sub-prime mortgages

IndyMac to Cut Work Force, Halt Most Loans Applications
By JAMES R. HAGERTY and DAMIAN PALETTA
Wall Street Journal, July 8, 2008
"IndyMac Bancorp Inc. said it has stopped taking most types of loan
applications and will cut more than half of its work force as it
struggles with losses from home-mortgage defaults.
The Pasadena, Calif., mortgage company and savings-bank operator is
one of the largest lenders yet to be forced by the credit crunch to
ditch the bulk of its business. IndyMac specialized during the housing
boom in Alt-A loans, a category between prime and subprime that
typically involves borrowers who don't fully document their incomes or
assets."
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I don't understand why such loans were ever made. Giving a lender a
few W-2 forms, tax returns, and bank/brokerage statements is not
difficult. The IRS offers free tax transcripts. A person who cannot
document income or assets should not be getting a loan.
There is no "magic" ratio of mortgage, home insurance, and property
tax payments to income above which a delinquency is impossible -- the
lower the better. In a free country, lenders ought to be able to make
riskier loans at higher interest rates and absorb the occasional
losses, as in the credit card industry. But why wouldn't lenders
gather information before handing over hundreds of thousands of
dollars?
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Reply to
beliavsky
wrote
I honestly feel that even the upper ranks of lenders' staff are abysmally educated. Thus they got caught up in the housing bubble (you can't lose when houses only go up and by lots! [not]). Then they fooled themselves into trusting that high risk loans could be re-packaged into lower risk vehicles. I think when one is making money hand over fist, one gets blinded. (And but for the grace of god, there go I. I got a tad too caught up in banks' high dividends.)
I know many here consider this a sound theory. Just reiterating so maybe this will become a lesson to be recorded in the annals of history. Like the causes of the Great Depression.
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Reply to
Elle
Because they could. The mortgage brokers got paid for making loans. As long as they met the standards to sell the loan, they didn't care. The buyers of the loans didn't care. They packaged them up, got some ratings agency to rate them "AAA" and sold the CDO's to investors, who believed the "AAA" ratings.
It all worked as long as housing prices kept going up. If the homeowner defaulted, the lender took the house and sold it for enough to be made whole.
-- Doug
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Reply to
Douglas Johnson
This is not a question about financial planning, but since the moderator approved it, I suppose it deserves an answer that also doesn't involve financial planning.
The subprime problem occurred because neither the mortgage brokers nor the bankers had any "skin" in the game. The brokers were lending money supplied by the bankers, securitized by investment bankers, and rated by securities rating companies. The brokers made money on every loan, but had no risk of loss if the loan failed. The bankers were selling the mortgages as soon as they were written to replenish their money supply. They were making money every loan they made, but were taking no risk, either. The investment bankers packaged the loans, obtained favorable ratings, and sold them to investors. They made money on every loan, but also had no risk of loss. The rating companies were paid by the investment bankers, who wanted high ratings to ease sales to investors, and satisfied their customers. They made money on every loan, but they also took no risk by overrating the packaged loans.
Loan qualification rules merely were impediments to the brokers, bankers, investment bankers, and rating companies making more money, so they found ways to relax the rules and finally to eliminate them completely.
Dave
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Reply to
Dave Dodson
A Ponzi scheme?
Elizabeth Richardson
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Reply to
Elizabeth Richardson
Securitizing itself became part of the problem. In the 'old' days, even a 90% loan to value mortgage was something one could understand. If the house dropped 20%, the mortgage holder stood to lose 1/9 of their funds (plus costs, of course). Securitization brought in more liquidity, of course, but also created instruments that were incomprehensible, slicing and dicing pools of loans so some pieces had no underlying value from day one. Even in normal times, one can slice up the expected payment streams to create tranches which would be impacted by even a low default rate. This time, those tranches all bubbled up too soon and too many at once as rates rose. Joe
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Reply to
joetaxpayer
Thank you, that is the clearest explanation of this mess I've heard yet. The greedheads keep pointing at each other so you can't figure out who to blame. Greed is good until you bring the whole house down on everybody.
I wonder if this is going to end like the Savings and Loan scandal of the Keating era (John McCain was one of his Five). Massive gov bail-outs for the greedheads and screw the middle guy.
That affects financial planning, brother!
Chip
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Reply to
Chip
"Dave Dodson" wrote
Don't the many bank writedowns of recent months show that the banks gambled, took risks, and lost? Also, when a bank requires minimal-to-no downpayment on a home mortgage, and then the house price goes upside-down and many folks default, the risk is clear.
I agree there were underlings who made money on transaction costs of home sales, but this money was relatively meager. Also, these underlings do not control things like the integrity of re-packaged mortgages and how much downpayment is required.
Aside: I think this does go towards financial planning for ordinary folks. We are seeing history here, insofar as another bubble has burst. Noting what caused the bubble is important. Ordinary folks must never look at an investment such as a house, stock, or mutual fund as an ATM machine.
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Reply to
Elle
Ordinary folks ought not to look at their house as an investment.
Elizabeth Richardson
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Reply to
Elizabeth Richardson
Agreed, but for some, the downsize after retirement can certainly help. No matter the economy, the person who sells their Boston or LA home and moves to a smaller home further away from a city is going to pocket some difference there. It would certainly be wise to underestimate that sum. Joe
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Reply to
joetaxpayer
They must understand the difference between liquid and illiquid assets, and the typically higher transaction costs associated with the latter.
If that were true, then why would anyone buy a house?
From investopedia:
"Investment [definition]: An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth."
"Determining Assets [for net worth determination] -Liquid assets are simply those that can be turned into cash quickly. Bank accounts, certificates of deposit, stocks, bonds, mutual funds and similar investments fall into this category. Illiquid assets, such as your primary residence and other real estate holdings, also count, as do assets in your 401(k) plan and partnerships in businesses. All of these items should be included in your calculations."
-Mark Bole
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Reply to
Mark Bole
How about as insurance? We have ~$250,000 in equity, according to a re-finance 6 months ago. We are both retired and love the house. But when either of us goes to the great pie in the sky, the other plans to sell the house and get out of Dodge. Surely the quarter $Mil is worth considering in a financial plan.
Chip
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Reply to
Chip
Because I prefer not to sleep on a park bench. I own a house, but do not consider it an investment, as I've said many times here. I own it free and clear of any mortgage. If I had either a mortgage or had to pay rent, I would have had to squirrel enough money away to generate additional income to pay for my shelter. So in my accumulation years, I prepaid my retirement shelter.
Elizabeth Richardson
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Reply to
Elizabeth Richardson
And the problem continues to escalate today because a large percentage of the *homeowners* today have no "'skin' in the game", so they're simply walking away. Long after the banks have tightened up on their lending practices, it's still sliding downhill as homowners who have nothing to lose simply walk.
They're all complicit - including the homeowner.
.
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Reply to
Sgt.Sausage
look at a home as an "investment" because it gets people out of a spending mind-set into a savings mind-set. Although it can be classed as shelter you must have and use every day, the house nevertheless increases in value over the years and provides a slow build-up of equity and inflation-protection that renters do not have. Putting money into a mortgage payment every month is a lot better than wastefully spending it. A few folks might have the discipline to put the difference between rent and a mortgage payment into a mutual fund every month, but I would guess there are not very many. Anyway, investment in mutual funds probably carries somewhat more risk than does counting on the equity in your house to increase.
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Reply to
Don
For the same reason that you buy a car, to use it as you see fit. In more numerical terms, there are times when owning becomes more economical that renting. That's when I bought a house.
So the house you live in fails this definition, at least the second sentence, since you live in it today.
-Will
william dot trice at ngc dot com
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Reply to
Will Trice
I don't think that a house provides inflation protection since they generally rise in value with inflation. From an economic standpoint, it may actually be better to spend the mortgage money on consumption. But having said that, I agree with you that a house may provide a useful psychological crutch to get folks to accumulate wealth when they might not otherwise do so.
-Will
william dot trice at ngc dot com
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Reply to
Will Trice
Indeed. We're seeing a persistent problem in our homeowners' association where folks would rather walk away from their homes than pay homeowners' dues. A few years ago, the association would slap a lien on a delinquent property and that quickly got the homeowner's attention because they had equity to protect. Now they walk over stupidly small sums because they have no or negative equity. The HOA actually owned one home briefly last year, not a business they want to be in.
-Will
william dot trice at ngc dot com
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Reply to
Will Trice
It is some protection, because rent increases over the years, while mortgage payments do not. And monthy payments for rent never end, while mortgage payments do!
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Reply to
Don
I included those in my greedheads term. It's the middle guy with responsible financial dealings that is going to get screwed again.
Chip
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Reply to
Chip

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