Sunday, November 18, 2007

The Mortgage Crisis, Part 1

I happened to see that last Friday's episode of the "Now" program on PBS had a segment on the mortgage crisis. Normally this program is far too liberal for me, but I decided to see what they had to say. Here are a few notes:
  • Potential loan losses of $400 billion, twice the S&L crisis, before this is done. (Although I presume this is not adjusted for inflation. A wild guess would be prices have doubled since then, so in that case these losses would be equal to the S&L crisis.)

  • Housing prices projected to drop an aggregate $2 trillion across the nation.

  • It was reported Countrywide sales reps made up income numbers to help close loans. They often didn't even ask the borrower what his income was.

  • An ex-Ameriquest sales rep said they routinely forged documents to inflate income. They were told "say anything, do anything, to get the sale."

  • Borrowers were told they could refinance before the rates went up, but when that time came, something prevented them -- such as high prepayment penalties, falling property value, a blotch on the borrower's credit record, etc.

  • Lenders would not negotiate payments -- not accepting, for instance, a series of payments throughout the month which would equal the payment that had been due at the first of the month. (Of course they don't have to, but hey, it would be better than foreclosure. I'm reminded of Biff knocking on George McFly's head in "Back to the Future," saying "Hello, anybody home in there?")
My take on this is there's blame to go around. Some or many lenders played fast and loose, the investors bought the repackaged loans without sufficient due diligence, the credit rating agencies assured the buyers the loan packages were safe, and the consumers didn't pay enough attention and didn't do budgeting. Many violated the precept of not signing anything you don't read and understand, and many violated the precepts of having a good-size emergency fund, and not putting yourself out on a high-risk limb.

Many borrowers also had inferior credit (the very definition of "sub-prime"), without which they wouldn't have been going to these lenders and paying elevated interest rates in the first place. And that doesn't speak well of their native financial management skills, does it?

This shows the necessity of being financially well-informed, and conservative (even reluctant) when taking on debt. It's been commented that many people spend more time analyzing the purchase of a wide-screen TV than their mortgage, when the latter is far more important. If you don't do your homework the result is all too predictable.

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