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Thread: Pandora's Box Just Opened re mortgage financing ...

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    Banned Melonie's Avatar
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    Default Pandora's Box Just Opened re mortgage financing ...

    If there was any doubt, this latest development should guarantee that most housing markets are going to decline in 2006

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    God/dess montythegeek's Avatar
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    Default Re: Pandora's Box Just Opened re mortgage financing ...

    The box has been opened before and it did not do diddly .
    The FTC previously has looked into the sub-prime mortgage market. From 2000 to 2002, it examined Citigroup's sales practices as part of an investigation into a consumer-finance company the bank bought.

    In 2004, the Federal Reserve fined Citigroup $70 million for improperly boosting credit-insurance fees. The bank in May changed its lending practices to ease concerns from some consumer advocates and regulators.

    Potential for Liability

    On May 2, 2003, the California Department of Corporations, which oversees brokerages and consumer-finance firms, revoked the license of Wells Fargo's home mortgage unit after finding it overcharged customers.

    In today's filing, Bear Stearns said the mortgage trust could be liable for ``monetary penalties'' if the originators of loans it holds as investments failed to comply with laws that discourage predatory lending. Additionally, the trust may be liable under federal law ``for all claims'' that borrowers make in court against lenders who sold them high-cost mortgages, according to the filing.

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    Banned Melonie's Avatar
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    Default Re: Pandora's Box Just Opened re mortgage financing ...

    Partly yes and partly no. Some would contend that any previous gov't investigations into mortgage lending practices were strictly based on 'illegal' charging of usurious interest rates and fees. Some would contend that this new investigation is concerned with the possible 'illegality' of subprime lending practices themselves ... i.e. TIN based mortgages granted to illegal aliens, reverse amortization/convertible mortgages granted to people who clearly won't be able to make payments once the initial 'discount' period runs out etc. Some would contend that recent Fed comments indicate a very wary stance toward the subprime mortgage lending industry (i.e. somebody must have remembered the true costs of the S&L bailout, and realizes that the US economy can't handle a replay).

    From a real world standpoint, this latest investigation will if nothing else cause Bear Stearns and other purchasers of 'packaged mortgage debt' to tighten lending practice/creditworthiness standards towards the originators of new mortgages. Obviously the actual originators of mortgages to illegal aliens, reverse amortization/convertible mortgages with front end 'discount' payments etc. have no intention of hanging onto such mortgages themselves - they're mainly interested in reselling the mortgage debt (and avoiding potential risk of default). Bear Stearns has taken the position that any 'packaged mortgage debt' which turns out to have been sold to them 'under false pretenses' by the mortgage originators is not Bear Stearns' fault - and that resulting losses should be covered by gov't guarantees. By calling for this inquiry, the gov't is positioning itself to try and avoid having gov't guarantees come into play to cover the 'gap' between mortgage originators and 'packaged mortgage debt' buyers.

    All of this smacks of early inning posturing in light of an anticipated subprime mortgage meltdown. The issue everyone is trying to avoid is the high probability that when a significant number of subprime mortgage holders find themselves unable to make increased monthly payments once the initial 'discount' period runs out and interest rates/monthly payment amounts increase, rather than to declare bankrupcy, that those subprime mortgage holders who can't make their monthly payments will resort to suing the mortgage originators on the basis of illegal lending practices. If such lawsuits are allowed to happen, those mortgages will go into a legal limbo until the lawsuits can be ejudicated and appealed - meaning that the holders of subprime 'packaged mortgage debt' won't be receiving monthly mortgage payments and won't be able to evict the subprime mortgage holders, foreclose and liquidate the property either.
    Last edited by Melonie; 01-01-2006 at 07:48 AM.

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    Default Re: Pandora's Box Just Opened re mortgage financing ...

    here's some 'expert' commentary on the subprime mortgage problem ...



    (snip)" You have to pause when you see that 76% of our economy is based on consumer spending. Seventy-two percent of homebuyers in California over the past two years are spending 40% of their total income on debt service. That is ominous when California real estate is over valued by 45%. In just 2003-2004 homeowners pulled $1.037 trillion out of the equity in their homes. That equity is gone, but the debt remains and the service is huge. Even though there has been a huge increase in home values equity is the lowest ever and service the highest ever. What you are seeing is not sustainable. Consumers are borrowing to make debt payments. They are pyramiding their debt. As soon as house prices fall many consumers will realize they are broke. If the cost of owning a home is 10% and wages grow 2% a year your house has to appreciate 8% a year. That has happened over the past five years, but that period is highly unusual. Over this period 50% of economic growth has been generated by industries affiliated with housing and real estate. If we are correct and a real estate correction only mirrors the 1989-92 period there would be a 4-5% fall in GDP for as long as the correction lasted. Needless to say, today debt is much more burdensome than it was in the 1989-92 period. In just the last ten years consumer debt is up 77% and mortgage debt has doubled. As de-leveraging, debt pay down, increasing savings and bankruptcies takes place, unemployment grows still victim to offshoring and outsourcing. That will throw an additional burden on the economy.

    Then there is the looming problem in the mortgage industry, which has created trillions of dollars of speculative loans in real estate and in other spheres. No interest, or 1% or adjustable rate loans. They have made everything possible for our modern hedonist. Over the past five years home mortgage and equity lines of credit have grown from $4.8 trillion to $8 trillion.

    Somebody made those future loans and they are sitting on a powder keg. It’s just like the 1920s with interest only loans. That is what kicked off our Great Depression, but few seem to know that. Who in their right mind would write or borrow with an option adjustable rate loan? A loan in which the principal amount can rise, instead of being reduced in a conventional rate loan. Few know that about 50% of the time borrowers need two loans. That is up from 20% in 2001. Those are adjustable rate loans and as interest rates climb so does the debt service. Thus far mortgage foreclosures are small, but the thing to look at is default and foreclosure. That is where the house is sold in default to avoid foreclosure. As we said before, next year will begin the moment of truth for the mortgage industry. In the last issue we covered securitisation of these loans, which could be a bomb that tears the derivative industry apart. We expect a full-blown crisis in the mortgage industry and in lending in general. Like our government and the Fed the mortgage lenders are out of control and have been allowed to be out of control for five years. How can responsible lenders allow 42% of first-time buyers to buy with nothing down and allow over 50% of loans to be adjustable? Today both 30-year fixed rate loans and adjustable rate loans both respectively make up 40% of all loans. Just a few years ago it was 70% for fixed. The whole daisy chain of loans is on shaky ground and that puts everyone at financial risk all the way down the chain including our entire financial system. What do you think will happen when house prices fall 20-60%? If 50% of the jobs created in the last four years were real estate related what do you think is going to happen to the economy if we are correct? We think 65 million American homeowners are going to be in shock, or at least 60% of them that are in the hot areas in the housing bubble."

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    Default Re: Pandora's Box Just Opened re mortgage financing ...

    absolutely nothing new here Mel, and there are some glaring errors:

    1/Brokers do not "sell" mortgages, they also do not service them. Brokers simply initiate paperwork and chose a lender.

    2/while I agree that there are instances of predetory lending, the legeslative reponse is often worse than the problem itself. For instance, Illinois just tried to enact measure 4050, which demanded that brokers pay for consumer xcredit counseling before writing loans for sub-prime lending. While sounding admirable, the rules were so asanine, that the lenders revolted and announced that they would fund no new loans in Cook county at all. The law was shelved.

    3/Neg Am/otion ARM loans are very useful when used properly. So what if you defer 4% of principal to the balance of your loan? If you have a home appreciating over 5%, and you are saving 50% on your mortgage payment-and you invest your savings in paying down high interest debt or creating cash flow for rental properties-then it is a good loan. Many consumers though simply spend the money foolishly.

    4/The "usurious" interest rates you claim are high to be sure, but, that is what happens when people don't pay their bills.

    5/Sub-Prime is tightening up it's lending practices, but it is not the end of the world.

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    Default Re: Pandora's Box Just Opened re mortgage financing ...

    Brokers do not "sell" mortgages, they also do not service them. Brokers simply initiate paperwork and chose a lender.
    In the sense I'm speaking of a loan 'originator', this is not true. The loan 'originator' is the local bank or finance company (not a broker which steers the borrower's paperwork to a local bank or finance company)... which has no intention of holding the property deed and mortgage for the 30 odd years to maturity. Instead the loan 'originator' typically packages the loan in conformance with FHA standards, and quickly sells the loan to either FNM/FRE, a reit fund, a mortgage backed bond fund, or some other financial institution, in exchange for x dollars in cash. The gov't backed or private repurchaser is then on the hook for mortgages which go into default, not the local bank or finance company.

    For instance, Illinois just tried to enact measure 4050, which demanded that brokers pay for consumer xcredit counseling before writing loans for sub-prime lending. While sounding admirable, the rules were so asanine, that the lenders revolted and announced that they would fund no new loans in Cook county at all. The law was shelved.
    Yup, another example of legislative ignorance of real world conditions/consequences.

    Neg Am/otion ARM loans are very useful when used properly. So what if you defer 4% of principal to the balance of your loan? If you have a home appreciating over 5%, and you are saving 50% on your mortgage payment-and you invest your savings in paying down high interest debt or creating cash flow for rental properties-then it is a good loan. Many consumers though simply spend the money foolishly
    Unfortunately, the intelligent and calculating NegAm/option ARM borrowers are greatly outnumbered by those consumers who simply enter into a NegAm/option ARM mortgage with no idea where they're going to find the extra money for higher monthly mortgage payments once the 2/3/5 year initial 'discount' period runs out. This is apparently based on teh (false) impression that rising real estate prices, a liquid seller oriented real estate market, and the ability to refinance at will on favorable terms, are conditions which will last forever.

    The "usurious" interest rates you claim are high to be sure, but, that is what happens when people don't pay their bills
    Yup for sure, and the higher interest rates will be quickly followed by bankrupcy, foreclosure, auction, declining real estate market values, tighter 'subprime' lending standards in an attempt to minimize future bankruptcy risk, fewer qualified buyers, and even lower real estate market values.

    This thread has taken somewhat of a sideways turn towards mortgage risk, so I started a new thread to pick up on this issue.

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    Featured Member scorpio's Avatar
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    Default Re: Pandora's Box Just Opened re mortgage financing ...

    Mel, there are already much tighter lending guidelines on sub-prime loans. It's not the end of the world.

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