If banks were not allowed to sell mortgages this 'mortgage crisis' would not exist

[berettafan]

Some points for this argument:

-local banks here, who use honest appraisers and are responsible to local shareholders, aren't having a 'crisis'.

-the mtg broker, underwriter, appraiser....everyone in the process knew what they were doing. they didn't care because they knew it would get sold and they get paid anyways.

[Rick V]

Don't you also think that the people who got an ARM, without doing thier homework has a little to do with it?
If you can't afford something with a conventional 30yr. fixed loan. What makes them think they will be able to afford the same thing with an ARM?

[Aurel]

When I got my mortgage from a local company, they told me: we select only the best customers, we have our own investors and we never resell our mortgages. This was a bunch of BS. Two weeks after closing, I got a letter from Countrywide telling me that they were servicing my mortgage from now on. I could have been unqualified for the mortgage, it would not have made a difference since they were going to sell it anyways. When mortgage brokers are OK about lying to their customers, I don`t think they have a problem over qualifying them either. There is part of the problem.

Aurel

[berettafan]

rick no question you are right.

the statement doesn't really address 'fault' so much as mechanism. it doesn't happen without somebody checking the 'approved' box.

[peppy]

How many of the people that are in trouble with their ARM were flipping?

In my opinion some of the realtors have done this to themselves by over inflating the value of property. The appraisers have gone along with this, and the towns and cities have profited with the property tax, so nobody said a word.

Case in point 19 acres of land 1500 square foot home build in 2001 and appraise for 140K. They cleared some pasture and fenced it with a single electric wire. Two years ago they refinanced to get a lower rate and the appraisal was 260K. This property is adjacent to an asbestos dump.

[Neilk]

Quick question about these ARMs, if people's rates are about to a adjust upwards and they have some equity, couldn't they refinance to a lower rate than their new ARM rate or are these people's credits, equity position beyond help?

[Porsche-O-Phile]

If there's such a thing as an "honest" or "ethical" mortgage broker or appraiser, I have yet to meet them.

They certainly weren't anywhere to be found the last five years.

Now that the picture is changing, a lot of the "get rich quick" opportunists will flee to other scams and leave only the good/long-term/passionate ones. This will help.

[Flatbutt1]

One of the Democratic candidates was asked a direct question on this topic (paraphrased) "...is it right to hold someone responsible for the bad judgement exercised by their neighbors?... The answer was NOT forthcoming. They talked all around the issue about "stopping the bleeding" and such. Never answered the question. So apparently no one is responsible.

[Moneyguy1]

"No one is responsible".

Welcome to the victim centered society called America.

[Flatbutt1]

Moneyguy, if by that you mean that the people who didn't exercise proper sense by taking mortgages they couldn't afford, yup you're right, those poor poor people

. Seems to me though, the fiscally responsible middle class will be the ones victimized by all of this. In other words most of us.

[hytem]

The problem is the 2% ARMs that a lot of people stupidly got five years ago when interest rates were much too low. Those rates became 5% or higher after a few years when interest rates inevitably rose again, and doubled and tripled the monthly payments.
The culprit is Mr Greenspan, who raised interest rates before the 2000 elections, and then lowered them 4 times in January 01 when Bush took office. That started the era of 1% CDs.

The new Fed chief knows that, and won't lower rates that low. But rates are too high right now
and they should be lowered down to the 4% range. Forget about inflation. That's all about oil prices and made in China.

As for the banks, they are more conservative in their loan practices than some private mortgage companies. I wouldn't blame them. You have to look at the fine print on those ARMs--some can go up way beyond the prime after a few years. Anybody sensible refinanced or bought fixed rate mortgages in the 5% range a few years back. But a lot of resort property flippers were probably victimized by the 2%ARMs, which is why resort properties have huge inventories right now.

Subprime, by the way, is just a mask for ARMs. A lot of people don't have a clue as to what subprime means. Wonder who invented that term.

[Lothar]

Originally Posted by Flatbutt1

Seems to me though, the fiscally responsible middle class will be the ones victimized by all of this. In other words most of us.

Never a truer word was spoken. The middle class always takes it in the shorts because they are the last ones to have access to new money in the economy. By that time, those dollars have already lost their value.

Who is victimizing the middle class? It is the banking industry and The Federal Reserve, who create money from nothing and devalue what you have worked hard to earn.

Since mortgages are typically the single largest consumer loan, the impact of the abuses of banks is similarly large.

The notion that congressional committees and federal agencies, that supposedly regulate the banking industry, can curb such abuses is absurd. The same politicians and government bureaucrats are owned by those who control the money supply, namely banks and The Federal Reserve. They do not work for The People, they work for elitists who finance their positions as puppets within the government. It's like putting the hens in charge of a wolf. The hens can only hope that the wolf likes eggs as much or better than chicken.

[jyl]

Be careful what you wish for. Prohibiting banks from re-selling mortgages is the same thing as asking for a credit crunch.

If banks are not permitted to re-sell mortgages, that there will be far fewer mortgages made, thus fewer houses bought/sold, and lower house values - and there will be fewer non-mortgage loans e.g. loans that finance businesses.

Not just cyclically, but structurally.

Bank lending is constrained by capital ratio requirements, also called risk reserve requirements. E.g. if a bank has $10BN in capital, and a 10% capital ratio, it can lend no more than $100BN.

So the bank industry, on its own, can make only a certain amount of loans. Its capital will support only a certain level of risk.

Re-selling and securitization allows that risk to be passed on to - supported - by the financial markets, which have vastly more capital than the banking industry does. The result is that far more loans can be made.

Re-selling and securitization of mortgages is not the problem. The problem is up-front payments, and misjudging risk.

Up-front payments mean that mortgage brokers, loan officers, securitizers, etc get paid when the mortgage is made, regardless of whether it goes bad later. So they have less incentive to make good loans.

Misjudging means that subprime mortgages and similar were perceived to be less risky than they really were. This problem encompasses commercial banks, mortgage brokers, ratings agencies, bond insurers, investment banks, investors, etc.

Not possible to do much about "misjudging". Humans will always make errors. But we should change the "up-front". You want to increase everyone's motivation to minimize errors.

[Rick Lee]

Originally Posted by hytem

The culprit is Mr Greenspan, who raised interest rates before the 2000 elections, and then lowered them 4 times in January 01 when Bush took office. That started the era of 1% CDs.

The new Fed chief knows that, and won't lower rates that low. But rates are too high right now
and they should be lowered down to the 4% range. Forget about inflation. That's all about oil prices and made in China.

Why are you under the impression that the Fed. chair decides mortgage interest rates? Let's go through this one more time for the ignorant. Traditional 30 yr. fixed mortgage rates are inversely proportional to bond yields. Most ARM's are tied to LIBOR or 1 yr. T-bill. The biggest effect Greenspan ever had on the real estate industry was when he uttered the phrase about how this was not a bubble. He didn't create subprime, he didn't even affect it. Ditto for Bush. No politician created it and none can fix it. AFAIK, no one person has the power to just turn the lending switch on or off like a light. Fannie and Freddie are the two biggest players and even they are not controlled by the gov't. FHA and VA are, but they are not the biggest players. Throw in the myriad private equity groups and investment bankers who wanted to compete with Fannie, Freddie and FHA and you got a spiraling race to the bottom to see who could lend the most to those least deserving of credit. Get off the Greenspan/Bush kick. They had nothing to do with this.

[berettafan]

some great discussion here! jyl great post! i was with you on the first 6 paragraphs but your conclusion, and following discussion, is where my feeling differs.

you are presuming there was a misunderstanding of risk by the institutions. selling loans makes sense if you use that assumption. my assumption is that everybody involved knew the loans were fundamentally bad lending but did not care because of the mechanism of selling debt.

while loans not being resold would certainly reduce the # of loans it would, i think, greatly increase the quality of the loans (or rather the borrowers) as the banks would have to live with their decisions for the full term.

your point about non mortgage loans being reduced in a non-debt-selling scenario is a very important consideration. good food for thought.

[Moses]

I know a local woman who is a realtor. She spent the last 8 years buying up properties with nothing down and financing with negative amortization and zero interest loans. She used the "equity" in one leveraged house to get another one. She currently "owns" 10 homes. She is going to lose ALL of them. She's crying and wringing her hands and stomping her feet. "Somebody has to fix this mess!"

She's as dumb as a sack of hammers. She's been living like a rockstar on equity pullouts. Now she want...no...INSISTS that there must be a federal bailout so she can keep her 10 homes!

After 10 minutes of conversation you would wonder how this woman ever passed the real estate exam. She's not terribly bright. She hasn't produced anything or added real value to anything, yet she thinks the taxpayers need to restore her lofty financial fantasies. Where does this crap end?

I'm sick of blaming banks and unscrupulous mortgage brokers. the argument "You should never have loaned me the money" is ABSURD! You borrowed the money, you signed the papers. It is YOUR problem.

Another thing. If we let the market slide to about 50% of present value, there is an ocean of hard working responsible families that will suddenly be able to afford reasonably priced homes. These working class families have been barred from the housing market by stupidly high values. I say let the market make its adjustments without interference.

[pwd72s]

When my parents bought a home, 30% down was required...most mortgages were 30 years, at a fixed rate.

[legion]

When I got my mortgage (almost 5 years ago now), my lender, National City, told me that they do not resell most of their loans. They also told me that they did not do ARMs and other such stuff. I don't know if any of this held true for the last five years, but they have held my mortgage the entire time. In fact, when the loan officer saw my credit score, her exact words were: "Oh, we will loan you the money. We will find a way."

Bloomington is a pretty white-collar area and it seems that most people only spend 10%-25% of their income on housing (at least talking to my friends that is what I have informally gathered). I'm in the 25% club--25% of my after tax income.

Locally, housing values are declining. Sales are slow unless they are at rock-bottom prices. I know several of the local banks have laid off loan officers and several independent mortgage brokers have closed up shop.

The wife and I want a bigger house, but we realize it isn't going to happen in the next few years. It will happen eventually. Time is on our side. The longer we wait, the more equity we have in our current house.

One of the guys I work out with is a real estate appraiser. I asked him about the run-up in housing prices the last few years. He's a pretty candid guy and he said that once houses started selling for more, it makes it difficult for him to keep the appraisals low as he has to show comparable properties on his report. I took that to mean that he didn't know how the trend started, but he had to follow it.

[TimothyFarrar]

If banks were not allowed to sell mortgages this 'mortgage crisis' would not exist

Perhaps we should rename the thread to "if people were not stupid, this 'mortgage crisis' would not exist."

Personally I'm reserving the word "Crisis" for when some jihadist sets off a nuke on our soil.

[Rick Lee]

Legion, my first job in the mortgage biz was with Nat. City and yes, they do service about 90% of their loans. But no lender, not a single one, can guarantee they will not sell your loan and you sign a disclosure acknowleding such at closing. Nat. City has always done and still does ARM's. Just because they don't sell it, doesn't mean they're keeping all the risk. Plenty of their loans are FHA or VA. That money comes from Nat. City, but those loans are insured by FHA or VA. So if they go into default, the bank gets their money back. Of course, that means they have to conform to FHA or VA underwriting guidelines and rest assured, when such loan goes bad and they make an insurance claim, the whole file gets audited.

Ditto in subprime. First payment defaults always meant a lender had to buy back the loan. And when that happened, those loans got heavily audited by QC. At least where I worked, if there was any shenanigans found, the retail lender either got dropped or put on double-secret probabtion. Any retail lender could, of course, just go to another wholesale lender. But eventually, you get a reputation for getting sent through QC and wholesalers tend to dry up then.