How are the Mortgage Brokers escaping unscathed?

[powayseller]

Let me explain. The end holders of these mortgages are investors (central banks, pension funds,etc.). They demanded a low risk premium for investing in notes for overvalued homes. Had they expected a 5% risk premium, Ameriquest could never have offered a 2% ARM.

Second, capitalism makes companies compete. Further, Wall Street pressures on ever glossier profit margins has caused these lenders to accept ever-greater risk, ever-lower profit margins, just to compete.

The biggest blame goes to the elimination of risk premium, as borrowers qualified with no money down. If MBS holders had priced in a 8% risk premium for 100% financing, borrowers would not have qualified. They also couldn’t have bought homes for 6x their income if they needed even 10% down.

This is just a product of capitalism. Not bad, but the role of regulator is to tame the excesses. The OCC is doing that now, or trying, but they are a little late…The damage has been done.

[docteur]

I have to agree with Josh. The ultimate buyer has to take responsibility for his actions. And he will, as prices fall, loans adjust and jobs are lost.

I think a lot of folks got caught up in the runaway YOY double digit increases in housing and fueled the fire, by taking risks they wouldn’t normally take. It was classic mob psychology in action.

No one wanted to miss the party and people became smug at realizing easy gains (not only in profit from home sales but also in lending fees, real estate commissions, construction contracts, etc.) Flipping became a national pastime (heck there was even a TV show about flipping) and folks forgot the real reason we build houses, to live in them.

“Integrity is what you do when no one else is looking.” You play, you stray, you pay.

[powayseller]

I wouldn’t blame any consumer under the age of 35 or 40. When you’re young, you don’t know so much. You go by what your parents taught you, and everyone has brainwashed us to believe that homeownership is a ladder on the life of success.

I was thinking back today to when we bought our first house in Phoenix in 1987. We barely eked into the payments. A year later, I found out a coworker was upside down on her mortgage. I had never heard of such a thing before. What if we had bought a few years earlier, and ended up that way? We bought after the market had already cooled, but I had no idea of that either.

It seems obvious to us on this board that prices are too high. But how will a 30-something couple, wanting that new house to start a family, know about the housing bubble back in 2003, 2004, or 2005? Even today, most people don’t believe it.

I agree with you Josh that people should be informed, but what would be the catalyst for them questioning the decades-old promotion of homeownership (even by the IRS)?

[an]

I don’t think being young have anything to do with it. I’m 25, but I find myself explaining why there is a bubble to people much older than me. I see people who completely forgot about the last down turn. I think it has alot more to do with mindset than age.

One way for people to see there is a bubble, if they want to see it, is to just simply compare mortgage payment to rent. That alone will tell you price is not right. Why buy a 600k house when you can rent it for 2k/month while mortgage payment for an interest only loan is much higher than that. But the problem is, most people don’t want to see it. I talked some people buying recently but there are also other people that, even after I gave them reasons there is a bubble, they still buy anyways.

[docteur]

First off, I don’t think we are talking about blame as much as taking responsibility for one’s actions. Blame implies that someone did something “wrong” and I don’t think the consumer did anything wrong, he/she just didn’t use good judgment.

And I don’t think the institution of home ownership should be questioned per se, but how you perceive it. Is it an investment or a place to raise a family and put down some roots (or both) and maybe get some tax breaks in the process?

I know a lot of younger homeowners in their 30s and 40s, who are highly intelligent, and make a great living. They are also highly leveraged because the glam of bigger and better got the best of them (they knew exactly what they were doing), and now they are stuck with way more house and (soon to be) much larger payments than they need.

My brother and sister-in-law, both high earners in their early 40s, live in a multi-million dollar home, vacation more than they work and go through money like crazy (designer labels and all, for them and their children). And so do all their friends, each one trying to outdo the other. It’s like a Hollywood premier when you go to a get together at their house. I see this everywhere. It’s just so cool to be cool.

Honestly, I don’t think equating age to ignorance regarding risk has a whole lot to do with it. You don’t have to experience a down market to know that it is always part of the equation. Folks in their 30s and 40s are certainly mature enough to understand risk/reward and notice when greed clouds their judgment. (What about all the younger posters on this site? They see what’s going down and are staying out until it blows over or blows up).

I am constantly amazed at the sophistication level of the internet generation (they have so much more information so much faster). But again, humans will be humans and when the action gets fast and furious, people want in for fear of “missing out” which is just soooo uncool.

It’s a national state of mind that has moved us from funny money in the stock market (hard lesson # 1) to easy money in real estate (hard lesson # 2). Everyone wants to get rich quick and after the dotcom bust, real estate was the next best thing (now it looks to me like commodities is the next best thing…)

I know a lot of relatively wealthy people and none of them “got rich quick,” even some of the dotcommers that survived that shakeout. Building real wealth takes time, sacrifice, patience and prudent decision making, (plus a lot of luck). Not a celebrity mentality of I’m hot, I drive a Mercedes and therefore I’m going to be rich.

You watch, as soon as this asset class really starts to tank, the stock market will take off like crazy (unless this mess truly snowballs into a national disaster, drags us into a recession/depression of unimaginable proportions, then all markets will be hurting).

Sometimes, I look at the pictures of the Great Depression, with the long lines of out of work Americans and I shudder to think that it could happen again.

[barnaby33]

Um I’m 31, have an almost 800 credit score and take my finances seriously. My dad, a former real estate broker suggested two years ago that I might take out an IO loan to buy a place. I said I respect you dad, but no thanks.

Its fun to place blame, especially on the obvious targets. I have seen alot of it here, but its counter productive. Ultimately someone who takes on the largest financial obligation of their life needs to take responsibility for that obligation. The simplest financial advice in the world is follow the money. If you do that you pretty much can’t go wrong. If you can’t you probably have no business buying something that large.

I will offer one caveat to my responsibility posting earlier. Information like we now have available wasn’t always so. People also previously weren’t taught to make use of it as effectively. However that applies to older people far more than younger ones. Those under 40 year olds may not have been taught good financial planning by their parents, but they sure should know how to access information more quickly.

Remember ignorance is not a viable defense in bakruptcy court.

Josh

[docteur]

Josh – I agree with you 100%. You have a lot of insight at a relatively young age. And you are right, ignorance is not a viable defense in BK court, I have used it and it didn’t work.

It’s amazing how our lives improve when we stop laying blame (including blaming themselves) and just accept the way our life is and that we were the ones who were always there when it unfolded that way.

Taking responsibility for creating our own particular set of circumstances is a huge step towards personal freedom and allows us to move ahead to a much fuller and rewarding existence.

You have learned the most valuable of life’s lessons at a relatively young age – it took me a lot longer and I experienced the severe consequences of acting irresponsibly, not only with my finances but with my relationships as well.

When I was your age I had a $ 10 Million statement, a wonderful family, a home on the ocean and a very cocky attitude, (ala George Chamberlin). Ninety days later I was broke, alone and living in my car. I had nobody to blame so I picked up the pieces and began a 25 year odyssey back to a meaningful life.

I took some hard hits when I was your age (and for many years thereafter) but I grew to understand that living responsibly is the only way to live with integrity. Blame has no place in a purposeful life.

I am glad to have been given a second chance at life and was humbled by the discovery of what really matters during our short time on earth – true freedom is nothing more than taking personal responsibility for all things in life (good or bad).

You have my deepest respect for taking a path that many never choose (as you said laying blame is fun and I might add a lot easier than taking responsibility).

But believe me, for taking the road less traveled…it will make all the difference.

[Author]

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