Easy Money No More

Crash Victim: The Mortgage "Honor System"

I thought I knew a lot about go-go mortgages. I had already written several articles about the explosive growth of liar’s loans, no-money-down loans, interest-only loans and other even more exotic mortgages. I had interviewed people with very modest incomes who had taken out big loans. Yet for all that, I was stunned at how much money people were willing to throw at me.

--Edmund L. Andrews, "My Personal Credit Crisis"; The New York Times (5/14/09)

When Times financial reporter Andrews says personal, he means personal: the details are things you wouldn't even expect close friend to divulge.

Leaving aside the stress, aggravation, etc. that has engulfed Andrews and his family, he reports a phenomenon I saw and heard about in spades a couple years ago -- namely, anyone with high credit scores could borrow virtually as much as they wanted.

Which is why I routinely counseled my clients to distinguish between how much mortgage they could qualify for, and how much they felt comfortable borrowing.

Today, of course, that advice is no longer necessary: banks once again are telling customers how much they can borrow, instead of vice versa.

P.S.: Foreclosure Feeding Frenzies

(More) Market Manipulation?

In my last post, "Banks Price Low to Elicit Multiple Offers," I discussed the increasingly popular tactic of foreclosure Sellers pricing low to precipitate bidding wars.

What I left out was the identity of the banks who appear to be behind many of them: notorious, sub-prime lenders such as Countrywide and Indymac.

Just to refresh your memory, these are the same folks at the epicenter of the real estate market melt-down in places like Southern California and Florida.

While credit was free-flowing, they handed out such exotic fare as option-ARM's (the borrower decides how much to pay, with any interest shortfall added to the principal); mortgages with initial teaser rates on loans that later "explode"; and various other, negative amortizing products.

When people refer to "Liar Loans" (no documentation of any kind required), these are the lenders who handed them out. Big surprise: such lenders made their money originating such loans and re-selling them.

So nice to see how far we've come . . . not.

Illusory "Bright Lines"

Two Types of Housing Distress

The key to understanding [the administration's housing] plan will be remembering that there are two different groups of homeowners who are at risk of foreclosure. The first group is made up of people who cannot afford their mortgages and have fallen behind on their monthly payments . . . The second group is far larger. It is made up of the more than 10 million households that can afford their monthly payments but whose houses are worth less than what is owed on their mortgages. In real estate parlance, they are underwater.

--David Leonhardt, "Bailout Likely to Focus on Most Afflicted Homeowners"; The New York Times (2/18/09)

Want to know which group of homeowners receives the higher priority in President Obama's housing bailout, due to be announced today in Phoenix? Look at the price tag.

Conventional wisdom seems to be that helping the first, most distressed group will require around $50 billion; the second, closer to $500 billion.

However, if there's one thing that has become apparent the last two years or so, it's that bright lines dividing one group of troubled homeowners from another are illusory.

Illusory "Bright Lines"

Initially, of course, it was thought that the financial fall-out from the housing downturn was limited to so-called "subprime borrowers" -- all the marginal homeowners who put nothing down using toxic loans with low, initial teaser rates.

With housing nationally now down 20%-25% from the 2006 peak, clearly the pain has spread to the entire market.

Now, the focus is all the homeowners who can afford their mortgages, at least for the time being, but economically would seem to have an incentive to default because their homes have lost so much value.

As the Times' Leonhardt points out, it is the behavior of this second group that holds the key to the housing market -- and perhaps the economy. If they honor their mortgages, things get better; if not . .

P.S.: My post, "What's So Bad About Bad Credit?," addresses this subject as well.