Dodd Blames Subprime Woes on Regulators

[maddezmom]

Source: Associated Press

Dodd Blames Subprime Woes on Regulators

By MARCY GORDON
The Associated Press
Wednesday, March 21, 2007; 9:06 PM

WASHINGTON -- The head of the Senate Banking Committee on Wednesday blamed the Federal Reserve and other U.S. regulators for setting off the crisis in the market for subprime mortgages.

The recent spike in delinquencies and foreclosures among homeowners with the higher-priced loans also was their fault, said Sen. Christopher Dodd, D-Conn. He accused the regulatory agencies of a "pattern of neglect" as banks and other lenders loosened their standards for making home loans to people with tarnished credit during the housing market boom in late 2003 and early 2004.

The regulators' conduct, including encouraging the development of unconventional mortgages that afforded low initial payments but ballooned later on, "precipitated the subprime mortgage crisis that could cause 2.2 million homeowners to lose their homes in the next few years," he said in a statement.

Dodd, who is a candidate for the Democratic presidential nomination in 2008, has summoned officials of the Federal Reserve and several other federal bank regulatory agencies to testify at a hearing Thursday of the Banking Committee.



Read more: http://www.washingtonpost.com/wp-dyn/content/article/2007/03/21/AR2007032101907.html

[youngdem]

1. The biggest fuck up of all was allowing stated loans

What in the hell is so difficult or problematic about proving your ability to buy a $250,000 item with no money down? Why in the hell would someone allow this? I used to be a realtor in Texas and I was stunned to watch when a kid with 590 credit and $3000 in his pocket could get a near zero down loan with stated income.

The great thing about low down programs is it increases home ownership because many people could never save the 10-20% that a typical loan used to require. However, in tough times or in a declining market, the owner has no cushion and no option to sell, because the owner will owe more than what the possible sale price is. No refinancing because of credit. No major upgrades to increase sellability because no money. Just trapped.

[hang a left]

2. I think that the problem here is the ARMs

I know many people in the OC area that have bought new homes with them. Their intention was to refinance in the following couple of years, depending upon an income that was going to increase. Nothing wrong with that.

People that secure mortgages with ARMs that can't afford a traditional mortgage in the first place haven't any business buying a home in whatever price range the home is in.

Also factor in the seconds and thirds people took out on their properties during the current RE boom for tuitions, remodels, cars, vacations, ect...
and the loose lending standards for those. Lots of people are going to be in trouble.

[youngdem]

6. Yes. ARM's are the ignition source that stressed the unqualified buyers

but the problem exists because of stated loans and lax proof of income requirements. ARM's are perfectly safe if capped and if the buyer is vetted properly to make sure they are able to bear the terms of the loan at its cap rate, not the introductory rate, which is what happened. They also would allow a self employed person to state their income (in complete conflict with what was reported on their taxes) and make a loan based on the fact that the buyer with 550 credit can come up with $3000 in loan fees, closing costs and app fees. This is the wood in a pile. The rate adjusting ignited it.

If ARM buyers were better vetted for financial strength, ARM's would pose no threat today because the buyer could bear them.

[salin]

3. a problem both on the regulatory and lender side (per your example)

but also on the societal side - where did we get the idea that we had to buy at a level that even initial payments eat up most of our monthly income? Where did we get the idea that one doesn't start with a modest, small home - or rent and sock money away until one can afford it. I am not that old, but after college I remember being adviced not to live in housing that cost more than 1/3 of my monthly income. That was not possible when I was in grad school in an expensive market - but aside from that time period I have tried to keep to that rule.

[pushycat]

5. Even with 50% down, in '99 we both had to show all financial info

for prior 3 years. How did things change so dramatically? This whole situation appears to be a set up, not 'who could have guessed these people wouldn't be able to handle double, triple payments in 3 years?'. A whole lot of vultures are gonna get fat on fresh real estate soon.

[youngdem]

7. You didn't HAVE TO, you went to a lender who properly showed you the best product

A reputable lender will show you the cheapest loan product for you, based on your creditworthiness, cash on hand and the value of the asset you are purchasing. So, in 99 you could have gone to a mortgage broker and said that you wanted to buy WAY too much house for you (read 33% and up of total available income) and ask him to assist you in getting a subprime or stated loan. But you didn't because you didn't need to. Also, your ENORMOUS down payment was not necessary (unless it was to meet your payment goals) and some would consider inadvisable to ever pay more than is necessary to avoid PMI because you could invest the money yourself for a better return than the zero it is getting at your bank as a down payment on your home. So, nothing has really changed except that as the market became higher priced and debt ratios made it harder to get the average buyer into the average home, more exotic loan products were used to shoehorn less and less qualified buyers into the average home. Finally, we reached a tipping point where the new buyers were such bad risks and the loan products that it began to CAUSE defaults.


Back when values were moving up, there was little risk in hot markets for making stated loans because a foreclosure exposed little risk because the properties would sell for more than the loan value at the foreclosure sale. Conditions like that make it VERY tempting - almost irresistible - to lenders to make as many loans as they can because the exposure is so low.


ARM's are a total set up because most people aren't math majors and assume that a 1% or 2% increase in their rate would mean a little more but not a lot. They don't realize what the cap rate can truly mean for their rate. Considering this fact at the same time that wages are falling against inflation, that food, electricity, insurance, property taxes, contractor costs ALL are heading up eating up all remaining disposable income it becomes clear that we are really at the very beginning of this crisis.


Millions more ARM's and stated loan financed homes will be hitting the market soon after foreclosure is performed. By tightening the lending requirements now, Fannie Mae and Freddie Mac are also removing millions of homebuyers from the market, who previously would have owned homes (not to mention the millions of homeowners who went through foreclosure who can now not buy a home for a few years). Now the market is gonna have millions more homes for sale and millions fewer buyers. Not to mention the panic effect leading many to try to sell their homes even if they aren't in trouble so they aren't stuck, further crashing the market. Days on market will skyrocket for the average listing, and there will be few 'predatory' investors out to rescue them. Why buy?


The net effect is going to be price crashes in many markets (north of 40%) and a vicious cycle happening causing more foreclosures because buyers in trouble are not able to sell their homes to get out of trouble because of crashing values make selling a 3 year old home for the loan balance impossible for the homeowner.

Silver lining? Middle class and upper middle class family rentals in good school districts are gonna see a HUGE increase in occupancy, rates and building. We are already seeing it here in NOLA.

Solution? Congressional action to incentivize renegotiating loans nearing default to protect market values and stability and to keep people in their homes. Tax funds will need to offset this, but it is far cheaper to do this than it is to do an S&L style bailout in 36 months for tens of billions of dollars after the average american has lost 30% of value on their home.

We are gonna all be paying for this.

[fed-up]

4. they're called LIAR loans-cuz loan agent would wait til signing to tell borrower it would adjust

two years down the road

In my case it wasn't until the day I went to sign the papers that the slimeball loan agent upped the rate 1/2 percent and then dropped the bombshell that it was only fixed for two years. I managed to get them to only raise it 1/4 percent, but signed anyway as I really, really wanted to payoff my cc debt incurred when I was ill. There was NO discussion on the part of the loan agent as to whether I would be able to afford the increase in interest.

At least I had 50% equity in my house when I signed and did manage to sell my house within three months of the switch to adjustable last Nov.

I was one of the very lucky ones...I bought down and am now mortgage free which is great as I have severe degenerative disc disease, am in constant pain and am living on very little income.

[Goat52a]

8. Only the tip of the iceberg

With the credit card companies, the home equity loans and the Bush's stringent new policy on bankruptcy, the only winners here seem to be the rich, who continue to grow richer. The credit card companies can charge usually high interest rates (boarding on usury), even though they approved the credit for people who really didn't have the know how to use it wisely. Taking advantage of the ignorant seems to be a major profit gain, which Congress seems to bless. So much for the great economy, of which only 13% of us can truly benefit from...