may not be so simple to "just refinance"

Posted by: ex SF-er at July 30, 2007 8:53 AM

a better description of PMI (more accurate, more detailed, more believable)

http://www.frbsf.org/publications/consumer/pmi.html

I quote:
"What Is PMI?

PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home's value. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI.

Benefits of PMI

PMI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan"

(italic emphasis mine)


Posted by: ex SF-er at July 30, 2007 8:55 AM

"None of us are going to be well served with a ton of foreclosures."

Not true....several of us have been sitting on a lot of cash just waiting for something like this to happen. You can call it schadenfreude if you want...I prefer to call it being rational (and a contrarian) when you spot an obviously unsustainable trend. No bailouts, please - let the market fix itself.

Posted by: Dude at July 30, 2007 9:11 AM

Dude- you could be sitting on all that cash for the next 10 years at this rate, and if you sat out the last five years, where does that leave you? With a lot cash to be sure, but not a home of your own. The individuals profiled in the Chronicle article were not investors, they were homeowners. Some investors will probably make a ton of money on the downturn if they have a keen eye for the truly undervalued properties, and perhaps you are one of these savvy real estate investors, but my sense is that by the time most people "realize" that prices have bottomed out, it will be too late and they will be buying into a rising market.

I guess I'm not sure what the point is of sitting on a lot of cash for 10 years waiting for the real estate market to correct. There are certainly more productive things to do with that money.

Believe me, I would love to see 1.5MM SFR's in nice S.F. neighborhoods going for $1M, but I just don't see it. Who wants to scoop up all those track homes in Valejo and Sacto? $500K or $350K, you're still in Sacto.

I'm concerned about the broader effects of a million people losing their homes and ruining their credit. What will this do to school district budgets and city services (not that we pay much attention to this in S.F. I suppose)? To the financial well being of responsible borrowers who just saw their down payment wiped out due to overbuilding to supply irresponsible borrowers. A severe housing downturn caused not by an economic downturn but by irresponsible lending (and borrowing) can be mitigated by forcing lenders to take all necessary steps to keep people in their homes.

Posted by: anono at July 30, 2007 9:39 AM

People who work on commissions for a living will let the car wreck happen as long as they get their commission. Let's hope for oversight similar to securities trading in the housing market .... professionals should protect their clients from infinitely stupid mistakes, not lubricate them right into a bad spot.

Posted by: Jamie at July 30, 2007 9:53 AM

America is in a bad spiral when folks feel no connection to other Americans and think nothing of pushing their neighbors down the road to self-destruction.

Posted by: Jamie at July 30, 2007 9:57 AM

What incentive does that give to the few remaining people out there who actually save their money and only buy things they can afford?

If there is some bailout where they "force" the banks to let people keep assets they should have never bought, then I hope SocketSite covers it early. That way I'll have enough time to buy that Four Seasons pad along with 2 Ferraris to put in the garage. The bank can give me a 200 year loan at 1% and I may be able to swing that. Forget those of you who are prudent with money...because I got mine, and it's all about preserving my equity.

Sarcasm aside, what you're proposing has been summarized by economists as "privatized gains, socialized losses." It's a market distortion that, in the long run, would do more harm than good. Any bailout would only delay and amplify the inevitable: a large market correction. The party is over, the hangover is starting. Sure, some hair of the dog will help us get through the day. But eventually you need to return to sobriety.

Posted by: Dude at July 30, 2007 9:58 AM

Sometimes I think the problem with this country is that too many people earn a living from sucking up or selling corporate waste products. A 10% mortgate about to adjust higher is such a waste product.

Unregulated capitalism is not "free" but a yucky swamp of gangsters and waste products. Waste products can effect the thinking, you know. I see that at times above.

What struck me in the sfgate story was that some of those folks were the kind of mid to low income folks among whom society should promote home ownership. They help to anchor their communities and families. Particularly the family in Vallejo and the Muni bus driver in Oakland.

A unregulated "free" industry that crushes such people is destructive for society as a whole.

Posted by: dissent at July 30, 2007 10:09 AM

There are severe logistical problems with engineering a bailout of overextended borrowers. Among them:

1. who should get the bailout? what about:
-first time homeowner who overextended due to financial ignorance
-first time homeowner who overextended on purpose but now can't pay the bill
-first time homeowner put into a loan fraudulently somehow by broker/lender, etc
-"investor" who has 10 different homes all on option-ARMs that are resetting
-homeowners who serially refinance, taking money out each time to buy SUV's and European Vacations.
-homeowner who lied on their application about salary in order to procure the loan in the first place.

I have a hard time with the idea that we should bail out an investor who has 10 "investment" properties that are going sour, or a person who lied on their application in order to get a loan they clearly couldn't afford.

if you bailout the overextended borrower, then can I also have a bailout? why should I have to pay MY mortgage per the contract, when you let those other people out so easily.

Posted by: ex SF-er at July 30, 2007 10:17 AM

ALSO:
who should bail out these homebuyers?
-the banks who made the mortgage typically don't own the loans... so it's not the banks that will bail them out. the banks have already sold the loan to the investment banks
-but the investment banks don't have it either. They've chopped the loans up into a million pieces and sold them to investors
-the investors traded them among themselves.
-not to mention: a lot of the lenders are going OUT OF BUSINESS. How can we rework that loan? The lender isn't even around to punish!

do you know who owns a lot of this stuff?

This is a trick question, because NOBODY really knows who "owns" most of this stuff. Thus NOBODY knows who would be the bagholder if we try to work out these loans.

it probably includes significant numbers of:
Pension funds
Insurance funds
Hedge Funds
Foreign governments.

How do you re-write loans like this, and who should take the hit? be careful, because you might find out that the people taking the hit are local Firefighter's through their pension.

Lastly:
what do you think would happen to mortgage rates if we passed a law that said "lenders and investors have to rework the loans at any time if the borrowers can't repay". Simple, people either wouldn't write loans anymore, or they'd charge astronomical rates to cover for future losses.

----
(to keep this "short", I didn't discuss how mortgages are actually funded... for a basic explanation, see my post from another socketsite thread, on July 11, 959am)

http://www.socketsite.com/archives/2007/07/justquotes_when_rates_rise_what_happens_to_prices.html

Posted by: ex SF-er at July 30, 2007 10:24 AM

ex-Sf-er,

The feds would be the ones to offer bailouts. And if the mess gets bad enough, and threatens the economy as a whole, and elected reps start feeling the heat from their constituents to "do something!", you can be guaranteed that they will - regardless of whether it is good for the economy in the long run - or whether or not it's "fair".

There will be a bailout of some type for some people. There will have to be - the number of people who will lose money is large enough that some politician will have incentive to do something, and something will get done.

Posted by: anon at July 30, 2007 10:34 AM

all that new construction - scary...

Posted by: Michael at July 30, 2007 10:42 AM

The stories of the financially unsophisticated homeowners are so sad. What happened to regulation in the lending industry? Or is there none. Has the loan process already tightened up, and, if so, at the demand of whom? Lenders who are losing money or regulators closing the hen house door after the visit from the fox?

I agree, I have no sympathy for serial flippers or unabashedly greedy folks, but for those who really didn't know better I feel bad. They trusted the so called professionals to give them good advice.

Posted by: Bink at July 30, 2007 10:54 AM

The Feds ALREADY bailed out homeowner, when the dropped the prime rate to 1% after the 2001 recession.

Check a graph of the Case Schiller Index for SF. You can clearly see an expected correction beginning after the dot.com bust and the brief recession.

But, instead of allowing the correction to continue the Fed dropped quickly dropped the prime rate to 1% basically making money free and reinflating the bubble.

Homeowners already got their bailout in 2001.

Posted by: badlydrawnbear at July 30, 2007 11:09 AM

So far most bailouts have been coming from the states. Usually involving the state housing authority issuing bonds and using that money to refinance subprime loans.

Posted by: Rillion at July 30, 2007 11:22 AM

to add to Rillion's comment. FNMA announced a partnership with NY state last week to allow for some refinancing for at-risk homeowners and I suspect FHLMC & FHLB will also get involved.

Posted by: rut at July 30, 2007 11:38 AM

“The mortgage originator, BNC Mortgage of Irvine, a subprime lender owned by Wall Street firm Lehman Bros., resold Pitts' mortgage, as is common in the business”
-------

How severely discounted was Mr. Pitts $430,000 mortgage to finally attract Lehman?----

Why didn’t Mr. Pitts have the same opportunity.

Some insight into this question:

The mortgage backed security market is fungible, deep, and (more or less) active.

Mortgage securities are marked to market and traded; at a certain price point speculators enter the market, hoping to capitalize on the spread between the bid and the face value What are speculators paying today for distressed RMBS…Structured Asset Investment Loan trust 2006-3 M7, (a sub prime product). Currently at 67/100.

Securitization transformed the business, creating new complexities, and facilitating access to homeownership. Some hold this development has been regrettable; however it is a fact of the global capital market, a reality yielding valuable pricing data. The difficult conditions of the market are no mystery, but rather quantified in real time pricing.

The motives for purchasing a house are impossible to divine and not a constructive exercise. The puritanical mindset that seeks some “justice” against the errors market participants made yesterday, errors now apparent today (magnified by hindsight) is equally misguided. How severe and lengthy will today’s tough times prove? What will a “get tough” approach produce?

Allocating cheap money to those not needing it, and dear money to those in dire conditions appeals to our sense of tidiness, however at some point it becomes punitive and quite messy.... serving neither the lender nor the borrower. When families are paying north of 10% on secured debt…. tough times will inevitably accelerate.

A destabilized market serves no one, as it’s calling card is volatility. Given the current magnitude of mortgage debt outstanding, instability has the potential for unknowable painful effects on our entire economy. Those speculators who lick their chops at the prospect of desperate outcomes may believe (as the distressed homeowner once did) that their timing is perfect.

We are all in the same boat.

Unfortunately the wish for short term volatility may unleash longer term or spiraling systemic risk that is more viscous than initially bargaining for. This storm now engulfs the sophisticated with equal vengeance, the Sowood Fund (with it’s Harvard Pedigree) find’s itself in the same boat with Mr. Pitts, now running aground on the mortgage rocks, for both; Mr. Pitts and genius quants; perfect timing became a perfect storm.

Additionally, there is a human and psychological toll to the manic nature of markets

Solutions.

One possible solution is to establish a new credit facility allowing the homeowner to repurchase his/her existing mortgage at the current traded market price.

Large firms in financial distress structure arrangements whereby they repurchase their own bonds when trading below par, thereby reducing their debt burden.

Using the aforementioned and oversimplified pricing of RMBS, Mr. Pitts 430K loan was purchased by Lehman for 288K.

Why not allow Mr. Pitts the same opportunity? Such a pool would be an attractive investment and I would wager other investors would feel similarly

The market adjusts, so let it do so on an even playing field. There are a variety of technical reasons why Mr. Pitts can only participate on one side, they are not insurmountable.


Posted by: Gottfreid Reschke at July 30, 2007 11:44 AM

I believe the 1% Fed Funds Target rate was a punt and a prayer that the dot-com market collapse and 9/11 terrorist attacks wouldn't gut our economic growth much more substantially than they did.

Regarding bailouts, I figure what is done is already done. Tragedies happen all the time to families, and we can't save every single one in a fair manner (see Hurricane Katrina disaster). We do need much more supervision of mortgage bankers... they should be required to say "No" to a lender when it is clear they're cutting their own financial throats. As much as we like to believe we are free to do whatever we want without affecting others - our inability to pay our mortgages DO affect others in multiple ways.

Posted by: Jamie at July 30, 2007 11:49 AM

Agreed about the increased supervision of lenders and appraisers. I've heard this song before, though. (read: S&L scandal). As Mark Twain put it, "History doesn't repeat itself, but it does rhyme."

And if we want to level the playing field, maybe we funnel some proceeds from this guy's yacht sale to Mr. Pitts:

http://money.cnn.com/2007/07/30/news/newsmakers/yacht_sale/index.htm?postversion=2007073008

Posted by: Dude at July 30, 2007 12:13 PM

"The feds would be the ones to offer bailouts."

perhaps. and where would they get this money? We already have gigantic deficits that can never be paid back and are mired in a very expensive war. With Medicare, Medicaid, future social security, Billions ot Iraq... where does the money come from?

The money can come from 2 places:
1. increase taxes to raise enough money to help the defaulting "homeowners". (not very politically palatable, so unlikely to happen)
or
2. create the money and deficit spend (a favorite of our gov't since 1980's.)

clearly, it will be funded as it always is, by "deficit spending". But in order to deficit spend, the Federal Reserve must CREATE new money. In doing so, it causes INFLATION. (more money chasing the same amount of goods causes inflation)

Creating money to give these borrowers means that we would see rampant inflation in our daily lives (worse than we're already seeing)... imagine $5 and $6/gallon gasoline as example.

Bailing out the homeowners will cost TRILLIONS that we don't have, that will be paid for either through taxation or by inflation.

---

That said, I agree... there will be a bailout. But not of homeowners. The bailout will go to the banks (disgusting, I know). The Federal Reserve is a PRIVATE bank and they will look out for someone... the banks. Thus, when a "too big to fail" bank starts to fail, it will be kept aloft by the Federal Reserve and govt, at huge TAXPAYER expense.

This is why it truly is disgusting. These banks abrogated all their responsibility to rake in HUGE profits the last 5 years. now the doodoo is hitting the fan... they will take losses and go crying to govt for a bailout.

PRIVATIZE the profits, and then SOCIALIZE the downside risk.

read this: (about the largest bank failure to date, Continental Illinois)

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

Posted by: ex SF-er at July 30, 2007 12:15 PM

ex-SFer,

You may hate banks, but without them, our economy would be 1/100000000 the size it is now.

And you probably wouldn't have your job in Chicago. Or anywhere.

As for additional regulation, well, how about more education on the part of consumers? I'm not blaming them for getting themselves into trouble necessarily, but it's clear that more information available to them might have made a difference.

Or maybe we should teach our kids that if it's too good to be true, it probably is.

[Editor’s Note: Or at the very least, to plug in to SocketSite…]

Posted by: Henry at July 30, 2007 12:48 PM

The problem with easy money is it caused builders to build, build, build, to soak up the demand from people who never could have afforded to buy, or bought a whole lot earlier than they should.

Trust me, the problem won't be from foreclosures, it will be from oversupply. The low interest rates distorted the market causing not only buyers to overbuy but for producers to overproduce and now it's going to be very hard to shove all that toothpaste back into the tube.

Bailout shmailout, if it ever happens (and those things are usually window dressing: they make them so hard to get that the only people who could use them are people who weren't in any real danger in the first place) that it won't do any good.

There's far too many homes out there for the number of legitimate buyers. Just like there was far too many dot com stocks for the number of legitimate (not speculative) buyers. There's only one way to solve that and it isn't pretty. And there are very few banks that are really that heavily invested. They made money off the fees, and found other suckers to invest the money. Remember that Bear Sterns had to inject money into its funds, funds owned by private investors. The Federal reserve couldn't give two hoots about them, and it knows that the air is going to come out of this thing one way or the other.

As for people taking responsibility for their actions, this whole country's economy is predicated on people doing anything BUT that. So many of my friends are up to their eyeballs in credit card debt that it isn't funny. But it's the American way!

Posted by: tipster at July 30, 2007 12:54 PM

As much as we may make fun of the "American Way" of debt, etc, etc, etc - the rest of the world is just as hooked on American debt as we are. They NEED us to go into debt and spend, spend, spend!

ex-SF-er, you talk about the govt going into debt as something that will cause inflation, and you're tight to soem extent, but as I've mentioned, the rest of the world NEEDS our consumers. If we need to issue more debt, China, and some other countries, will buy the debt to help prevent a global meltdown.

Posted by: anon at July 30, 2007 1:19 PM

several of us have been sitting on a lot of cash just waiting for something like this to happen.

I'm one of those people too. Rubbing my hands greedily for the last 12 months, licking my chops.

No, I don't expect a massive downturn and I won't time the market, because what's different between now and 1995 is Silicon Valley. Any fall will be softer than before, as I know many people in my exact situation, waiting.

But the prices we are seeing just seem out of all proportion and it's silly to rush into buying when a downturn is expected. We attend open houses and will move if we find what we want at a fair price. But frankly, we are in the top 10 % of income in SF and find even a basic, decent SFR to be a stretch financially, even with 20% down. it would take half our monthly net income. That's a sign to us that the market is due for a correction.

In addition, I snagged a below market rate apt a few years back, so our rental costs are also below the market rate---so no rush.

A luxury!

Posted by: Melinda at July 30, 2007 2:06 PM

I too am sitting on the sidelines, rubbing my hands together. I am torn in my opinion about these situations -- I completely sympathize with people who are losing their homes to foreclosure, but on the other hand, owning an asset like property is a big responsibility and you must keep yourself informed and on top of things. Ignorance that leads to foreclosure is not an excuse. Nor is it a reason for a bailout.

Posted by: Lori at July 30, 2007 3:22 PM

Keep in mind that most of us reading and posting to Socketsite are not typical. We are unusual.

If memory serves, most of us have bachelor if not master degrees ... I don't know that folks without the benefits of education (and even some of those with the benefits) can truly approach their first home buying experience without relying on the advice of so-called professionals.

Posted by: Jamie at July 30, 2007 3:28 PM

Yes, let's not forget that these people have been, if not victimized, than ill-served by the people who were supposed to help them through the complex process of financing and buying a home. I wish them all luck.

Posted by: jeccat at July 30, 2007 3:39 PM

Many of the people "waiting on the sidelines" will turn and run when the real estate losses really start piling up.

Amazon stock dropped from 60 to 6. How come you didn't buy? Because you thought it would drop even lower, just like I did. I remember seeing that stock price and thinking, wow, that's cheaper than I would have ever dreamed. But fresh from the stories of all the people losing their shirts, I kept my wallet closed.

Most of the people on the sidelines are on the sidelines because they didn't think it would go any higher 4 years ago. It kept going up with no end in sight and they didn't buy.

I wouldn't count on them to buy when, in contrast to the mood four years ago, they see stories of thousands of homeowners and dozens of homebuilders filing for bankruptcy and there is no end in sight.

Posted by: tipster at July 30, 2007 3:54 PM

"ex-SFer, You may hate banks, but without them, our economy would be 1/100000000 the size it is now."

I don't hate banks at all... far from it. I only hate the idea that the various lenders made TONS of money in this Real Estate Run-up, partly by giving out FOOLISH loans... and now that it is time for the lenders to face their comeuppance, they will run to mama-government and ask for a bailout. let them fail. Then in the future, they'll think before lending people amounts that can never be repaid.


"If we need to issue more debt, China, and some other countries, will buy the debt to help prevent a global meltdown."

If it was so easy to just create debt, then why not just create 1 ka-trillion dollars right now? Then we can all be rich! right?

the thing you're not understanding is that as we keep creating debt/money
1. the money is worth LESS with each new dollar created. Thus, prices for things go UP here at home. it will put a lot of pressure on Americans as our dollars continue to lose value. All of the things we import will RAISE in price (which is much of what we buy... oil, gas, food, stuff from walmart, electronics, you name it). so it's a hidden tax on us.

2. as the US continues to write more and more debt that it cannot repay, the Asian countries become less willing to purchase it. this has been happening over the last year or so. (look at all the countries "diversifying" out of the dollar". This is why our dollar is crashing right now, nobody wants it. it is near all time lows versus the Yen, the Pound, the Euro, Gold, and almost everything else. The dollar is quite literally becoming worthless.

this is dangerous due to the US Dollar being the "reserve currency". I am sorry, but it is too complex to go into further here.

Posted by: ex SF-er at July 30, 2007 4:05 PM

I don't feel happy for any family losing its home. But when you buy something that costs more than you have, education level doesn't affect whether you ask, "How much will I owe the government and the bank every month next year? The year after that?". Many people who own homes don't have a higher education, but that doesn't mean they can't think in terms like this. Frankly, people who don't have a higher education often have less money to get by on and have to plan their spending a lot more carefully than a family with a six figure income. If someone lied to a consumer with an adjustable loan and said, "your initial monthly payment is all you'll ever have to pay", then that's fraud. However, if someone tells you, "your payment is only fixed for 24 months, and after that it can vary", you ask, "well, how much could I be on the hook for?". If the minimum answer is more than you can afford, you don't buy the house. Unlike everything else about real estate, that's not complicated.

Posted by: David at July 30, 2007 4:12 PM

"If memory serves, most of us have bachelor if not master degrees ... I don't know that folks without the benefits of education (and even some of those with the benefits) can truly approach their first home buying experience without relying on the advice of so-called professionals."

While I don't necessarily disagree, I find this statement rather funny because I think lots of people with an "education" are going to look back and think "hmmm...maybe it wasn't such a great idea to pay 1.2MM for that 2/2 with a view in Rincon Hill/SOMA/Mission Bay." The Chronicle article profiles mostly the lower end of the market but this looks like it is going to be a wider Bay Area problem.

Posted by: Willow at July 30, 2007 4:13 PM

ex-SF-er,

You don't need to explain to me what happens when we write more debt. I know that things will eventually get bad - I'm just saying that if a sudden downturn begins, you can be for damn sure that China, Japan, and many other Asian countries will STOP diversifying out of the dollar. Right now, they are helping to insure a "soft landing" for the dollar - no one is going to benefit from a dollar free-fall. Perhaps in a couple decades when China is much stronger, but right now they aren't in a position to let the dollar plummet - the fall of the dollar has been remarkably slow considering how bad our debt is - and more importantly - how bad our current account deficit is.

Posted by: anon at July 30, 2007 5:24 PM

What if the person answering the question about "How much could I be on the hook for?" only shows historical mortgage rates back to 2003? Maybe folks were told by trusted friends, "ARMs are the way to go.... no question."

I think the bottom line is that there needs to be more regulation in this industry, similar to the regulation in the securities industry with margin requirements.

Posted by: Jamie at July 30, 2007 6:17 PM

Why are you so obsessed with more regulation?

Posted by: Usually Named at July 30, 2007 7:55 PM

"You don't need to explain to me what happens when we write more debt."

Sorry! :)

---
"Why are you so obsessed with more regulation?"

Some people (like me) only want regulation if/when someone else's actions have a high probability of negativey affecting me.

In this instance, lender negligence combined with ignorance/greed of significant % of buyers has caused systemic risk to our financial system.

Now these people (who are the cause of their own misery) collectively ask for bailouts- be it the borrowers, the banks, or the financial system.

If they don't want a bailout, then there need be no regulation.

But if they want ME as a taxpayer/citizen to come and clean up their financial diarrhea, then I want a say in how they conduct their "business".

It has been only 2 decades since the last Real Estate related banking collapse and bailout (to the tune of $125 billion TAX dollars, not including significantly more $$$ and govt time spent on this). Already I'm hearing squawking about another bailout (of various homedebtors and soon it may be the banks).

The financial industry KNOWS they will get a bailout. That's why they encouraged this to happen.

But before we as little people approve the bailout, read my other posts. The bailout will NOT go to the homedebtors. they will still lose everything. The bailout will go to the big corporate heavyweights, who are "too big to fail". And we as little people will pay for it, either through higher TAXES, through diversion of money from other needed services to the corporations, or through creation of debt which will make our life savings lose value.

we call this "moral hazard".

Please read the "Lending and Debt" section of this wikipedia post on "Moral Hazard"

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

Posted by: ex SF-er at July 31, 2007 5:26 AM

Banks may be exposed to subprime mortgages, but the big boys ('too big to fail') are diversified. It's the mortgage lenders like Countrywide and LandAmerica that are at risk, and they're *not* too big to fail. In fact, I see this as an opportunity for the big banks to snap up these mortgage lenders at a reduced price. That will probably be their bailout.

Hedge funds? I don't see them getting a bailout either, unless there's some complex financial engineering a la LTC that we aren't aware of. Plus after the LTC bailout and the public's perception (misunderstood from my perspective) of these funds in general, it's not going to happen. Anyway, mortgage-backed securities are a dime a dozen.

I don't see bailouts for the builders either.

So why are you so obsessed about bailouts?

Anyway, you aren't the only one of this board with any economics and finance knowledge (real or imagined -- mostly the latter for me), so -- take this however you want, but it's just feedback from me -- please reduce the the faux-professor tone of your posts, ex-SFer.

Posted by: Usually Named at July 31, 2007 6:59 AM

Plus after the LTC bailout and the public's perception (misunderstood from my perspective) of these funds in general, it's not going to happen

....and I thought Scooter Libby might actually go to jail too, except...well...he didn't. This administration is capable of literally *anything* to support their cronies. And capable of doing *anything* to destroy its enemies. Just ask Valerie Plame. I sure *hope* they won't be stupid enough to bail these clowns out, but you never know.

and PS. I've learned a lot from ex-SFer, and from the debate in general. I LIKE when people include links, suggest background reading, and share facts (or purported facts. ;) "usually named", your lack of a moniker in this case signals to me that perhaps you are a bit ashamed of attacking someone in a public forum, rather than just responding with facts. You're being overly touchy, and you probably know it. Relax. Step away from the computer and BREATHE. Now let's all drink a soy latte smoothie, do some yoga, get calmed down, and go back to discussing housing.

Posted by: Melinda at July 31, 2007 7:59 AM

My solution to the insane SF housing prices? Not buy here. While I love the city, and have been a 30 year resident, both here and in Marin County, it is just to crazy to comtemplate home ownership here, price wise. Having an excellent reasonably priced rental in an interesting neighborhood helps (and is rare, I know, especially given the fact I have a wonderful landlord), what I found that works is having a real estate outside the city. In fact, I have two, a condo in Palm Springs, and a small house in Sonoma County. Both added up would equal a so-so condo or TIC in some neighborhood. Additional bonuses are places to weekend or vacation in familiar settings, rental income, and the equity building both properties have allowed. Again, a solution not for everyone, but works for me. I gave up the "dream" of SFR ownership some time ago and couldn't be happier.

Posted by: Matthew Gardner at July 31, 2007 10:21 AM

Melinda, for someone not putting in their last name on their own post, telling me that I'm lacking a moniker is indeed pot calling the kettle black.

In any case, my point is to ex-SFer (and you now), is that we don't know squat about what's going to happen. Bailouts? It's not big enough right now. Yes, the big guys are exposed, but then so what. I'm just against knee-jerk regulation, which gave us the lead-weight that's known as Sarbanes-Oxley.

Talk about needing to step back and BREATHE. We need to step back and really think if more regulation is necessary.

Posted by: Usually Named at July 31, 2007 10:23 AM

Agree with Melinda. I prefer if someone makes statements about the state of the housing market that they back it up with real numbers/data and links.

Posted by: anon at July 31, 2007 10:27 AM

Linking to real numbers/data, yes, I agree.

Linking to Wikipedia? That strains credibility.

Posted by: Usually Named at July 31, 2007 10:40 AM

What exactly about the section of the wikipedia article referred to did you find lacking in fact? The section of the article in question referred to is factual to the best of my knowledge.

PS. According to the highly respected and very credible science journal Nature, the error rates for Wikipedia vs. Enclopedia Brittanica were 3.9 vs. 2.9, respectively. Amazing given that Wikipedia is FREE (and thus a super link to give in a public forum.) Certainly with common sense most people can tell the truth from fiction.

More info here: http://www.nature.com/news/2005/051212/full/438900a.html

Posted by: Melinda at July 31, 2007 11:18 AM

"please reduce the the faux-professor tone of your posts, ex-SFer."

Unnamed: my goal hasn't been to be professorial or condescending... if they come off that way I apologize. My goal is rather to fully encapsulate my argument/point, which I feel sometimes takes considerable explanation to make sure that it makes sense. I (obviously) am not good at being concise...

When I re-read some of my posts I guess I can see how the tone can differ in writing compared to when I speak the same words. believe me when I say my goal is debate and engagement (and yes, some teaching), not to condescend or be argumentative.
---
"Linking to real numbers/data, yes, I agree.

Linking to Wikipedia? That strains credibility."

I don't only use Wikipedia, I just used it twice in this thread. In other threads, I have cited the San Francisco Federal Reserve Bank, other governmental sites, and even some routine media reports (like Bloomberg, CNBC and so on).

Even so, I'm not sure why you are so adverse to Wikipedia. I used that sourse for a few reasons
1. they are quite accurate IMO
2. they give sources if you want further follow up or clarification
3. they are easy to read and concise

For instance, if you doubt the info relating to Continental Illinois, the Wikipedia link sources the FDIC at the bottom.

I could have used the FDIC link, but it is a PDF file, very long and laborious to read.

http://www.fdic.gov/bank/historical/history/235_258.pdf#search='Continental%20Illinois'

Posted by: ex SF-er at July 31, 2007 12:21 PM

"That said, I agree... there will be a bailout. But not of homeowners. The bailout will go to the banks (disgusting, I know)." ex-SFer

All this talk of a bailout seems a bit premature. As far as any bailout going to the banks, I think that is less likely as they have packaged and sold many of these loans to pension and mutual funds along with insurance companies and hedge funds. Unlike the S&L bailout, banks today holds relatively little in the way of mortgages on their balance sheets (a very different case than the S&L crisis). Granted a few smaller banks might fail along with many mortgage brokers but I don't see the government coming to the rescue.


Posted by: Pvilly at July 31, 2007 6:23 PM

I read some comments (I believe it was last week) in the WSJ that indicate where the problems lie for the banks (particularly smaller regional banks) is not in mortgages, but in the loans to the developers who are now having trouble selling the units. So any 'bailout' that helps refinance existing mortgages isn't going to do that much to help the banks.

Posted by: Rillion at August 1, 2007 4:26 PM

Post a comment


(required - will be published)


(required - will not be published, sold, or shared)


(optional - your "Posted by" name will link to this URL)

Remember Me?

(you may use HTML tags for style)


Continue Perusing SocketSite:

« JustQuotes: The Green Building Exchange In Redwood City | HOME | Two-Year Payout For Evicted Tenants Accelerated And Approved »