Let’s start the day off with some light news:
Little by little, millions of Americans surrendered equity in their homes in recent years. Lulled by good times, they borrowed — sometimes heavily — against the roofs over their heads.
Now the bill is coming due. As the housing market spirals downward, home equity loans, which turn home sweet home into cash sweet cash, are becoming the next flash point in the mortgage crisis.
Americans owe a staggering $1.1 trillion on home equity loans — and banks are increasingly worried they may not get some of that money back.
To get it, many lenders are taking the extraordinary step of preventing some people from selling their homes or refinancing their mortgages unless they pay off all or part of their home equity loans first. In the past, when home prices were not falling, lenders did not resort to these measures.
Let the good times roll.
*** Update ***
This is helpful:
Jen
Thank goodness the site is back up. Where else was I going to post this?
It’s grassroots conservatism at its best. Really, I think this might be their best.
Jen
I’m going to assume everyone is just too stunned to comment, rather than I’ve killed a perfectly good legitimate serious thread about the mortgage crisis. Feel free to be on topic if you like.
jenniebee
Ustabee if a big employer in your area shut down, you could at least pick up and move to another city where the economy was doing better. Not so much now.
And to think, just a year ago, I was disappointed when we renewed our lease because we couldn’t find a house in our price range that wasn’t either on the verge of collapse or else so far out in the county that our commute would have tripled. Three years ago, when my mother-in-law sold her house about a mile and a half from us (in Richmond’s Fan district), her house sold for $12K above asking, sight unseen, within hours of being listed. Now the for sale signs are as common – and persistent – as daffodils and dandelions.
Walker
The NYTimes should just outsource their financial news staff to the economics blogs. I swear I was reading about how this was going to happen when I stumbled on Calculated Risk over two years ago.
Reading financial news in the NYT is like reading about Iraq. Everyone keeps saying “no one could have expected”, and then keep interviewing the same people that were denying there was any problem last year.
Xenos
The sub-prime has been undermining the I-banks because in order to sell the good tranches of debt they had to hold the crap. Now the commercial banks are going to suffer for the crap paper they hold.
The only way to protect their security is to bid in, way above market value, when a senior mortgage forecloses. Which is to say the HELOCs are no longer secured loans.
When the Alt-As start to reset at the end of 2008, then there will be real pain. If people walk away from all the jumbo Alt-As, there is not enough money in the world to do a damn thing about it.
gypsy howell
How exactly does this help the situation?
Zifnab
Jesus Christ! My eyes! Where’s the bleach? Where’s the bleach?
You know what? I’m going to take a page from Malkin on this one and remind people they need to Suck. It. Up.
If you can’t afford to live in your decadent three bedroom house with a luxurious SUV in which you drive your posh little young’ns to overpriced soccer practice, perhaps you deserve to get thrown out on the street.
Get a job, if you can’t pay the rent. If you’ve already got a job, then maybe you should get a second, like they do in Minnesota.
Maybe you shouldn’t have been so lazy and stupid when you were in school. Don’t you have a college degree and a cushy job with a high salary and good benefits? No? Then I guess the American Dream is too good for you. This’ll teach you to dig yourself into debt you can’t pay your way out of.
Evinfuilt
If they interviewed someone else, it would break the momentum of not knowing. It would show that they could have known, for the past 8+ years they could have known the truth and choose not to.
But instead of that, they have to keep being stupid to show that they never could have been smart enough.
LiberalTarian
Yeah, I’ve been waiting for the housing crash for a while. Being right isn’t necessarily a good thing.
zzyzx
I might be a little too conservative with my finances but that 30 year fixed with no equity pulled out and a credit card that will be paid off by the end of the year sure looks good now.
Xenos
Being right five years too early is as good as being wrong, sometimes. I will have to file this lesson away for the next real estate bubble in 15+ years – it always takes longer for a bubble to pop than can reasonably be expected, so instead of sitting it out, invest with the idiots and get out at the last minute!
Walker
The issue is that we have been using debt in this country to mask the effects of inflation.
Clinton did one thing that really screwed us economically, and it wasn’t NAFTA. He let the Boskin Commission change the CPI methodology. That is when they introduced substitutions (Steak to expensive? Hamburger is just as good) and hedonistic adjustments (Those improvements to your computer have nothing to do with economies of scale — they are a sign of deflation). This has led people to believe — incorrectly — that inflation has been really low since the 1990s. This is a lie. Attempts to convert the measurement back to the old 1980s methodology suggest that inflation has been over 8% since 1996.
As people have not been able to keep up with the inflation we have been experiencing, they have had to borrow more and more. We have just reached the point where you cannot do that anymore. It is called debt exhaustion.
It is also why it is very possible that, no matter what the Fed does, we still see deflation instead of inflation. The inflation has already happened; we were just the proverbial slow boiled frog. Unless wages go up, our current prices cannot be supported without debt.
Jamey
Cue Ray Liotta (as Henry Hill): “Fuck you, pay me.”
Walker
If you are trying to make money off of it, then yes, this is true. But not if you are trying to set policy to keep the taxpayers from cleaning up this mess.
lutton
The Roof is on Fire flowchart:
http://flickr.com/photos/boyshapedbox/2283442220/sizes/m/in/set-72157603957925616/
Xenos
Walker-
Is anyone out there reliably estimating what M3 has been for the last few years? I don’t know how to tease apart consumer inflation, consumer inflation including food and energy, inflation and deflation once housing speculation is taken into account, and inflation/deflation once fractional reserve lending is factored in.
Maybe it is my fault for never taking macroeconomics in college. But then, nobody else seems to know either, except for people who are paid to promulgate certain opinions. Is Minyanville the most reliable source? God, we are screwed.
joe
LiberalTarian Says:
I expected a plateau in housing prices and a soft landing, which is what this started off as.
It would have remained such, were it not for the insane loans going out. People didn’t just stop making money off of appreciation – they stopped making money that they has already borrowed against in the expectation of selling.
This didn’t have to be a real estate crash, nevermind a recession (at what SHOULD BE the sweet part of the business cycle, dammit!). It was irresponsibility in the financial sector (bad loans, junky mortgage-backed securities rated AAA) enabled by laissez-faire policy by the so-called regulators that turned it into one.
JWeidner
Respectfully, that’s a pretty shitty attitude to have. You seem perfectly willing to paint all troubled homeowners with a single brush – they’re all driving SUVs, paying for overpriced activities for the kids, etc. And they’ve all bought more house than they should have and should all pay the price if the market tanks.
What about the families who were perfectly able to afford their homes, but one or both parents got laid off? Maybe one parent suffered a major illness or injury that is keeping them from working. The loss of that income will pretty much guarantee they can’t pay the monthly nut. If they already happen to be underwater on their mortgage due to the decline in the market, they’re pretty much fucked if they can’t convince the lender to forgive the difference. And it’s hard to manage that because so many of these home loans were packaged up and securitized – meaning there are dozens, if not more, of people and investment institutions who may own a piece of that mortgage. And they may not be willing to renegotiate simply because they can’t take much more in losses either.
All I’m saying is that there are a lot of other possibilities for many of these families, other than they are greedy bastards who deserve whatever the market brings to them. For every family who DOES fit your profile (and I’m not denying they exist), I’m sure there is one who is facing losing their home through circumstances not entirely in their control.
It just seems disappointing to see people assume the worst about others.
J. Michael Neal
Michelle Bachman is cute, but dumb. I’m in Minnesota, and I can’t find the first job, let alone the second.
J. Michael Neal
These changes weren’t the problem; they are real, and should be factored in. The problem is the other changes that were and weren’t made.
On the hedonistic adjustment, they only allow it to work in one direction: making things cheaper. This makes sense in the case of the computer where you get more for what you pay. However, there should also be an adjustment for the fact that, to get help with your computer, you now need to wade through a long voice mail maze in order to wait fifteen minutes on hold so tgat you can talk to someone with whom you share only half of a common language. That’s getting less for your money.
The other major adjustment, which has really skewed over the last few years, was a change in how the price of housing was counted, back in the 1980s. It’s now based upon imputed rents, with no reference to how much it costs to buy a house. This is actually a fairly complicated subject; how do you account for changes in housing prices when many people are in fixed rate mortgages that don’t change? Still, this approach was a cop out. It dramatically understated inflation during the housing boom. However, as house prices fall, it’s overstating inflation now.
Yes, if you want to compare inflation in the present to the 1970s, you need to adjust one set of numbers so that you are counting both in the same way. If you do, you find that inflation now is roughly the same as it was in the 1970s.
What should the CPI numbers actually say? I don’t know.
The Other Steve
Allow me to point out that Michelle Bachmann may very well be the most insane member of Congress. She’s batshit crazy.
But she opposes abortion, and has gots religion, and that is what counts! Although she’ll probably lose reelection this year if the DFL has a decent candidate.
Brachiator
It’s odd to try to transform an economics issue into some kind of personal or moral failing, especially when the same standards are not applied to the lending institutions that the Bush Administration are busy shoring up. Even John McCain’s recent speeches about “personal responsibility” up and down the line are obviously phony since the financial institution bailout is already in full swing.
Part of what happened here is ridiculously simple. You don’t have to get into arcane theories about business cycles and housing bubbles.
1. Lenders severely understated the risks of the loan packages they were coming up with to investors and other banks.
2. Lenders mis-stated the risks and consequences of subprime loans and, being the “experts,” steered consumers away from fixed rate loans.
3. Lenders ignored their own rules and marketed loans to people who did not remotely qualify for them.
4. There was so much money being made that anyone who should have been paying attention, from regulators, to business news reporters got caught up in the euphoria and stopped looking at the numbers.
Worst of all, some accounting firms which set the rules and perform the audits, and which should have known better, turned a blind eye to all the shenanigans going on. And just as Arthur Andersen got taken down as collateral damage in the Enron mess, another accounting firm may tumble due to its role in one lender’s duplicitous actions (Sub-prime lender allegedly inflated its profit)
It’s also ironic that while New Century’s executives can shelter themselves from responsibility by taking advantage of bankruptcy laws, the Bush Administration (with the complicity of gutless Democrats) re-wrote the bankruptcy laws for individuals so that it is much harder to find relief.
RSA
I’m probably way too conservative with my finances, but about five years ago, when the mortgage frenzy was still in full swing, I realized I could refinance my 30 year fixed rate into a 15 year fixed rate and pay a manageable amount more per month on my below-average-price house. Ten more years. . .
The Other Steve
There seems to be high demand for .NET developers. My phone keeps ringing.
The Other Steve
You didn’t mention the granite countertops.
Xenos
Is that really a cop-out? When I had trouble sleeping at night due to the really pretty modest debt that was secured by my house, I sold it and have been renting since 2005. I have given up on all sorts of prestige and some tax breaks, but have a housing cost at around 15% gross household income. Anybody else could have made that sort of move, and if they all had, the last two years of the housing boom would have fizzled out.
Here in the Northeast has almost become impossible to rent a decent-sized house in a community with good schools. That is because people would take any risk to buy a house, and there have been so few empty houses available to rent. This is a tragedy of the commons situation, where available school districts are hunted into near-extinction, as the side effects of the accumulation of capital into fewer and fewer communities degrades the funds available to schools in general. The No Child Left Behind laws created a testing regime that discredited a lot of the public school systems, accelerating this process.
There is a good doctoral thesis buried in there, if anyone wants to take it on.
Brachiator
I forgot to throw in this little tidbit about New Century, and the reason why their cooking the books is especially egregious:
So a neat little cycle: make bad loans, sell the bad loan package to investors, cook the books, pad the profits, then run for the cover of bankruptcy protection. Meanwhile, some of a conservative bent can discuss the philosophy of personal responsibility, totally untethered from reality.
Conservatively Liberal
yawn Those of us who have been roosting at Calculated Risk saw this train wreck coming for a long time now.CR was abit ahead of the curve, but other than that Tanta and CR have been on target.
This mess is going to take some time to unravel, and as it does we are going to see chicken after chicken coming home to roost. I am glad that we are not carrying any debt at our end, but the ones who are really going to pay are the ones like myself who did not participate in this mess. The profit has been privatized, now it is time to socialize the losses.
Ahh, the wonders of a free market, eh? Free to fuck over everyone that they can, that is.
J. Michael Neal
Yes, it is a cop out. CPI is meant to measure the prices that people are paying for things, not the prices that they could pay if they bought different things.
ThymeZone
Just heard Barack Obama’s speech on the economy and mortgage crisis. The pre-release transcript is on the link.
Obama was introduced to the audience at Cooper Union by Michael Bloomberg. His speech was without doubt the most understandable and plain-spoken explanation of a general policy in a time of economic turmoil I’ve ever heard. A breath of fresh oxygen after the absurd and constipated mess of a speech made earlier this week by John McPain, who basically said, as Obama pointed out, yeah, we have big problems, but you folks are on your own.
If I hadn’t picked a presidential candidate yet, today’s speech would have won me over. It was memorable, I hope you get a chance to listen to it, because the delivery was part of its appeal.
The Other Steve
Interesting.
HeartlandLiberal
We bought our house at $139,000 about 15 years ago. Immediately invested $16,000 to totally finish the lower level. Result: 3100 sq ft living space on three stories. We aggressively paid off the mortgage upfront. Every extra reduction in principle at that point was worth TWICE its value in interest never to be paid. We refinanced several years ago when rates were rock bottom. 15 years, 4.625%. Read it and weep. On a house now still worth about 1/4 million dollars, I owe a paltry $57,000. I recently calculated that on our current loan the monthly interest is so low it is not worth additional extra payments in the remaining two years I plan on regular mortgage payments. Principle is being paid off rapidly.
Because we refused to participate in the mad squandering of equity in the single most important investment an American can make. Their home. I will retire in two years. Our first act will be to pay off the remaining mortgage. There will be NO mortgage payments after retirement. Nada.
Now you tell me. Who displayed better financial judgment? Us? Or the wise mortgage and investment fund brokers and managers? They did not care about the economic health of consumers. They cared about one thing. Their immediate short term profits, and lining the pockets of their stock in investment holding papers in a gigantic speculative bubble that is now popping rather nastily.
Utter, sheer madness. Americans have been living an economic life of what one economist, Robert J. Shiller, called in his famous book ‘Irrational Exuberance’. Ironically enough, Alan Greenspan even used the same phrase in a famous speech in the 90’s to describe the insanity of markets at that time. I say ironic since much of today’s mess could have been avoided if Greenspan had acted while still in office. One of the most disgusting news reports I have seen lately is Hillary Clinton suggesting she would bring Greenie in to clean things up. Another nail in the coffin of her reputation and qualities she would bring to the job, as far as I am concerned. Blecch.
We as a nation that is so supposedly wealthy have abysmally low savings rates. The vast majority of American wage earners will go into retirement with hardly any savings or investments other than social security to support them. Because we have been encouraged to spend, spend, spend like there was no tomorrow. All based on inflated future values of property, and borrowing against it. And those values are now collapsing like the house of cards they were.
Ed Drone
Chorus:
It’s moving day, moving day.
Rip the carpet up off the floor.
It’s moving day, moving day.
If you can’t pay your rent, you gotta live out in a tent,
Because it’s moving day.
Landlord said this morning to me,
“Give me your key; this room ain’t free.
I can’t get no rent out of you, so
Pack your clothes up and skidoo, you!
I’m just waiting for my Bill to come home,
He’s my honey from the honey-comb,
He’ll have money ’cause he told me so this morning.
Repeat chorus
[From Charlie Poole and the North Carolina Ramblers, circa 1930]
Ed
Walker
I actually do not disagree with this, and I would be willing to stomach the current CPI if it was done. But I also think that technological advances in the CPI are very tricky to weight; feature bloat that does not actually make my life easier or increase my productivity should not actually effect the CPI.
But I think you pointed out the real issue. I am sick and tired of the mathematical illiterates in financial reporting telling me that inflation (using modern CPI) is so much less now than it was in the 70s and 80s (using the older methodology).
Walker
John Williams has a continuation on his alternate series chart. I won’t vouch for it, as I do not know his methodology. His CPI conversions seem to be fairly well respected in the community, however. Barry Ritholtz at Big Picture is a fan.
If you believe his figures, M3 is currently around 17% year-over-year.
Walker
Then why do you support substitutions in the CPI? Your response to my CPI post suggests that you do.
D-Chance.
I have to agree with Zif… hard to have sympathy for the Party Now, Worry Later crowd.
There’s a reason banks had strict regulations on mortgage qualification. Sufficient income. Excellent credit. Loan max at 80% of equity (and if your home fell in value, you either coughed up a lump sum to get it back in line or got foreclosed upon, despite payment history).
But on the consumer end… what we are seeing is the result of the internet generation. Get it, get it NOW, and get it FREE. Because we want it, we deserve it, and it’s our right. Wait until you’ve saved 20% for a down? We need to earn how much per year? We’re limited to a house only worth that little? You’re discriminating against the working class. Not buying a home until age 40… wha, are you crazy? I want my crib! Sunken pool, 3000+ square foot pad (and a second mortgage to expand to 5000 sq ft), 4-car garage, all blinged out. Hey, if anything happens, I got 5 cards with $50K in credit lines. I’ve seen ads advertising second loans up to 125% of equity. And if all else fails, I can flip that jewel and walk away with a six-figure profit… they do it on TV all the time.
Ours is a civilization which has fallen for almost every one of the Seven Deadly Sins; lust (luxury), gluttony, greed, sloth, wrath, envy, pride. I’d argue that at least 5, if not 6, of those traits are entwined with the current housing market. Greed, envy, lust, pride, a bit of sloth and gluttony… all playing a part in this mess.
One last thing… where were the lawyers for the purchasers? You’re walking into a room on closing day facing a half-dozen professionals, and being asked to sign a half-hundred or more documents, all written in legalese. All vetted by the lenders’ lawyers. You’re purchasing a product that’s going to take you several years’ income in debt, a debt probably 10X or more the value of a new automobile. Surely, you hired your own lawyer to review all those documents and represent YOUR interests in this financial situation? Hmmm? Bah, the lawyer would have probably told you not to do it, so fuck him, right? Yeah.
Brachiator
Have you been paying attention to the sub-prime mess? The banks threw out their own regulations, which weren’t very STRICT at all. People were getting loans based on “stated income,” i.e., whatever they said their income was, with no documentation. People were getting loans with bad credit. Even when consumers questioned why it was so easy to get loans, they were bamboozled with nonsensical explanations (e.g. home values were rising so high that equity would always be available to help pay down loans).
Then the banks turned around and packaged the loans into investment vehicles, and understated the quality and risk of the underlying loans.
And no one, no regulator anywhere, existed to certify the quality of the packaged loans. Meanwhile, the Fed just shrugged and said “What? Me Worry?”
As I already noted, in some cases, auditors turned a blind eye to the lack of any reasonable value in the loans sold and packaged.
But on the consumer end… what we are seeing is the result of the internet generation. Get it, get it NOW, and get it FREE. Because we want it, we deserve it, and it’s our right.
This is so absurd it’s almost funny. The Bush Administration downplayed the subprime mess before it totally blew up, claiming that lenders were just helping people achieve the American dream. No one, I repeat, no one noted that people were trying to get something for nothing.
And no bank has ever been FORCED to give a loan to people who would not otherwise qualify for it. They did it on their own, did it willingly, and did it knowing that they could bank fees and commissions no matter the quality of the underlying loan.
Huh?? The average Joe, even many non-average joes, cannot afford a lawyer to read a contract.
NR
Actually, that’s only part of the problem. Another part is that wages have hardly gone up at all. Sure, the people in the top 1% have seen their salaries skyrocket, but for everyone else? Not so much.
As prices go up and wages don’t keep pace, people have been going into debt to maintain the same standard of living. Well, you can’t keep doing that forever, and the bills are finally coming due. This is going to get ugly.
Xenos
The lawyer is there to make sure your title is right, and to warn you about anything in the paperwork you do not know about. A lot of these buyers were making risky business decisions and knew it. I represented some commercial buyers at the peak of it all and I was horrified at the terms they were agreeing to. When trouble hit and my clients went to a hard money lender for relief, I withdrew from representing them. Sooner or later, they were going down, and I was going to take last place in the bankruptcy filing. I can lose money just as easily, and with much less stress, farting around on the internet.
There appears to have been more fraud in the refinancing business, as the homeowners usually did not have their own counsel. Whether the buyers fully understood what they were doing is a mystery. Lender beware.
NR
And by “ugly,” I mean “a lot uglier than it is already.”
J. Michael Neal
People do make substitutions. The substitution effect results not from saying that people could opt to buy more chicken if the price of beef goes up. It stems from the fact that, if the price of beef goes up, people actually do buy less beef and more chicken. It is an attempt to make sure that the basket of goods used to measure CPI accurately reflects the basket of goods that people purchase.
Walker
But that violates the entire purpose of the CPI, which is to measure the change in our purchasing power. If it changes to measure what people are buying this year, and makes them equal to what people were buying last year, then it completely and utterly fails at that job.
The CPI was designed to reflect a fixed basket of goods for a reason. If I have to change my basket of goods in a way that effects my quality of life (hamburger is by and large thought to be inferior steak), then how is this not inflationary? Indeed, this is just another meanings of ignoring reverse hedonistic adjustments that you were complaining about earlier.
If the CPI ignore reductions in our quality of life, then it becomes a useless measurement of the change in our purchasing power. It is no longer a measurement of inflation and should be replaced by superior metrics.
w vincentz
TZ,
Right! Barack’s speech was on the money (pun intended).
His four point plan is the way to protect the little guys, and also allow the players to play (with oversight).
Ain’t no “trickle up”, beyond the pain caused by past practices.
As a side note, John might be right about doing the self suffieciecy approach. Sadly, it might be too late for many to gather their nest winter’s firewood, plant a garden, learn how to forage and “jack” deer. I’m more than ready, but to get to my garden and woodpile, the risk will be that the takers will be on the receiving end of my 10 ga mag.
Good luck!
dbrown
Get a lawyer for closing? What!? Remeber, lawyers are the enemy – just ask any repubic … wait, they won’t talk to you, you have to speak only to their lawyers!
Inflation rate is never based on the costs of food and fuel – like, what American wastes their money on those things, anyway?
Houses will always go up, at least in the long run, like the S&P.
Remember to put equity you have in your home to work (unlike credit cards, the lender can forclose on a home)! Borrow and us that money for important things, like a low mileage SUV with extra insurance to protect the lender!
bago
Another word up for .net devs. I took my resume offline a year and a half ago and still get 2-3 recruiter calls a week. The best was being recruited for the same job that I had voluntarily left 2 years ago because they complained about me taking my shoes off at work.
BH Buck
Wave your hands in the air like you just don’t care!
John, you’re so damn funny!
Asti
And of course, that Visa commercial where the party stops when someone uses cash… why does Visa hate the American dollar?
TenguPhule
Wrong.
It is an attempt to hide inflation by pretending that people forced to purchase inferior substitutes are somehow not losing purchasing power because they can no longer afford the old basket of goods because it costs too much.