The march of the dummies continues on.
Here’s my big beef about Fannie Mae and Freddie Mac. They’re both quasi-government organizations.
Whoever is running the place, doesn’t really care about the quality of their performance.
Here is my first-hand experience as a real estate investor.
In the spring of 2007, a friend of mine turned over her house to me.
To make a long story short, a tragedy in her family left her with a huge mortgage she couldn’t afford.
She tried to sell her house for a year to no avail, so she got a $25K second mortgage from Countrywide to fix it up.
She then went to hire a new agent, and it sat for 6 months. No offers. No one could afford it.
At this point, there was nothing in it for her, so she was simply willling to walk away. I offered to negotiate a short sale with the bank, which in this case, was Fannie Mae.
My partners and I were able to negotiate down from $350K to $225K. Inspite of the fix-up, there was a lot of mold in the attic and all over the beautiful cedar siding.
However, Fannie Mae demanded that Countrywide should get no more than $1K from their 2nd mortgage.
But after months of haggling, endless phone tag games, and case reassignment, Countrywide wanted $5K.
As it turned out, it was fairly normal for each loss mitigation agent to work on 100 mortgages concurrently. You can just imagine how a $25K loan can easily get lost in the billions of mortgages that Countrywide owned.
In the end, the entire deal fell apart by the summer of 2008. The house has since been vandalized (since it was unoccupied), and its value could easily plummet another $100K within those long 15 months of haggling.
Had Fannie Mae looked at this case with some common sense, they could have cut their losses by accepting $225K. We had a buyer willing to pay $250K. Subtract the $5K for countrywide, and a profit of $20K for my partners and myself. My friend would have been saved from a foreclosure record on her credit score.
Everyone would have walked away with some benefit.
As of today, I would be surprised if the house can fetch ‘as is’ for $150K at the county’s foreclosure sale. This would completely wipe out Countrywide. My friend would now be forced to file for bankruptcy, and my partners and I would get nothing at all.
What’s wrong with this picture?
Can you see this scenario happening thousands, or hundreds of thousand times throughout the country?
Watch out for part 4 tomorrow.
Technorati Tags: Fannie Mae, foreclosures
While I talked about the Wall St dummies yesterday, the financial cancer started on Main St.
The investment bankers in NY became addicted to their greedy behavior. Some of these actions even border on criminal.
While Washington D.C. was wrangling about the bailout bill, something else was going on in the other side of the country in Seattle. Washington Mutual (WAMu) became the biggest bank failure in US history. It might be representative of how this financial disease started.
Kerry Killinger rose up the ranks since 1982 until he became the CEO in 1990. He engineered WAMu’s numerous acquisitions, and was responsible for growing the bank into the largest savings and loan institution.
For the past 2 decades, WAMu adapted to the market and came up with innovative products and services. In the process, it transformed itself.
Their primary product turned out to be the home mortgage and the firm became the country’s top bank in servicing mortgages.
Target: Lower-Income Borrowers
Killinger came up with an innovative idea of “the only mortgage loan you’ll ever need”, and he focused on lower-income borrowers.
This loan mortgage, called the Option ARM provided flexibility and allowed the borrower to choose how to pay their mortgage, every month as follows:
- minimum - during lean months, it allowed the borrower to keep more cash. However, this is not enough to pay for interest, so the total loan balance grows over time.
- interest only payment - outstanding loan balance remains the same
- regular payment - both interest and normal principal payments are covered
- accelerated payment - allows the loan to paid off sooner; i.e. as in 15 years - saving the borrower from interest costs
Unfortunately, human nature takes over and most people tended to stick with option 1.
Perhaps the borrowers were hopeful that the value of their homes will keep on increasing to cover the growing balances in their mortgage.
Meanwhile, the loan officers, responsible for approving loan appliactions, were driven by the commissions and fees or other corporate business goals that Killinger had established.
Sure enough, mortgages started to default, especially after these Option ARMs adjusted their interest rates.
Irresponsible home buying? Probably.
I’m sure some people were having high hopes of buying more house than they can really afford. After all, It’s easy to “forget” that the low interest rates are temporary. Or was it that they were wishing that it would last forever?
Other people, who had extra money, were simply speculating. Some of them even pulled out their assets from the stock market, and bought 2nd or 3rd homes for investment purposes only.
Of course, there are the normal responsible folks who got caught in the tidal wave of mortgage defaults; they needed to:
- relocate for a job, or
- sell because of a death in the family, or
- downsize because of job loss
- pull the house equity in a divorce situation, etc.
These people paid their mortgages diligently, but they had a very legitimate need to sell their homes.
So it didn’t help with…
…The Rise of the Predators
Predatory lending? Most likely.
You see, loan officers should know better. They needed to be on the lookout for people who cannot really afford the homes they were buying.
They needed to watch out for market trends and assess the risk of speculative buying. They needed to assess the job stability of the home buyers.
Who came up with the “no documentation” loan anyway? It simply means that the loan officer can take the word of the applicant, with regard to his/her financial resources.
Wasn’t that a dummies idea or what!?
Unfortunately, there was too big of a carrot to pocket the loan fees, and not a big enough stick to be careful when approving loans.
So why this imbalance between the lender’s carrot and stick?
Watch out for part 3.
So as of this writing, the stock market has been going thru a roller coaster and ended up on the negative side even as the US Congress approved the bailout bill.
The world markets reacted in unison both in Asia as well as in Europe, while some of the European governments plan a similar strategy to bailout their own financial institutions.
Perhaps the only good news is that oil prices are plummeting as well.
It’s interesting to note that there were 2 news items I came across just this past weekend.
- CBS’ 60 Minutes - The Wall St Shadow Market
- A feature article on Keller, the ex-CEO of Washington Mutual
The Shadow Market talks about Jim Grant’s interpretation of what really happened. He’s the editor of “Grant’s Interest Rate Observer”, and is considered to be on the country’s foremost experts on credit.
In simple terms, there were 2 things that the investment houses did:
- Packaged the mortgages into complex paper investments.
- Offered “credit default swap” as insurance to back these paper investments.
Investment Securities Gone Wild
Physicists and other math geeks (hired by Wall St) created a complex formula to package both regular and subprime mortgages into unintelligible paper investments.
The intent of the formula was to minimize, if not eliminate risk. Each of these papers, literally consisted of hundreds of pages of small fine print, and were traded to other banks worldwide.
For whatever reason, a critical mass of the “smart bankers” throughout the world, bought into the idea that the US real estate market was going to skyrocket forever.
The Darker Shadow of “Credit Default Swaps”
To sweeten the deal, the same investment houses offered a “credit default swap”. This was a carefully worded term to avoid a label of “insurance”. The purpose is to get paid, in case the investment paper fails.
Wow! Talk about the used car salesman, selling you a guarantee against defects, on a car that is a lemon to begin with!
The problem is, the term insurance was avoided, in order to avoid regulation.
Regulation that would have required the “credit default swap” to be backed by real money. Since it wasn’t labeled “insurance”, there was no regulation to require real money behind it.
So the investment bank dummies … I mean dominoes, fell as soon as the over-spending US homebuyers started defaulting on their mortgage loans.
Tomorrow I’ll talk about Part 2 of how the mortgages started to default.
In a stunning development, the Dow Industrial Average plummets 777 points, even before Congress voted against it by 228-205.
What does this mean to all of us ordinary folks who depend on our paychecks or run small businesses?
How much of your spending is made via CASH vs. CREDIT?
The more credit-dependent you are, the more painful it is going to be for you.
However, even if you are a 100% cash-spending person, you will also be affected. Chances are, you probably buy groceries from a store that relies on credit.
At the same time, you might have customers that use credit to run their business, even if you DO NOT extend credit to them.
Either way, the economy is going into shock. Maybe cardiac arrest, but I do not think it is going to die from heart attack.
People will spend less on things like restaurants and cell phones, and vacations. The economy will definitely slow down, and a lot of businesses will have to close shop.
You, as a consumer, will have less choices.
Recovery from this event will be long and hard. But after we get through this; we as a society, will do much, much better.
I don’t know what Bush/Paulson/Bernanke are going to do next, but everyone should brace for a financial tornado in the coming years ahead.
Regardless of what’s going to happen - stop your credit lifestyle - and just hang on in there.
I’m surprised that none of the mainstream discussions talk about the HOMEOWNERS! Not the media, not the presidential candidates, not Congress, not the White House.
http://allison-linnmsnbc.newsvine.com/_question/2008/09/22/1897791-whos-to-blame-for-the-current-economic-crisis?GT1=43001
Listen up people! When you signed those mortgage documents, you knew what your monthly payments will be for the next 30 years.
Even if you signed up for an adjustable mortgage:
1. you understood what the consequences of an adjustable are, and
2. interest rates may have gone up, but your payments double? Give me a break, there’s a cap on adjustments.
With a few exceptions, like:
- those who are forced to relocate,
- job loss (last I checked, unemployment is still relatively low for most of the country);
- medical bills,
- death in the family
- etc. i.e anything else UNFORESEEN;
everyone else should face the MIRROR!
None of the exceptions above are big enough to take down Wall St.
If you’re going to blame the bankers - then you have no business buying a house. I still haven’t heard of a case where the underwriter held a gun to the mortgagee’s head.
The greater majority of the people were either speculators throwing the dice, or trying to take advantage of the low interest rates.
I don’t like unhealthy credit. But over the years, I have come to realize that “no credit check loans” have their place under the sun. As always, I fully support the wise, responsible use of healthy consumer credit.
However, the growing “culture of debt” encourages us to cast caution to the wind and do so beyond “keeping up with the Joneses.” We’re supposed to want to leave them in the wake of our financed-to-the-hilt luxury speedboats.
But What Would Jesus Do? He’d sell bracelets, right? Then, using the post-charity profits, he might launch a campaign to shut down no credit check loans companies. Because they’re an obvious modern-day incarnation of Jewish temple moneychangers… right?
Arizona Daily Star reporter Stephanie Innes and the Arizona Ecumenical Council apparently believe that they are, but I emphatically disagree. Before I get to that, however, let’s get some background.
Proposition 200 and the Ecumenical Argument Against Bad Credit Payday Loans
Proposition 200, also known as the “Payday Loan Reform Act,” was designed to cut loan fees, establish flexible repayment plans, regulate Internet lending and reduce the number of storefront loans for people with bad credit in the state of Arizona.
However, the Arizona Ecumenical Council and opponents say it’s “deceptive.” They claim it would allow lenders to continue to do business in Arizona beyond their previously designated 2010 sunset year. Moreover, they would be allowed to maintain current interest rates, rather than being capped at 36 percent.
Yet it is apparent that the Ecumenicals’ main objection to payday loans with bad credit in Arizona is that the lenders “are banking on people not knowing the difference between a fair loan and a rip-off.” These lenders, according to the religious group, should be thrown out of the state, just like the moneychangers were ejected from the temple in Jesus’ time.
Hapless Arizonans, the “good folks who are struggling to survive and build stable lives for themselves,” are victims in the minds of the Ecumenical Council.
Innes goes so far as to say this:
“It’s kind of hard to say anything good about an industry that follows a philosophy of greed and feeding on the most vulnerable people in the community – those who receive regular paychecks but still can’t make ends meet.”
Biased Reporting and Scriptural Shenanigans Look to Build Their Case
To say that Innes presents this story in a slanted light is an understatement. Seriously, how unbiased does it sound when a reporter writes, “For the money changers’ side of the story, (look here)?”
At what point did running a business that earns a profit become ethically or morally wrong? An honest and profitable business is not the same as extortion.
According to the federal Truth in Lending Act of 1968, lenders are required to disclose all key terms of the lending arrangement, inclusive of all costs, and to disclose the annual percentage rate (APR). The APR is reflective of the entire cost of the consumer credit.
It is important to note that the payday loans for bad credit industry takes significant steps to inform consumers of not only the costs and terms of taking out a loan, but also encourages personal responsibility.
Lenders make it clear that their loans are intended for short-term use. They do not replace proper budgeting.
No Credit Check Loans Don’t Replace A Nice, Juicy Budget
Nobody is being taken advantage of here. When Jesus busted up the moneychangers’ operation, He did so because He took offense at the moneychangers’ extortion of profit.
Pilgrims exchanged their Greek and Roman money for Jewish and Tyrian money, which were the only coinage the temple accepted.
This is not equivalent to payday loans with no credit check. Consumers are being given money, with the expectation that it will be repaid later.
In addition to covering costs, a business has to collect some form of profit if they are to continue to exist. Lenders are no exception. Profit in this sense is not evil, but capitalist and American.
If we are to assume that money changing is evil, then forget about traveling to a foreign country for vacation.
Since the Euro is worth more than the dollar, are foreign banks and businesses that convert your money instruments of Satan if you aren’t getting the better of the exchange? Since the peso is worth less than the American dollar, are Tijuana tourists being exploited in a manner similar to their less legal migrant countrymen and women when they do business en El Norte? As you see, it’s all a ridiculous idea.
Stop Painting No Credit Payday Lenders with a Broad Brush
Even if some bad credit payday loans companies do play dirty pool, it’s categorically unfair to classify the entire industry as predatory. There are well-known organizations like the Community Financial Services Association of America who work in concert with established federal laws to promote responsible regulation of the industry.
In much the same way, not all Christians are morally upright citizens, but that doesn’t mean that it’s rational or fair to label all Christians as dishonest backsliders. There are always exceptions. People are people.
A Spoonful of Responsibility Makes the Medicine Go Down
Personal responsibility is the key to using any type of payday loans no credit check. Just like it says, it’s a personal choice. I believe in more choices; it means more freedom. It is supposed to be used as a matter of last resort.
After borrowing from your mother, and cousins and neighbors, and your children … and all of a sudden the car breaks down! Now what?
Your credit cards are maxed, and your credit scores are shot due to medical bills you incurred a few months ago.
Where else would you expect these responsible people to go, to get their cars fixed?
On the other hand, getting a cash advance to buy a new set of shiny custom wheels, so that you can impress your neighbor or your date … that’s an entirely different story.
I cannot make a judgment of ALL the lenders in the payday industry, because some of them would be bad eggs, while others are just as honorable eggs as your local fastfood franchise owner.
Although one can argue about the quality of the food most of them serve (e.g. French fries and soda).
Using the same type of improbable leap of logic the Arizona Ecumenical Council uses to compare these lenders with the ancient moneychangers, let’s bust Ronald McDonald, the Burger King, Jack, Wendy and all the usual suspects.
Why? Because the sugar in products like their sodas are more addictive than cocaine. That clown is worse than a drug dealer! And don’t be fooled when they switch to Splenda, either, as it has much in common with DDT, a synthetic pesticide. Let’s squash that bug right now.
Be Responsible and Make Good Decisions When Using Bad Credit Payday Loans
I don’t exactly remember, but I must have been in a fast food restaurant probably once in the past six months. In general, I avoid them for health reasons.
However, there are occasions when I don’t really have a choice about going, so I always try to make the healthiest selection I can.
In the same way, with no credit check loans, consumers have a choice.
Fast food restaurants will provide nutritional information on their food upon request, but the lending companies provide information without being asked. Lenders want customers to know the details about their product so that they can make their own informed decision.
Isn’t that responsibility?
Check Out: No Credit Check Loans for Responsible Consumers!
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