Yves Smith thinks it might have
Half the subprimes were cash out refis. This isn't implausible. Freddie Mac reported that cash-out (meaning the new mortgage was at least 5% larger than the one it replaced) refis for its borrowers were 35% in the second quarter of 2007, and noted that refinancings as a proportion of total mortgages were declining, which is typical in a rising interest rate environment.Now why is this so significant? It gives a completely different picture of the nature of the problem. It suggests that many of the people who took out subprimes weren't people who bought more housing than they could afford. It says they were already overstressed and overstretched financially. Using their home as a source of cash was a gamble to keep themselves out of bankruptcy, but in many cases, that bet didn't work out.
The high proportion of cash-out refis suggests that it would behoove someone to do some investigation to get a better grip on why people took these loans and what became of them. Were most, as Lee suggested, in bad shape and taking the one way they saw out, or were they merely foolhardy overspenders? If they needed the new mortgage to pay off other debts, how did they get in trouble in the first place?
The last large scale study of why people filed for bankruptcy (published in 2005 but looking at 2001 bankruptcies) found medical expenses were the top reason and job loss/interruption was number two. If these are the real reasons that a large proportion of subprime borrowers went that route, it suggests a completely different set of remedies than if it is say, primarily a housing bubble (too many people felt they could gamble on appreciation) or predatory lender problem.
Dean Baker pointed out that some borrowers defaulted before reset, which suggests that pre-existing financial stress may have played a role:
[M]any of the subprimes were seriously delinquent or in foreclosure long before the mortgages reset to higher rates. In an analysis done early this year, the FDIC found that 10 percent of the subprime adjustable rate mortgages issued in 2006 were seriously delinquent (missed three or more payments) or in foreclosure within 10 months of issuance.
A parenthetical note: that bankruptcy study is horrendous and should never be cited by anyone. It counted any bankruptcy in which the parties had more than $1,000 in uninsured medical bills as having been caused by the bankruptcy, even when the respondents themselves cited other reasons. $1,000 is a nasty sum, but no matter how poor you are, it is not bankruptcy-level. Anyone who declares bankruptcy over a couple of thousand dollars worth of debt should sue their lawyer for incompetence. More rigorous studies find the commonest causes of bankruptcy are divorce and job loss; where medical problems are a cause, the main factor is usually income loss from lost work, not bills. Medical providers will almost always take a workout rather than bankruptcy.
But the broader point is interesting--though Yves, like most observers, is more interested than I am in assigning blame. I'm less interested in who was wrong, than in what broad forces pushed us in this direction. And he hints at an interesting one:
One other factor that may have contributed to the subprime frenzy: Lew Ranieri, the so-called father of mortgage backed securities, has stated that the overheated phase of subprime lending started at the end of the third quarter of 2005 and extended through most of 2006. When did the new bankruptcy law take effect? October 24, 2005. There is no ready way to prove a connection between the new law and the explosion phase of subprime growth, but consumers became much more cautious in taking on credit card debt after the law became effective. And the ones that had above median incomes which would force them into a Chapter 13 (meaning they'd have to repay their debts) might be even more eager to tap home equity if they saw themselves at risk.
One way to cast this: mean lenders got Congress to change the bankruptcy laws, which meant people desperte to get out of their credit card debt put their houses on the line. Another way: irresponsible borrowers confronted with the cost of their past profligacy, gambled their houses, too. The interesting explanation, though, I think is more value-neutral.
From what I hear, the evidence on bankruptcy reform is that all the actors involved behaved in a perfectly economically predictible way. Lenders, with more assurance that they would be repaid, became more willing to lend. But borrowers became less willing to borrow, so the amount of credit supplied to the market contracted. (Incidentally, people who think that we should protect the poor from credit cards and payday lenders should be glad about this.)
But there was a huge credit glut in this country, thanks in part to a torrential inflow of foreign capital. That credit had to go somewhere; if credit card borrowers wouldn't take it, they'd just offer cheaper rates to someone else . . . like mortgage borrowers. Mortgages aren't much affected by bankruptcy, because it's secured debt. Under the new law, as the old, borrowers either hold onto the house by committing to meet the payments, or surrender it to the lender. So falling interest rates in that market, especially combined with rising prices, were likely to produce the bubble conditions we saw.
Fix blockquotes, please; we can't tell who said what.
Medical providers will almost always take a workout rather than bankruptcy.
Especially doctors. Since doctors are about last in line to be paid in a bankruptcy they will try to work out a payment plan if at all possible. My spouse has taken payment schedules of $10/month, no interest on $500 debts and gotten paid. Most people are willing to pay their debts, they just sometimes need a lifeline thrown to them.
Now the people that got checks from the insurer (despite an assignment of benefits being filed) and spent it on trips, furniture, etc. get little slack cut for them....
I believe that the bankruptcy law was only a small factor among all the factors responsible for growing the housing bubble.
If you look at any chart of the Case/Shiller housing price index, late 2005 doesn't stick out as a acceleration point, or anything like that. It just looks like a continuation of what was had been happening for the last few years. If it was a factor, it doesn't seem to have been a big one.
I don't know, Megan...
the evidence on bankruptcy reform is that all the actors involved behaved in a perfectly economically predictible way. Lenders, with more assurance that they would be repaid, became more willing to lend. But borrowers became less willing to borrow, so the amount of credit supplied to the market contracted. (Incidentally, people who think that we should protect the poor from credit cards and payday lenders should be glad about this.)
I just find it difficult to believe that the kinds of people who accumulate lots of credit card debt are, by and large, the kinds of people who respond rationally and carefully to changes in the bankruptcy law.
"...huge credit glut...torrential influx of foreign capitol..."
Gosh, when I got a great mortgage from HSBC a half dozen years ago, I thought it was kinda strange and exotic to deal with (I think I've got this right) a British/Chinese bank. I guess, not so strange.
Megan, some more information about this, please. References. Numbers. Opinions. Background.
And thanx. Once again the Atlantic completes my education.
“From what I hear, the evidence on bankruptcy reform is that all the actors involved behaved in a perfectly economically predictible way. Lenders, with more assurance that they would be repaid, became more willing to lend. But borrowers became less willing to borrow, so the amount of credit supplied to the market contracted. (Incidentally, people who think that we should protect the poor from credit cards and payday lenders should be glad about this.)” - Megan McArdle
Megan – the one part you left out…..the Politicians. They did not act in a rationale way (well – rationale if you assume they are strictly out to the highest bidders). The politicians essentially let the credit and financing industries write the new Bankruptcy bill. Had the politicians been acting rationally and with due care, as one should expect from an elected official, we may have ended up with a far different bankruptcy bill that would have made giving out easy credit more risky, and therefore, everyone may have been a bit more cautious. Lenders would have backed away from riskier borrowers, forcing borrowers at those debt levels to either declare or try to pay down their debts. But instead, the bill kept the ship afloat for just a little bit longer, allowing debtors to dig their graves that much deeper.
The biggest problem with the bankruptcy bill, is that it allowed creditors to essentially legislate in security on their unsecured debt. The biggest risk with unsecured debt is that in the event the debtor does not pay, the creditor will collect pennies on the dollar or not collect at all after Secured and Preferred creditors take their share. This bill, by making the liquidation of debts (Chapter 7) more difficult, all of sudden legislated in security on unsecured debt. Since now a liquidation of the estate is no longer allowed to most people, and since they HAVE to pay the debt over time based on a court order, you now have now secured all unsecured debt by attaching it with a Chapter 13 judicially mandated receivable owed to the creditor and required to be paid over time. Granted, a creditor may not get its money back in one fell swoop as it would by taking the asset covered in a perfected secured note, but a credit card company now has something to walk away with. They essentially legislated out risk of a pre-existing agreement prior to the law. The equivalent opposite would have been if Congress legislated in a rule disperfecting all secured interests of all mortgagees, so even in the event of default on a home loan, the debtor kept the house.
And correct me if I am wrong, but here is the kicker with this entire foreclosure situation for home owners and the economy in general. When a lender forecloses on a house, whether it be in bankruptcy or whether it be a unique, singular transaction, if the house sells for less than the value of the home loan, the mortgagee (bank) could go after the debtor for the deficit as general unsecured debt (just like a credit card debt by the way). Now, under Chapter 7, this was not really an issue, since typically under Chapter 7, general unsecured debt is usually discharged without payment (the “start-over” theory of Chapter 7)
But now, under Chapter 13, even when they foreclose on a house, they can now go after the debtor for the deficit, and make the debtor pay that deficit over time. It cannot be discharged. This is not much of an issue in times of rising prices, but in times of declining home values, a 10% drop in the value of a home on a mortgage (the expected decline this year) taken out in the last 2-3 years can result in all of sudden $10 - $20 thousand or more of unsecured obligations to the creditor. And since so many people refinanced since 2002, it is not as if people are walking around with mortgages paid down since 1995 or earlier. Many, many people took out home equity loans prior to the passage of the bankruptcy bill. The least the politicians could have done is grandfathered in all pre-existing mortgages from the new rules, so that any deficits on a foreclosure of a home could be discharged, even under Chapter 13.
So in reality, these very people risking their houses because their homes were secured, would have been just as well as to take out credit card debt, because in the end, unless you qualify for Chapter 7, you are going to owe everything anyways. Actually Megan, the problem was that debtors acted rationally IF THE OLD BANKRUPTCY LAW WAS STILL IN TACT.
Interesting... so fixing the distortionary incentives in the consumer credit market actually ended up making the economy as a whole worse off, since net result was to drive more credit into subprime mortgages, which suffered from even greater distortions.
If true, this is pretty good example of ‘the theory of the second best’ in action.
the Politicians. They did not act in a rationale way (well – rationale if you assume they are strictly out to the highest bidders).
That assumption turns out to be an excellent predictor of politicians' behaviour. (Extra 'u' in Megan's honor.)
Brad Towne wrote: Had the politicians been acting rationally and with due care, as one should expect from an elected official, we may have ended up with a far different bankruptcy bill that would have made giving out easy credit more risky, and therefore, everyone may have been a bit more cautious.
Had the politicians been acting rationally and with due care, the credit companies might have never found themselves in the position of being hamstrung by anti-redlining laws that prevented them from aggressively singling out and severely limiting or excluding the highest credit risks from the easy-debt markets until AFTER those risky borrowers had proven themslves prodigal and irresponsible.
So, while the new bankruptcy laws may indeed be skewed, it's hard to fault the lenders for saying (in effect) "If you're going to require us to extend uniform terms to a market of non-uniform borrowers, then we want every possible of means of debt recovery when those non-uniformities are revealed via unpaid obligations."
I'll bet the same people who blindly entered into a mortgage in the past few years have no idea the bankruptcy laws have changed....
There is limited risk to loan money to people who by law will pay for a house for ever since they can not file Chanpter 7.
I saw this one coming since they did the BK reform. OH MY!
> The last large scale study of why people filed for bankruptcy (published in 2005 but looking at 2001 bankruptcies) found medical expenses were the top reason and job loss/interruption was number two.
Is this a study that counted gambling as a "medical expense" because gambling is an addiction so "clearly" anyone who has a gambling problem is not receiving adequate medical care?
> I just find it difficult to believe that the kinds of people who accumulate lots of credit card debt are, by and large, the kinds of people who respond rationally and carefully to changes in the bankruptcy law.
I find it easy to believe that they'd act in accordance with all of the doom and gloom that the bankruptcy law opponents were screaming during the debate.
So long as we're making unquantified assumptions, we might as well assume that:
1. The new bk law produced a wave of filings just before its effective date. Delinquent borrowers weren't clear yet on how the law would change but the bk bar and press told them things would get worse.
2. Although down-market card lenders offer credit hilariously soon to the recently discharged, the wave of pre-new law filings produced a dip in unsecured credit demand in subprime markets.
3. As noted, the money had to go somewhere, just as other money had to go into prime mortgage lending after the equities collapse. The recently discharged subprimes weren't the same people responding to all those subprime mortgage ads. However, they were the same type of borrower in some instances.
So just as the cautious and lucky take their bubble-iscious rollercoaster rides from equities to housing to whatever's next (what's next, by the way?), the less careful and fortunate as a group take their own ride through credit card default, to losing their houses.
Or were subprime mortgage lenders giving money to the same people who were in default on their credit cards? Wonder if the hedge fund managers who went big for CMOs knew that?
You want to know why people are defaulting?
I'll tell you why.
Two years ago, someone with a Fair Issac of 530 could get an 80/20 30-year fixed at 11%.
What does that mean, exactly? It means that someone who had a track record as a complete loser when it comes to finances, had many outstanding debts, didn't pay on time and defaulted totally on some credit cards was receiving 100% mortgage financing (an 80% primary mortgage and a 20% HELOC) with zero down payment at 11% interest. This loan typically reset in 3 years to a LIBOR+2% rate. Some paid points to get this rate (points are pre-paid interest.)
Today, you can still get that mortgage, but you need a 630, which means you still aren't the best credit risk and have bad marks on your credit history (not paying, paying late, etc.)
Losers can still get that mortgage!
We're nowhere near the bottom of the housing crisis if folks who have proven they can't be trusted when borrowing money are able to get 100% financing on a home mortgage.
The problem is, however, that all the good customers ALREADY HAVE mortgages. All the good credit risks don't carry balances (or bankrupted before the "reform.") That's what makes them good credit risks.
On the other hand, a 775 carrying zero debt can barely get a 30-year fixed for 6.5?
So, the moral of the story is: You can be a total deadbeat and never pay off. It only costs you 3 or 4 points of interest. If things go bad, you can just walk away from the house and go rent someplace. It's no problem.
So if I buy a house with a mortgage then have to sell the house at a price lower than the payoff on the mortgage, I am still indebted to the lender for the balance? No bankruptcy out for the former homeowner.
Personally, that means I won't be buying a house until the market settles. Why buy into a declining market?
Of course, if it were otherwise, the market risk would be the lender and interest rates would have to cover the exposure to volitility.
Megan...The way I predicted the burst was the Kelo decision. It shook faith in the very principal of land ownership. I compare it to the Microsoft Anti-trust decision that started the Tech bust.
Your opinion may vary. Regardless of the pinnacle turning point, both bubbles were built on bad business methods and were waiting for an excuse to pop.
Brad Towne....no deficiency judgements allowed here in California on mortgage financing used to purchase a home - probably also the case in some other states. That is why mortgages cost a little more in Cal than elsewhere. Second mortgages or home equity loans may allow for deficiency judgements, I'm not sure.
Bottom line....any "short sales" in California will have to be eaten by the lenders. This happened a lot in the late 80's/early 90's out here. The lenders will put that off as long as possible, so prices may not fall for a while out here until the FDIC (hopefully) forces them to clear these foreclosed properties off their books.
The extent of the coming suffering can't yet be fathomed. The only way out of it will be a massive Fed-driven inflation, but the investor class and the Fed has historically stopped the party when inflation got to wages. It appears now to be getting to wages with an increase in gross payroll wages of something like 9% year over year.
If these people tolerate wage inflation to head off a crisis in the credit markets and the deflation that would have to occur if massive bad debt was written off -- well, I'd be amazed. It's possible, sure, but it is so far from the historical interests of these people -- their production costs rise when wages rise and it takes money right out of their pockets.
"Give a man money, prices rise and you have no control over the man. Loan a man money, and prices rise, but you have control over both the prices and the man." Some Central Banker, or Investor, or other.
The harm from that bankruptcy bill was clearly looser lending standards and through an act of Congress effectively securing previously agreed to unsecured debt. That made debt secured by agreement significantly less secure.
The majority of the American public strikes me as a bunch of spoiled children. As long as they can feed their faces, borrow money at cheap rates to shop, and have a job to go to each day, they will allow the government to bug their phones, torture people, invade other countries, kill perhaps a million people, borrow more money than can ever be paid back, they will allow anything.
But as soon as times get tough for our $300,000 a year family of four living paycheck to paycheck from crazy, compulsive consumption, "heads will roll!"
Ultimately, the American public retains the right to pressure politicians to print more money, to tax different groups to the benefit of others, to do whatever is necessary to keep that easy credit coming. I am so afraid that a terrible outcome will result from all of this. The public has been rendered less competent than a toddler. What will such people do when the credit tap runs dry?
I believe the fault is with those who repurchased the loans without a mathematically predictable knowledge of the underwriting standards and probabilities associated with the original loan.
Who would buy a bond if they understood that the underlying repayment was predicated on a homeowner's undocumented word that htey could meet the payment 2 years into the loan with rates reset?
The majority of the American public strikes me as a bunch of spoiled children....
The public has been rendered less competent than a toddler. What will such people do when the credit tap runs dry?
On behalf of the imbecilic mouth-breathers, I stand chastened, eager to learn from my intellectual and moral superiors how I should properly think and act.
So falling interest rates in that market, especially combined with rising prices, were likely to produce the bubble conditions we saw.
My understanding of the "housing bubble" currently bursting is not only the mortgages themselves, but the new and inventive ways those mortgages were packaged and sold in the investment market. Investors literally did not know what the value of those mortgages truly was, which was no problem as long as the securities kept increasing in value; but when the music stopped and the investors looked around there were no chairs for anyone to sit in. They started trying to determine just what the values backing those securities were and found no stable ground, and everything went downhill from there.
I think it's quite plausible that the bankruptcy bill contributed to a surge in cash-out refinances to eliminate credit card debt; TV ad campaigns on late-night TV constantly touted that, though usually in quiet terms at the end of the segment (after they talked about taking that European vacation you always wanted or making those home improvements you were always putting off). Certainly it may not be the only factor; but the easy credit terms and teaser interest rates would absolutely be an incentive. Especially if you didn't plan to live in your house more than a few years; who cares if there is a balloon payment or interest hike in five years if you're only going to be living there three? If you need the money, cash it out now and get it. Your home will be worth more in a few years anyway.
Very seductive. I opted for a home equity loan to pay off my credit card debt rather than a refi, despite my bank's constant importunations. And I have a "traditional" 30-year mortgage, though I did manage to avoid a large downpayment via a 401(k) loan (which came back to bite me when I lost my job, but that's another story).
Another ingredient in this housing bubble/credit card debt connection has to be the stagnation of wages in the bottom half of the workforce. Expenses don't stop coming and prices don't stop rising just because your wages stop growing. That pushes you more and more to turn to credit cards to bridge the gap and cover the big expenses that come along; and somehow unless you're very careful you never seem to get ahead of those expenses. I'm already "reloaded" in credit card debt to an alarming degree (to me, anyway; I could still pay off all credit cards and loans via my retirement savings), just though interminable $300-700 expenses coming along every month or so that I can't quite seem to cover. At some point either wages are going to have to rise to cover those expenses, or people like me wind right back at square one owing huge amounts we can't ever pay off.
(Before I get lots of advice thrown my way about cutting out luxuries and living frugally, let me point out that I'm talking about expenses such as $700 in truck repairs and $300 in plumbing repairs that I had last month; these are not "luxuries" but necessities of life, and they seem to keep coming and coming.)
The new bankruptcy law did not change unsecured debts to secured debts. It made it so that people who have enough income to repay their debts using an extended payment plan and lower or zero new interest would have to do this rather than walk away debt-free after spending all the money they borrowed. If one is not making enough money for these payments then the debt can still be wiped away.
(Before I get lots of advice thrown my way about cutting out luxuries and living frugally, let me point out that I'm talking about expenses such as $700 in truck repairs and $300 in plumbing repairs that I had last month; these are not "luxuries" but necessities of life, and they seem to keep coming and coming.)
If you've got a house, then you've got a place to store basic repair supplies and tools. My parents avoided thousands of dollars in appliance, electrical, plumbing, and auto repairs over the years, simply because my dad was a self-trained jack-of-all-trades.
Worth thinking about, anyway, if you're not already there. So few people these days know how to work with their hands that you could probably turn around some side income next time your neighbors have a problem with their plumbing.
LiberalRob: Sounds like you should start to budget $500/month for misc. expenses. The months there are none you can add it to savings.
I have zero love for the credit card companies. No, more than that. There is no neutrality here. I hate them. Bloodsucking vultures, all. They prey on the vulnerable, using slick advertising and proven techniques of psychological entrapment perfected by the gambling industry (I refuse to call it the "gaming" industry), then slap usurious rates on people who have no understanding of the principle of compound interest, and impose grossly unfair penalties for even a single day's late payment. I've seen them destroy families and ruin lives.
People who owe so much that they will be paying for the rest of their lives should band together and simply stop paying. A lot may end up in prison but, when the credit companies come crashing down, at least they won't owe anymore to the bastards.
JohnF:
You are correct, but only a few stated I believe have such comprehensive anti-deficiency laws. And, I am not certain how the new Bankruptcy law (since Federal always trumps State law) impacts these statutes. In addition, these laws only apply with the Purchase Money Interest Loans (i.e. – the loan which actually was used to purchase the house. Equity financing is not covered, and I imagine the deficit is proportionally allocated between the balance of the defaulted PMI loan and any subsequent equity loan.
Secondly, these laws DO NOT COVER investment properties. So all of these people who went into the condo market down in Florida, California and elsewhere under the impression they could flip them for a profit, well, welcome to the end of your middle-class life as you knew it. You will be beholden to these creditors unless you literally decide to become a homeless bum and then file Chapter 7.
Don't forget the Greenspan push a couple years ago to make sure your credit card payments at least cover some of the principal, and caused credit card companies to double minimum payments to 2% of balance. Not a bad idea for new borrowers, but for someone on the edge, it was a killer. And of course, if you negotiate with your card company to forgive some debt, the IRS counts that as income, and you need to come up with the taxes and/or lose some benefits for those on the low end of the income ladder.
Sterling,
yes, they are not in "title" changing these unsecured debts to all of sudden secured debt. But, in actuality, that is exactly what is happening here. Whether or not there was scienter involved on the part of the debtor when they charged the expenses to their Visa, the fact is, they did so at least with the presumed knowledge that this was unsecured debt, and under the supposed assumption that, if push comes to shove, could be discharged should bad times hit.
This very fact is why credit card rates are often so much higher than secured debt, because the creditors are inherently taking on more risk. Perhaps I would have had more sympathy for them, if after the Bankruptcy Reform Act of 2005, they dropped the interest rates on everyone's credit cards to reflect that their risk paradigm for that debt declined. But they did not. What they did was essentially reduce their risk, but still price the debt as if it was truly unsecured and could be discharged away of the debtor declared bankruptcy.
And to repeat on the debt now being secured. If it walks like a duck, quack likes a duck, most likely, it is a duck. If the debt can now not be discharged by most people, and is required to be paid back by a judicial mandated asset (essentially Chapter 13 converts the credit card debt into a judicial account receivable), it is now at the very least quasi-secured debt.
As an aside,
I wonder often now why it is that high-schools, Universities and other so called educational institutions that claim to prepare people for life do not require at least 3 - 9 credits of personal financial classes in order to prepare people for life.
I mean, we prepare people to go out an make money, even how to deal with complex, abstract ideas that their employer or researcher may face. But we have done nothing to prepare people for the complex transactions and complex financial issues they will face as adults in the United States in 2007.
Sean:
I concur. Americans do not realize what is coming up on the horizen as a result of the housing bubble and credit bubble bursting all at once. It would be bad enough, but add to this the fact that the housing bubble and credit bubble essentially fueled our economy, and I think we can all see where this is heading.
If you've got a house, then you've got a place to store basic repair supplies and tools. My parents avoided thousands of dollars in appliance, electrical, plumbing, and auto repairs over the years, simply because my dad was a self-trained jack-of-all-trades....So few people these days know how to work with their hands that you could probably turn around some side income next time your neighbors have a problem with their plumbing.
Posted by anony-mouse | September 4, 2007 7:38 PM
My dad added on an entire wing of his house himself, and he's an excellent amateur mechanic who has restored several antique cars himself (except for heavy machine-shop work, which he did not possess the equipment to perform) and helped others restore many more. But even he can no longer work on modern vehicles, which require specialized tools and computer equipment to diagnose most problems.
It sounds great to say "be more self-reliant," but in this modern world that is becoming less and less an option. I have learned that if you install your own hot water heater without a permit from the city you are breaking the law here, and there are many city codes to follow that were not in place in earlier days. You are almost forced to hire a plumber to do the job. I don't have the skills and tools to be a plumber, nor a small plumbing supply house in my garage, and when your faucet breaks in the middle of the night there is no time to learn "on the job." So you break out the credit card once more.
Take a look at some of the ads still appearing on the major websites:
1.9% CUT YOUR PAYMENT!!!!! No income verification!!! Habla Espanol!!!
These are negative amortization loans being peddled to illegal immigrants.
And Congress thinks that's OK! Banks can loan your savings to illegal immigrants. It's LEGAL. Of course, when the chicken farm gets raided, and all those folks get deported ... guess who gets the bill?
Banks and credit card companies ought to have their rates controlled, and predatory practices should be outlawed. It is time for the middle class of this country to take the government back and start having laws written that favor people over institutions and moneyed interests. The Congress right now is a shill for every special money interest that lobbies in Washington. I am not sure that is what the forefathers intended.
mr lawson writes: "The way I predicted the burst was the Kelo decision. It shook faith in the very principal of land ownership. "
Silliest thing I've ever read on this sub-blog. Congrats.
As a bankruptcy trustee as well as a bankruptcy attorney, I get to see this from the inside out. Many points to be made.
First, the securitization of mortgage debt makes it next to impossible to negotiate loss mitigation because the indenture trustees for the bondholders - the real owners of the debt - have no discretion to negotiate - they just have to grind out their foreclosures.
Second, debt secured only by mortgages on a residence can't be modified in a bankruptcy case, unlike any other sort of secured debt. The best a debtor can do in a chapter 13 bankruptcy is to stretch out the time within which to cure a default. Donald Trump, for example, gets a much better deal on a defaulted debt on a casino in chapter 11 than a homeowner gets in Chapter 13.
Third, ultra-aggressive tactics by holders of credit card debts, including the banks and the people that buy written off bank debt, result in a lot of pressure for people to pay off that debt - otherwise, they face wage garnishment in amounts even greater than they would have to pay in a chapter 13.
Fourth, chapter 13 is now called for in the cases of some people over the median income - although hardly as many as you might think.
Fifth, home equity lines of credit or second mortgages seem like a reasonable way to pay off unsecured credit card debt but don't help unless the borrower (a) cuts back on his expenses and (b) saves enough to pay off or at least amortize the new secured debt.
Sixth - many mortgage products have been created which are next to impossible for the borrower to satisfy - such as option ARMS, interest only, balloon notes and the like.
Interestingly, the holders of mortgage debt turn out to often be the same banks that held the credit card debt in the first place.
Conclusion - equity in houses - that is to say wealth - is being transferred from home-owners to lenders, either through interest on credit card debt or through equity lost in foreclosures. Of course, that presumes that there was equity there in the first place - and the current bursting of the bubble in real estate values demonstrates to the banks that there is no free lunch.
The market in a free economy is cruelly wonderful, isn't it??
There may be some plausibility to this - the major mortgage lenders all supported bankrupcty reform because they knew it would lead to an increase in home equity lending. But they were evn more clever in pushing total refinances and coming up with different types of ARM products that they could sell to strapped people as a way to actually reduce their total monthly debt payments.
A friend of mine who is a veteran in the mortgage business insists that the real culprit goes all the way back to the 1993 tax bill that eliminated the deduction for all forms of interest except on mortgages. When mortgage rates were at 5 percent and bvelow, if you add in the deductibility of mortgage interest, mortgages were essentially free for a few years. Why would anyone in their right mind pay 10-15% on credit cards when mortgage money was free?
KRK writes: "A friend of mine who is a veteran in the mortgage business insists that the real culprit goes all the way back to the 1993 tax bill that eliminated the deduction for all forms of interest except on mortgages. When mortgage rates were at 5 percent and bvelow, if you add in the deductibility of mortgage interest, mortgages were essentially free for a few years. Why would anyone in their right mind pay 10-15% on credit cards when mortgage money was free?"
That argument was exactly what was being used to sell homeowners additional financing every time they refinanced, and it wasn't restricted to 5% loans, of course. When a homeowner with credit problems can get rid of car loans (with 4 or 5 year terms) or credit cards with rates of 18% and up, a 9% adjustable looks like a good deal. And through 4 or 5 refinances, they'd still think so.
Of course right now "Helter Skelter" is that industry's theme song. It's no lullaby.
I went through a bankruptcy (chap 13) my ford windstar broke down so much I thought I bought a new car putting an old car back on the road. My husband walked out (he was smart he made sure all the credit cards were in my name, sure get it it'll be okay)and I was paying for the child care. as long as he was there I could see problems arising but I thought we could handle them with a few nips and tucks here and there but I also noticed he was going to the bank withdrawing large sums of money and then admitted he was taking out what he put in so it became evident I was really paying all the bills and he was putting on a show depositing money so he could have an argument he was participating. One month he said he was not giving me any money because being a truck driver he was never there. When we worked good and I worked overtime we could put 6 grand in the bank a month. Okay now that he is gone, naturally he offers no help until I sue for child support and then he quits his job and goes to work for labor ready to hide, I am working like a dog to keep everything together. Kids, child care (500 a month) car note, mortgage (20% down 30 yr fxed house in my name) a rental property left to me by my parents rented but catches on fire (no insurance)that income immediately gone, the whole house of cards just falls. I file chap 13 (i didn't list any relatives that helped by buying food and helping with the mortgage)the payments are 2200 a month leaving me with 400.00 to pay child care, gas, electric, water, food, incidentals. Luckily for me the fire happned during the housing boom. The house sold for 70g's more than I owed, I got the extra. Out of bankruptcy and a huge lesson learned. Don't trust your partner to do right by you even though you thought you could, don't get yourself so in debt that you see no way out (the biggest bill I had was trying to keep my windstar running, I will never buy a Ford again) leave credit at the credit store, don't buy it if you owe on something else. (car note and no other loans. pay one off before signing up for something else) Do you have so much company coming over that you want an impressive car, house, expensive furniture if not what's the point? to show off every now and then? When I look at what mistakes I made they are plentiful and what have I learned that I use now, I knew then: I have more now paying cash for everything that I ever did paying with credit. Just one bankruptcy story among many. Alot of people didn't just go out making up credit to ditch on it later. Chapter 13 makes you pay off all your debt if you have a job and property. The truth of the matter is they want you to sell your house to pay your bills that is why they make you pay so much every month. Chapter 7 fresh start is not an option any more even if you work at MCDONALDS and rent, they figure you have a job. The reason so many people are walking away is because the court orders people to sell the house by switching from a Chapter 13 to a Chapter 7 (if you can't afford those Chapter 13 month payments) and ordering you to liquidate and sell the the house if the house doesn't sell the bank will still foreclose. So why even bother to file Chapter 13 it does no good it's not a fresh start it's a delay of the inevitable, plus a bankruptcy on your credit file.
I think the bankruptcy laws knew about what would happen although it was presented as banks making sure they got paid back because so many dead beats weren't paying them back by filing bankruptcy. But, back then they didn't think about a housing crash, that was why it was so easy to get credit on your house, so you could pay them back and not have to file bankruptcy. Now look at the mess they have on their hands. Their desire to teach a few lessons are putting them out of business with people just not bothering to file bankruptcy but just walking away. The laws were changed so that people had no recourse no matter the circumstances even the payments were designed to teach you a lesson (one well learned I must say, for me anyway). The lesson is if you can't control your spending we will control it for you. You will be like a rabid dog around water if you even think about credit or credit cards. I understand the trauma of owing and can't pay, feeding my kids top ramen and hot dogs, the baby sitter and car note comes first or no more baby sitter and no car to get to work. Endless phone calls at home at work, being served by people suing you, real estate agents knocking on your door to buy your house for pennies on the dollars, foreclosure notices, suicidal thoughts wanting to just walk away from everything and then bankruptcy and then almost being worse off than you were before because now it is another creditor who sends letters everyday. Don't think bankruptcy is a walk in the park on a sunny day. Alot of pain tears and suffering leads people on that path and there are 1000's of stories like mine. Now there are less people in the credit pool because they have been scared off maybe that is best. I found I couldn't play in the credit market so I got out of the game. My decline was a couple of years in the making and not a making of only a few months. How things are now I do not know but I can imagine and the pictures in my mind leave me depressed again for all the people who are suffering as I was. Sure there are dead beats that take advantage of any crack in any doors or windows, but then again they may be more the exception than the rule.
Mandatory consumer arbitration and courts have played a large role in the subprime mortgage mess. I refinanced with a subprime mortgage to pay a large arbitration award, which was about to become a judgment. That was three years ago and the paid credit card debt/arbitration award is still being reported as delinquent!!
I have been in court and we are now in second court-ordered aribtration to determine what happened to our money. Our HUD statement reflects payment, which now makes the subprime mortgage fraudulent. The governement has ignored all our requests for help. It seems that our case has been 'covered-up'.
Elle
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