I feel sorry for people that got into this mess, but it bears saying: You made your bed, now lie in it. People must be responsible for their actions. Over the course of 2004-2007, quite a few people I knew felt the need to buy these houses that they were barely able to afford. They laughed at me for renting, telling me I was throwing my money down the drain and that I should buy now because everyone was doing it. Fast-forward to today: My wife and I own our home, paying $70 a month less than what we paid in rent for our old apartment with a fixed-rate mortgage. I still can't comprehend how people could willingly sign up for such a thing. Did they really think that their interest rate would be lowered? Plain and simple thinking, people: Banks are a business, not a charity. They exist to make money.
The average American isn't exactly a paragon of intelligence. I understand the temptation to smugly look down upon the masses of retards that had their houses foreclosed upon but it is intellectually dishonest to treat the situation as that black and white. There are dozens of small advantages that most of you were probably born into such as being white, having two stable parents with consistent jobs, being raised in an area that isn't a total shithole, etc. The assholes who borrowed disgusting sums of money to fund their McMansions are obviously reprehensible, but as far as I know they comprise the minority. Consumer responsibility is critical but with the shear immensity of impossible mortgages and subprime loans our banks were pimping out it comes as no surprise that the average American (IQ 100) might not understand the economic ramifications of making such a huge commitment. Our society is far too complex to arrogantly attribute the recession to a single factor (i.e. POOR PEOPLE ARE ALL LAZY FUCKERS RAHHH). Empathy people! Focus: Been foreclosed? Skipped out on the rent? Tell your side of the story. My next-door neighbors. They have a severally mentally, and somewhat physically handicapped daughter, and moved into our neighborhood because it was close to a special needs school that would give her a better chance of succeeding later in life. After seven years of living in said house the recession comes along and *poof*, the father’s job is gone. It’s really fucking sad.
I'm going to ruffle some feathers here but you are two examples of exactly what pisses me off. Anyone who signs up for a variable rate mortgage at a time of record low interest is an idiot. The word variable, for your information, means by definition, that your interest rate will change. When rates are at an all-time low, where do you think they will go? Up, perhaps? It is so basic you make my head hurt. Wicked, have you not heard of a home inspection? Trees don't grow all that fast - if the tree was damaging your home it would have been evident when you moved in, and your home inspection should have noted it. If you looked carefully you probably could have seen evidence yourself. And I have no sympathy for someone who buys a house that suddenly loses value. There are no guarantees that the value of ANYTHING will stay the same, or even increase. If you bought the house as an investment, then you should have taken your lumps. If you bought it to actually live in, you signed a contract to pay a given amount, and it was your responsibility to pay that amount. I have no doubt that if you went an extended time working without getting a paycheck you'd be pretty pissed off, and that doesn't even involve a legal document. No one said that there is only one factor involved. Certainly the banks, mortgage companies, investment firms, and rating agencies were to blame as well. And as for the folks Politik mentioned, they obviously were dealing with more than most. But let's not be fools here. I bought a house for far, far less than the lenders were willing to give me, and certainly less than I could afford. And I live in an expensive area of the country (NYC suburbs in NJ). I signed a traditional, 30 year mortgage - no balloon payments, no variable bullshit, no interest only carrot on a stick. My job could go tits up tomorrow and it wouldn't affect my living conditions. It's called planning a head and using your brain. And maybe, just maybe, those folks who are too ignorant to understand what they are getting themselves into shouldn't be signing mortgages in the first place. There is no constitutional right to owning a home. Fuck, I'll get off my soapbox now.
The way it was explained to me was that there would be no federal guarantee without a minimum quota of NINJA loans, and that bigger institutions suffered when they securitised the loans, which then went bad and Fannie and Freddie refused to guarantee them because of the scale of what was happening. Corporations then found that the asset they'd purchased was worth spit and unable to be sold.
Even if rates AREN'T at an all-time low, you are still accepting a very real risk that they will go up anyway and you will be left holding the bag. Someone please explain to me: What was Plan B for all these people? If someone had taken them aside before they signed their loan docs and said "Now folks, this is just a formality, but I'm wondering...and really the odds of this happening are super slim and I don't mean to worry you, but I'm just asking because I have to...what are you going to do if your house payment doubles in a few years when the rate adjusts?" I'm guessing that most people had no Plan B because everyone who did this was in massive denial. The second shocker for me was the no-doc/low-doc loans, many of which were also variable-rate. Look I understand that Joe Freelance Hotshot $500/hour Consultant who pulls down $600K a year should not be precluded from buying a house just because he doesn't have a W-2. But how many Joe Consultants were taking advantage of this vs. how many people that simply could not afford the house they were buying by any reasonable metric? The third thing that befuddles me is this: why in the fuck would you trust a bank or a lender any further than you could throw him/her? Do you trust the used car guy? Do you trust the guy on late-night TV that has Natural Cures THEY Don't Want You To Know About? I dunno, maybe you do. If you do, you're clinically brain-damaged. If you don't, why in the fuck would you trust anything a lender told you? The final insult is that all of us who realized this was a massive clusterfuck and stayed as far away from it as possible got fucked ANYWAY. People who did deplorable shit like buying houses they couldn't afford, walking out on mortgages, and pump-and-dumping the real estate market all made out BETTER than the people who kept their heads down or got legitimate fixed-rate mortgages they could actually pay on. Why shouldn't those people all have been forced to fight each other, Thunderdome style, for the best spaces to live under the local bridge? Why should they not have been forced to create a cannibalistic society scavenging the garbage of the sensible people who bought up their houses for dirt cheap after they were kicked out?
For all of you Harvard economists who saw this recession coming from miles away...did you try to spread the word? Like, warn your friends and family and shit? Serious question. (If so I will respectfully bow out)
Uh, yes? It's hard to say, in that I didn't specifically warn anybody off from buying a house they couldn't afford. Mostly because I didn't hang out with anybody that tried to do it. Most of the people I hang out with independently realized that buying a house you couldn't actually afford was a bad idea, regardless of what any banker was saying. I knew three people who bought houses they could afford during that time with traditional fixed-rate mortgages. A buddy of mine bought his first house at the upswing and made a couple of lateral moves over that period, but since he was selling one house at a ridiculous price and buying another at the same ridiculous price when he moved it all worked out. His girlfriend bought a condo right at the upswing and stayed in it. After the downturn her condo is probably worth a little more than it was when she bought it, but in the interim it would have been going for a lot more. An ex-girlfriend of mine rented until the shit started hitting the fan and bought a house on a traditional fixed-rate mortgage on a short sale for $180,000 less than the previous sale value. Because of the short-sale, she got jerked around by two different banks through the whole process and they were trying to squeeze money out of her on the last day of escrow, literally. Looking on Redfin, there are two short sales in that same tract going on right now for about 10-20% less than what she paid. So her house has probably lost some value, but not much. The exception to this was a newly-married couple; my ex-girlfriend's brother's fiancee's brother and his wife. I didn't know them well. He was a substitute teacher making peanuts and she was the breadwinner working a managerial IT position and making in the low six figures. They both had student loans and car loans and the works. Anyway, they decided to buy a house they could not afford on an adjustable-rate interest-only mortgage. Then they decided to have some kids, which put her out on maternity leave, which added some pressure. He stopped subbing to become a stay-at-home dad at the house they couldn't afford with the kids they couldn't afford. When it became clear they couldn't afford the house they were in, they decided to downsize and bought a slightly less expensive house that they still couldn't afford before they had a firm offer on the old house. They were able to do this thanks, again, to the miracle of interest-only mortgages. Surprise surprise, they couldn't sell House #1 for like six months. In the end, I think they ended up fucking up their credit utterly, taking a bath on the first house (which in practice meant their parents did because they hit up Mom & Dad for the cash), and then were living paycheck-to-paycheck in House #2. I distinctly remember at the time discreetly asking my girlfriend and her brother what the hell these two were thinking. The answer was that they basically weren't. They just assumed "everything would be OK." After all, who wants to let responsibility get in the way of important life milestones like buying the perfect house and squatting the perfect pair of kids? Had they not had parents with $100,000+ (in cash and credit) to loan them, they probably would have foreclosed on both houses, fucked up their credit worse, and be renting somewhere now, looking for somewhere to buy. Sadly, they would not be living under a bridge like they should be.
There's a big, big difference between realizing 'This finance model is stupid and has to be some kind of scam, fuck that noise' and realizing 'our economic state is so heavily predicated on these scams that when the ass falls out, we're all going to be living on unemployment insurance and cat food'. I think a lot of people realized the former - but very few people realized the latter. Personally, I made a bunch of mistakes. I made a lot of money young, and my debt was was far in excess of my maturity by the time I was 22. Then I tried to be mature and responsible, and bought property with my Dad. I then believed 'financial advisers' who worked for credit providers and advertising material and ended up in a financial position that was pretty damaging - but with enough equity in my home that I could roll it all up into a consolidation loan as part of my mortgage and treat the whole thing as an expensive but manageable lesson. Some government decisions going against my interests, some advisers who didn't act, then did the wrong thing, the GFC dropping my income through the floor and my asset value even further than the government's decision about where to locate a busway, and some family issues moved it from manageable lesson to soul destroying cluster fuck. Depression problems that I had when things were stressful but manageable became debilitating and crippling and a failure to act on my part was a large part of the problem - if I'd been better equipped to process the whole thing and deal - I probably could have taken less of a beating - but I went from something like half a million dollars worth of assets and something like $200k worth of debt, to $60 or $70k worth of debt and some personal goods that have a fairly high replacement value - but very little resale value. At some point fairly soon, I'll have to stop putting it off and just go bankrupt. And then at almost 30, I'll own roughly as much as I owned when I was 19, earning roughly the same amount of money - but with a credit history you wouldn't touch with a barge pole and some govt mandated retirement savings I can't touch for another 35 years. Hell, at 19 I had stock options that I thought were worth the paper they were printed on - I thought I was going to be rich. Now I'll just be happy to not be screwed. I recovered enough money disposing of the house to pay off my share of the mortgage and get clear of that, but all the money we spent on that house was effectively lost. It's a hard thing knowing that if I'd acted sooner to try and manage my shit - I'd be $200k or $300k better off than I am. And it's entirely my own fault. Of course I blame an asshole financial adviser, and to some extent my father also - I could have been much less thoroughly fucked, and they'd be in an essentially identical position if they'd done things just a little differently. But reality is that the the vast majority of the fault is mine, and I'll still be dealing with the fall out from those decisions at 35, and probably only just clearing the tail of them at 40.
Long story which is not particularily interesting, but I'm bored. You've been warned. Mine is not a story of an economy going tits up and unscrupulous, greedy players. It's simply a story of shit happening and a brief bout of common sense that saved the day. 8 years ago we (myself, husband and a 13 yr. old) were fortunate enough to come into a significant amount of inheritance money; enough to pay our debts off and put a down payment on our first house. This is where I switch to "I" and not "we", because I made all the important decisions in the family. I have always had no regard for money. I can't be bothered caring about it or managing it. I just make it and live and it'll sort itself out (obviously not an ideal financial plan - I never said I was good at this). It was time to house shop! I grew up poor in a large family and had never, ever lived in a single family dwelling. Dad was military and we lived in the PMQ's, a three bedroom half duplex, with 5 kids and 2 parents. That's one small bathroom for 7. This is where I made the single best financial decison of my life. While we qualified for a McMansion in the burbs, I chose to buy a modest, 40 yr. old, 1200 sq.ft. bungalow in a great neighbourhood. I put a full 25% down on our little home and kept our mortgage payments small. Sure, it would have been fun to show off the new house, with it's 5 bedrooms, 4 bathrooms, monster ensuite, chef's kitchen and a 3 car garage (and our neighbours in their cookie-cutter house that's pressed right up against ours, but don't get me started). But put simply, it was just far more house than we needed. I couldn't justify that opulence just for ego purposes. Flash forward 3 yrs. and my world crumbles...I lost my job and I went into a complete tailspin. I didn't work for a few years, exhausted all avenues of credit and lost everything, except my house. The payments were low enough that the husband's income was just barely enough to keep up the mortgage payments and keep us afloat, until I gathered myself and started contributing again. There were no extras for things like haircuts or movie rentals - it was that close. The moral of this story is that North Americans have some kind of entitlement complex that inflates their own importance in this world. Huge, fancy houses for little families, is ridiculous. What ever happened to kids sharing bedrooms, bathrooms and having a commom space to all hang out in? Perhaps the family unit would be stronger (and then society), if they were forced to breath the same air, instead of hiding out in their "wing" of the house, with an iPod in their ear and dinner left in the fridge to nuke. Ooops, getting off-topic and ranty now. I'll stop.
I don't think people truly understand how tenuous financial markets can be, by necessary design. So much of their operation revolves around confidence. First, take publicly traded companies. What happens when there's a nasty rumour or some bad press? Their stock goes down. That's confidence at work. Then, when a run starts to happen it generates its own impetus as people sell out to avoid taking a bath in the fall. Now, add banks. Here, at least, they're publicly traded companies. Next, realise that when you put your money with a bank, they don't put it in a box out the back with your name on it and wait until you want it. They use it. Often they will use it for a locked in term so they can make money off your money (and not share it with you). The government will mandate a cash reserves holding level. What that means is that they must keep a certain percentage of their holdings liquid so people can withdraw funds from ATMs/over the counter and so on. When the confidence in a bank plummets, everyone wants their money back. When the bank can't cope with that because of the exhaustion of their liquid reserves, you get trouble... and possibly riots. That I know of, it's happened a few times in the UK over the years. The government then generally has to step in and bail them out for the sake of peace; this costs money. All because of mass hysteria over something that may not even be real. Then, there's the expectation that facilities will be able to be rolled over. A bank may borrow bulk international funds to bankroll its lending operations. They may be, say, subject to a 90 day rollover/renewal. If the confidence drops in that bank, or they're in serious trouble, their lender may not renew the facility. They then call in the money owing, which the bank does not have. Cue a collapse. The bank is insolvent*. It may have sufficient assets, but they are not liquidated to pay their debts. An insolvent bank is about as popular and useful as a leper at an orgy. The same, to a degree, runs for governments. This is why there's such a big concern when there's talk of downgrading a country's credit rating from AAA. It's not so much their ability to find new funding (but is relevant) as it is the fear that their existing debts may be called in. *For those that don't know, insolvent is where an entity is unable to meet their debts as and when they fall due.
You can not say that one specific thing caused the crap sandwich mess we are in right now, it was a number of things. There were a lot of people who 3-5 years ago signed up for adjustable rate mortgages (ARM), those mortgages were/are tied to the 12 month LIBOR for the index and had a margin of around 2.45% so if your loan was to adjust this month it would be index+margin=rate. Currently the 12 month LIBOR is .7644 so some quick math would tell you your loan rate for the next year would be 3.184% which is lower than the initial ARM rate they started at. Now in fairness most of those loans had a floor that it would not go lower than. Most of the FNMA and FHLMC ARM loans from the last 7 years would have adjusted down and not up. There was another group of people who wanted the lowest payment they could possibly get, and a lot of them signed up for an Option ARM. In short the option ARM offers 4 different payment options, the first one is the teaser rate that was based on either COFI (cost of funds index) or the LIBOR (london interbank offered rate) this rate was give to the borrower for a year or 6 months then after the teaser period if the borrower chose to make this payment they would have negative ammortization meaning their principle balance would increase, the second option is to pay interest only, the third option is a 30 year fixed, the fourth is a 15 year fixed. There are probably about 2% of the people who got those option ARMS who can explain what they got and that is both the fault of the borrower and the banker/broker, and of the banker/brokers who sold them 20% of those guys could explain it. See any problems there? There has been huge changes in the lending industry in the last year including federal and state licensing, mandatory testing, continuing education and more to come, that is fine with me as it will create some accountability. In response to "never trust a broker/banker", if you are making one of the largest purchases of your life you better work with someone you trust and you better understand what you are signing up for.
Damn straight. It was a bit of a "perfect storm" scenario. Personally, I'd kill for some of those lending rates here. I'm currently on 7.17% variable rate, having come off fixed (which I fixed before our rates dropped). However, unlike most people I walked in with a distinct margin between what I was willing to pay and what I could afford. I've been dealing with bankers and lenders in my own capacity since I took out my first business loan at 18. I've never met one who deals in the smaller stuff (talking sub a few million) who really knows what they're doing, or understands a borrower's situation. I don't know how many times I've had to sit with a business banking manager and explain my business model for them to say "I don't know how you guys make money." The consumer ones are down a peg or two. I'm not ragging on them, they just don't have the capacity to know everyone's circumstances.... it's impossible. Instead, they have to work on modelling and statistics. Accordingly, don't let them make decisions for you. They'll try, but it's your decision to make. If you don't know enough to understand it, go get advice from someone who does. People whinge and bitch about paying a couple of grand in expenses when buying a house. Put it this way: for a lot of people, this is the single biggest investment they will make in their life. If you cut corners on that, you're insane. It's a huge gamble if things go wrong. Unfortunately, too many people get caught up in the "romance" of things, usually fostered by realtors (who I have a generalised, special hatred for). Every house I've bought, they've tried to "get me excited" and "imagine yourself coming home" and "what a wonderful opportunity". No. This is the precise moment people need to be thinking very clearly, because that moment of magic can quickly turn into 30 years of indentured slavery to a loan they can't afford.