A year ago, the Mortgage Bankers Association was thrilled to sign a contract to buy a fancy new headquarters building in downtown Washington. Interest rates were low, the group’s revenues were steady and the prospects for quickly renting out part of the structure were strong.
But since then, the association has fallen on tough times as many of the subprime mortgages dispensed by some of its members proved dicey. Borrowers discovered the loans were more costly than they had anticipated. Foreclosures soared, and cheap, inexpensive credit dried up, slowing the economy.
The result: The trade group is about to find it harder than it imagined to pay its own mortgage.
Scheduled to close on the building in the coming weeks, the association will have to pay millions of dollars more than it would have a year ago when it contracted to buy the 160,000-square-foot structure — millions of dollars it is now less able to afford.
The brokers who engineered this mess earned my sympathy like Enron traders who yukked it up about shutting off granny’s electricity. If the association gets foreclosed and faces bankruptcy then an angel somewhere will get its wings.
I can spare a bit more for owners and sunny-day real estate agents because, though their behavior perfectly illustrates the defects among even educated consumers that fed the poisonous bubble (that’s why the NYT Magazine gave 5 pages to a chat in a taco chain), these guys seemed to think that they were doing, well, if not the right thing then at least only risking themselves. Reading them talk about interest-only ARMs the way I talk about an ATM withdrawal is like getting dispatches from another world – I understand that people somewhere think that way, but I’d never seen them in their natural environment before. It’s sad.
I get a certain feeling of cognitive dissonance as I post a reply to an entry about interest-only ARMs and other foolish debt vehicles.
On the left, there is an add for the ultimate debt vehicle, the Cadillac Escalade, and another ad about how to pay for it–with a ditech home financing loan underwritten by GMAC….
I’m sure there’ll be a bail out by the government for them too.
On a side note, it hasn’t been exactly a secret that the economy has been propped up by consumers using their houses as ATM machines. Refinancing, spending the equity on frivolous stuff.
The way I see it is home owners are the foundation of the economy. If they keep losing their homes, it’s going to be a vicious cycle. You can bail out BS, mortgage companies and builders until your a blue in the face, but if you don’t fix the foundation, your not stabilizing anything just throwing good money after bad.
Sometimes I think their plan is to destroy the dollar and seek religious asylum in Iran.
Nah, TenguPhule. They’re planning on destroying the dollar and turning this country into Iran, only a kinda-sorta-Christian version.
On a shitty side note, it looks like Malkin got another trophy.
No shit? When did they start having queefing competitions and giving out trophies?
How does that work? Is it how many ping pong balls they can shoot out…or how far they can make them go?
Does it have something to do with accuracy?
I gotta get out more.
The way the right (and some on the left) have been running this country, I have the impression that they are doing everything they can to turn our country into one that can compete with Chinese (or any other cheap labor). When our politicians say that ‘our workers have to be able to compete in the global economy’, they are really saying that we are paid too much and need to learn to live with less. Only then will businesses from other nations bring jobs here, and our businesses will stop shipping them out of the country.
I think that to some businessmen and politicians, globalization is a tool that is used to play people against each other for the benefit of themselves. Business costs too high? Send the jobs overseas. Keep doing this long enough and one day people will discover that they will have to accept less to keep their job.
Anyone ever read “The Smartest Boys In The Room”? I did, and it is an eye opener into how people can and will manipulate a whole segment of the economy for their own personal gain. Recently, some oil company executives were on capitol hill testifying to Congress about oil pricing. When they were asked why they are raking in the record breaking profits, they stated that they don’t set the prices, the world market does.
In other words, they are suffering (the huge profits) because the mean nasty ol’ world is making them do it. It is not their fault.
The name of the game is to take essential commodities and milk them for everything they can. That is what Enron did, and our oil companies are doing the same thing. Hell, in the Enron book I referenced above, they explain the strategy clearly and concisely. Find the commodity, target how to manipulate it and then get to cashing in on it. Supply and demand are not relevant factors any more. Manipulate the supply, and you control the demand.
Every great nation falls, every single one of them. Sometimes from outside influences, but often from the rot within. Our country is a mess right now, and people do not want to face the fact that the chickens are coming home to roost.
Our housing and mortgage markets have been screwed over, the prices of commodities are rising and our dollar is falling. The solution? Toss the rest of the regulations out of the window to ‘modernize’ our economy.
When world economies go to crap, wars eventually break out. They make great distractions for politicians as it gets the heat off of their backs by providing a common ‘enemy’ for the public to focus their anger on.
If you think things suck now, just wait. It is going to get worse, no doubt about it.
In happier news—-it looks like a higher power has finally seized that gun from Charlton Heston’s cold, dead hands.
They still give out Golden Phallus awards?
From the concluding paragraph of the NYTimes piece.
There is so much wrong here that you just have to shake your head at the spectacle of so much human folly. You could search the country for a year and not find a single MBA you would feel a minute’s guilt for walking away from an underwater secured debt. This poor schmoe actually thinks he owned that house, although it was underwater within months of buying it – he just got scammed of his down payment.
These people have bought into a meaningles, artificial and unsustainable non-community in the remote distance and they confuse it for the American Dream. I thye will doi anything to avoid realizing that there is no American Dream there – just a scam, and they are the marks.
Absolut had it right – we need to give it back to the Mexicans, because under the Mexican economic system a few peasants might create something useful, like a few sacks of dried beans from an irrigated field. It would be a more noble pursuit than what is there now.
How else is the money class ever going to maintain profitability on their investments? It’s a case of diminishing returns of sorts. The higher stock value is, the harder it is to squeeze the next level of value out of a company.
It needs to be recognized that in the eyes of the money class, 99% of us should be making less money than we are now. It doesn’t matter to them how much education your position needs, they can always find someone cheaper.
That this would destroy the economy as we know it is of little concern to them. They’d rather be kings of oblivion than be partners in paradise. (Which is why I support punitive level capital gains taxation to basically destroy the current system and replace it one relying on long-term profitability).
I don’t get this. I really don’t. It’s one thing if people can’t afford their mortgage, but it would be that way if it was underwater or not. But if they can, you payed X dollars for a house, you still have the house, you can live with it. So it’s not as good investment as you hoped. It’s a HOME it’s not supposed to be an investment.
It’s clear that at the core of this mess is the coddling of investments and investors. It’s time for that to end.
What bothered me was that instead of making a clear break from a disastrous decision, Fox is going to ride this down to the bitter end, consuming larger and larger parts of his money, time, and everything. All for a house in the middle of the desert, only half-populated, where the only culture is the grocery store.
Fox was investing, but as he saw it, investing in the a community, in a future, in a dream. But they all overpaid so much that the financing is ruinous. And now they feel morally obliged to stick with this catastrophe, like they have a moral obligation to the thieves (including the banks) that set up the monstrous fraud.
Meanwhile, on the other side of the transaction, are businessmen who never were concerned about the long-term survivability of the community, and who, themselves, are trained to cut off a bad investment and start over again any time it proves prudent. The secured lender takes care of itself- it is a business decision. Unpleasant, but you do what it takes to survive. Fox is concerned with his honor, but nobody else in the scheme care one whit about theirs. Ultimately, Fox is held in thrall and systematically ripped off by others manipulating his sense of honesty.
It reminds me of nothing so much as Uncle Tom, a slave who will not try to run away because he is convinced that it would be wrong to steal from his master.
Don’t get me wrong, if he feels he should walk away I think he should too. I’m not saying there’s any moral reasoning for his decision. They’d do it to him in a heartbeat if they could sooo…
I just think that any bailout should come with the expectation that is done for home ownership and not for investment reasons. Maybe put a lean on such houses that if they are sold within the next 20 years that money has to be paid back to the government or something like that.
And yes, dead communities are going to be a huge problem. Don’t know how to fix that ‘tho..
Yes, Karma. I have a friend who’s a Realtor. She understood it’s an inherent conflict for lenders to use their own appraisers to determine the value of the property and thus the amount of the loan, something she saw more than a few times. It outraged her. But hey, we have Bush government and a corrupt Congress, so this is what we should expect. So what if some dumb investor in Singapore ends up holding the bag, just as long as the financial co. got their big fat fee.
Beside, we were told greed is good! I want more. I want mine! Gimee, gimee, gimee…
Mah Gawd! Someone needs to bail out these innocent victims of a poor economy. ‘Cos if the MBA can’t pay its lease then mortgage companies … jobs … um … lobbying … um … mortgage companies won’t be able to lobby for better bills and as a result they’ll shut down and there will be fewer jobs!
Yeah. That’s the ticket.
I don’t know that any bailout is called for, although the Fed seems to have decided, of its own accord, to bail out the investment banks. The only reason anyone is looking at bailing out anyone else is that now the Fed has set the direction (inflation), they may as well try to cover the losses of all the other parties, too.
The difficult part is that the entire country needs to look the disaster square in the face. Like Fox, we are not nearly as wealthy as we wanted to think we were. Like Fox, we need to realize that we are in debt, and have wasted a lot of good resources, our ‘life savings’, in a foolish attempt to leverage our way in to mega-wealth. And have built a non-functioning community for our children to live in.
We are broke, guys. It will take 20-30 years to build our way back up to where we were in 1997. If we ever do.
Those top 1%ers? A few will lead the way to rebuild us, the rest will decamp for Dubai to join the Russian kleptocrats and soon to be joined by the Chinese plutocrats. The rest of the planet’s people will have no recourse except through non-state sponsored paramilitary aggression. And in 500 years, the historians will look at 9/11 as the first day in the war against the emerging overclass, as religion and American nationalism will seem so incredibly quaint that no-one will imagine people fighting over such a thing.
And the Senate wants to bail out homebuilders. The fact that no one can afford a house either eludes the asshats in charge or they just can’t stand to see their pals suffer.
CLib – Very good observation!
Even though my wife has been in the Mortgage business for over 12 years as a sideline, and I did a year long stint in the business myself, she (and I) never steered clients into those loan products, and for all the right reasons, I’m happy to say. And this was not always easy because during the low rate refinance boom a few years back broke-ass people who were not savvy to the pitfalls of these loans would want these loans, having heard from freinds and family about the deals they got.
The American economy has became a house of cards built on debt. Period. We’re to the point now where if people ever really stopped spending on credit like they do, the economy would grind to a halt in about 6 months. The malls would close, unemployment would be at depression-era levels, and the stock market and the retail sector would be in the tank. Just look at last Christmas, with consumer spending down.
Meanwhile the investor class ships jobs overseas for cheap labor and enormous profits and then hides those profits from taxation, and the fucking idiot Wal-Mart Republicans foam at the mouth and remain distracted by the media and American Idol and who’s wearing a lapel pin or not or who’s got an angry negro pastor in their church, while the rich who get richer by providing and profiting on these distractions, go on nice vacations, buy a second home in Nantucket and a new BMW. Cash.
Look at the 2006 election. Bush never gave a fuck at how his insane policies were killing the republicans in congress vying for re-election. Bush isn’t concerned about loyalty to his party… He’s loyalty is to his class. The haves and the have mores, he’s all but said it himself. Then the fucking numbskull blames it on Rove. Sweet.
Our Sucker Nation. Wait until these fools get a load of the NASCO corridor blazing right straight up the middle of The Heartland with trucks driven by non-unionized forigners, loaded full of cheap goods from the asian pacific rim. While they can’t get a decent paying job.
But hey, why should I care? If the Rust Belt and other areas of the US decimated by NAFTA and globalization wind up eating dog food, and having charlie brown christmas trees it’s their own fucking fault, having swallowed hook, line and sinker the Big Lie that is the phony-to-the-core, hyper religious, divisive line of pure “trickle-down” bullshit that is Modern American Conservatism, complete with it’s Wars, both real and cultural, FOX News, right wing talk radio and all the rest of it. Rush Limbaugh, Coulter, O’Reilly and all the other inhabitants of the nine circles of hell are doing very well these days thank you very much, while many of the morons and dittoheads who listen and watch these assholes work two or even three job to keep their homes. And they can forget about sending their kids to college unless a Democrat gets back in the White House.
My wife and I got hip to this shit a long time ago. We started our own business, a virtually recession-proof business where we actually help people save both money and their sanity, and now we tell the government how much money we make. Our business is about 3/4 of a mile from our home so gas prices don’t hurt too much. We’ve almost cleared our all of our unsecured consumer debt, so fuck the credit card companies and “what’s in your wallet” and what we do still have we rolled into secured debt for the tax breaks, and I supplement our income by making money on the Intertubes. While I sleep.
Moral of the story: If you’re dumb, you suffer.
(thank you for allowing me my sunday morning purge, I’m not really this smug, I’m just frustrated beyond belief over the last eight years)
Well, the first start would then be shanty towns built out of corrugated iron and cardboard on the empty land in the desert. Maybe they’ll have to knock down some of the empty houses in Maricopa to create some shanty space.
Wait tell AGW, loss of habitat (less ‘fresh’ (not just clean) water around the world) and peak oil all combine for the perfect storm over the next fives years. Then, things will get interesting.
The Other Steve
Ok, that is funny.
I’ve been waiting for this (with dread) for years. It was obvious to me that something was very wrong just from looking around and seeing people who I know are drawing middle class wages living the lifestyle (huge house, huge cars, huge TV’s, fancy vacations, you name it) that in my youth was associated with the truly wealthy (i.e. top 1 percenters).
In retrospect it looks like middle class wages have been not just stagnant but in real decline for a generation. We’ve been able to hide this fact for 3 major reasons:
1) Leveraging massive amounts of cheap credit.
2) Conversion of 1-income households into 2-income households.
3) Cheap offshored manufacturing = cheap crap to buy at Walmart, so stagnant wages can be used to buy more stuff which feels good as long as you ignore how rapidly it depreciates in value.
The problem is that all of these are non-repeatable. You can only go to the well once.
#1 everyone with a brain understands now – we’ve reached the end of our endless credit rope, to find a noose tied on and waiting.
#2 – increasing the number of incomes per household. Unless we repeal the child labor laws or legalize polygamy, there isn’t a third body in each nuclear family that can be sent out into the workforce to boost household income yet again.
I predict that under the economic pressures of the next decade average household size will increase as nuclear families fuse back into multi-generational units, and hoo boo is that going to fun! Me and thee and granny can all carpool together to go to our jobs at the local Walmart. Imagine the joy of arguing over who gets to set the “my house, my rules” framework at home. Our local police dept.’s had better increase their training and resources for dealing with domestic disputes.
#3 isn’t going to help anymore, because the collapsing dollar, wage inflation in countries like China, increased transportation costs, and the fact that the low hanging fruit have already been picked mean that you aren’t going to see prices coming down any more anytime soon on this stuff, unless we have catastrophic deflation.
The other problem with buying cheap crap at Walmart is that this stuff falls apart so fast that families which have spent a large chunk of their wages on these things are going to see much of their net worth in household goods slip away like the sand in the upper half of an hourglass. It amazes me how much of the stuff which my parents bought back in the 1950’s and 1960’s is still usable today, but I don’t expect to be passing much of the stuff I can buy today on to my children. It breaks too easily and is designed to not be repairable.
It looks like the various Potemkin village props used to conceal middle class decline are all falling over at the same time.
I realized that the situation was seriously akilter when Greenspan started raving about the benefits of ARMs when the fixed rate was less than 6%. Given that historically the rate has averaged around 8%, there’s something wrong here….I thought of John Law and the mississippi bubble and realized that when in a crunch, gov’t will try to inflate itself out of any debt, with equivalent effects on interest rates. Zimbabwe, anyone?
Me, I’m stodgy and hate surprises. Hence I went for a 15-year fixed rate at less than 6% and 40% down.
Justice?! Angel getting its wings?
Organizations != people.
“The association laid off some employees this year, but won’t say how many. It also recently lost two senior vice presidents to other jobs in the real estate industry.”
The real engineers of the crisis make out like bandits, as usual. They got their huge bonuses, then jumped ship to healthier industries for more huge salaries and bonuses.
It’s only when you think of an organization as a person that there’s any justice here.
This will not work unless you allow three wives like Islam – that way, one always needs the man to take her side against the other two … .
It might be more accurate to say that home ownership is one of the clearest indicators of a healthy economy.
But the foundation has been undermined by wage stagnation and a shift away from the belief that s stable, growing middle-class is essential to a vibrant economy. These problems have been worsened by Bush Administration tax policies, which favor capital gains over wage income, and by Bush’s inability to think about the economy at something higher than a third grade level of sophistication.
Yet it wasn’t by the elite that the pig was elected these “Walmart Republicians’ (as the excellent post by Fulcanelli called them) vote against their own economic interest are the fools that keep the party of hell in power. As the asshole minister said “My flock doesn’t care about jobs, they only are concerened about protecting marrage … . With AO’s like that voting, the terroist don’t need to do anything further to win.
Thanks for the comments… :)
What I don’t understand is that these business and economic ‘giants’ are so stupid as to think that this country will keep consuming while wages are stagnant or declining. They want their stocks and sales to go through the roof, yet they ship good jobs overseas and bring in H1-B college grads that they can pay less than they would have to pay a citizen.
They are decimating the middle class, and people think that they are ‘the’ current middle class when it is actually an illusion. Like what was said above, I have seen people purchase some of the most expensive things that I know that they can not afford, but the home ATM let them fool themselves into thinking they could. They have buried themselves in so much debt that there is not much left to spend on anything else.
Add to this the upside-down mortgages; some from poor financing of an inflated home price, and others from the homeowner who decided to cash out with their HELOC (home ATM). Once the prices declined, many also ended upside-down.
The middle class is what drove our economy during the ‘good times’, and with creative credit people have been able to maintain the illusion of being middle class. Never mind that they are in debt up to their hair roots, at least they ‘look’ middle class!
Bailing out businesses is not going to save the day this time. People are out of money, they can’t sustain the economy any more. The rich have moved so much capital into their hands that the rest of us are left holding the scraps.
And the rich want those scraps too? Because that is about all they have left to take from us. I don’t begrudge the honest person who went out and made their money for themselves. What I do not like is the creation of a wealthy class who is favored over the middle class who built and made this country what it is.
It is the people who got their hands dirty who built this country, not the rich guys pulling strings. Money does not do a damn thing by itself, the rich have to pay someone to do what they themselves can not. Who is more important? The people who own a company or the people who make the company run?
Too often people answer this saying that the people who own the company are the important ones. Nope. The company does not do squat until they pay people to make it happen. The focus is on the business when it is actually the people of the country who make the business what it is.
Businesses do nothing until people make it happen. But our government has done everything they can to favor business over the worker, and in the process they have destroyed the basis for our strong economy.
Sorry for the rant, but I am sick of being on the sidelines watching our country being taken apart, dollar by dollar.
I agree with the rant. The remorseless arrogance and avarice of those who have turned America into a supply-side Sodom and greed-is-good Gommorah is staggering. Hopefully people are beginning to wake up.
I don’t think anybody could have predicted that people would spend like drunken sailors AND covet McMansions AND go to private colleges when a state school would do as well AND pay $100 to see a fucking rock concert AND give business to a TOTALLY bogus company like Starbucks.
We are our own worst enemies.
Thumbnail history: in 1980, Americans had a choice between Jimmy Carter, a man who told them it would take hard work and sacrifice to carry on the American enterprise, and Ronald Reagan, a man who told them they could repeal the laws of economics. Since the American people voted for Ronald Reagan, the United States has run a solid trade deficit (yes, even during the boom years of the Clinton presidency), and a government accounts deficit for most of the period. At the same time, government policies and economic trends generated greater and greater economic inequality.
To make this unsustainable system look as though it worked, American and international governments and financiers engaged in repeated manouevers to keep the money flowing in the “right” direction. First came the Savings and Loan bubble, crash, scandal. Then the tech bubble, where analysts told us the rules of economics had vanished in a puff of silicon, before the resulting crash and scandal brought some of them down. Then, through the Bush years, as the propaganda for the fading illusions of “Reaganism” grew increasingly shrill, desperate and vicious, as nakedy unjust tax policies steadily directed wealth to the wealthiest, middle-class Americans had no way to preserve the illusion, except to tap the value in their houses, leading to the real estate bubble and the latest crash and scandal. This time, most of the pretences have blown away, as foreign governments, especially the Chinese, move in to buy up large parts of the American financial system, and Americans lose their houses and other assets in record numbers.
In this context, Hillary Clinton’s campaign makes a lot of sense. I suspect that intelligent democrats appreciate that in order to make real change, they will have to dismantle large parts of the legacy of Ronald Reagan, and they cannot do that unless the majority of Americans realise how badly those policies have failed them. As Harriet Tubman famously said,
The democratic party cannot save the American middle class until they stop listening to O’Reilly, Malkin, and Coulter, and face reality. To have a democrat in the White House without the support needed to make real change would mean disaster for the party; without real change, the next occupant of 1600 Pennsylvania will simply sputter along as things get worse for the average American. If Barack Obabma can’t win with the head of steam it will take to overhaul the system, then the Democrats would really do better to run Hillary, let McCain win, and let the Rebublicans deal with the unfolding mess. If Barack Obama can’t overcome the slings and arrows of Hillary Clinton, I see no way he can overcome the larger crisis in American public and financial life.
Pople did all those things because of all the people, from Reagan to Bush on downward, who told them they could, they should, and, heck, they had a moral duty to do it. Real estate brokers painted the McMansion as an investment. Governments starved the public school system of money while preaching about the duty of everyone to give their kids “the best”. The rock concert and Starbucks? At any threat of an outbreak of thrift, financial reporters shuddered at the thought that consumers might slow the economy down. The President went on the air in a time of national crisis and told Americans to do the patriotic thing: shop ’til they dropped.
Yes, the average American should have seen through all of this, but blaming them and calling them their own worst enemies leaves the real source of the problem out.
Bingo! We have a winner.
The real contest that matters this year isn’t about just taking back the WH, it is about taking back the MSM too.
If we win the WH but the GOP continues to hold the MSM in a headlock, then the Dems and the middle class will lose, because the financial house of cards will collapse under a Democratic administration, and the MSM will deny that the GOP was responsible, which means our best chance at reversing the policies which created this mess will be lost.
One reason I’m supporting Obama is that I think once in WH he may have some small chance of swinging the MSM over in our direction. The temptation in the MSM for them to get all gooey and mushy and self-congratulatory about the “1st minority president” story angle will be too strong for them to resist, at least for a little while.
With Hillary in the WH I don’t think this will work nearly as well, instead it will be the 1990’s all over again – there is no way the media will cut her any slack at all; their knives will be out from day 2 of her administration.
MBA does publish some reasonably useful stuff in terms of trade data.
And one “charitable” conclusion from this mess you might be willing to arrive at is that these Mortgage bankers weren’t out to screw you per se, but rather that they really believed in the ever-lasting housing market boom. At least that’s one explanation for their willingness to buy an office they cannot afford.
Small comfort, I know. But you see the glass as 99% empty, I see it as 1% full.
Although I have to take issue with their macro forecasts:
Forecasting interests rates and GDPs are all nice and good. But if your name is MORTGAGE Banker Association, would it kill you to forecast, oh I don’t know, MORTGAGE volume or housing prices?
CLib – Great posts, for once I really have nothing to add.