[Daniel]

Totally agree, Russell. Most people didn’t realize what they were getting into, and fraud (or “fudging”, if you will) was so pervasive that it was more or less considered acceptable practice. “Everybody’s doing it”, as they say.

But, since analyst’s argument is legal and not moral, we can take that line to its logical conclusion. Many mortgage brokers should probably be in jail, if law was to be followed. Some borrowers, too. And a lot of other people up and down the chain. You know, those loan documents have quite a few dotted lines to sign on, for all parties involved. I remember a post by Tanta at CR, long ago, about “representations and warranties”. Every party in the chain makes “representations and warranties” to the next party that the loan docs are basically sound. The borower promises the mortgage broker that he didn’t lie, the broker promises the mortgage lender, the lender promises the Wall Street bank, and the Wall Street bank promises the final bagholder investor. If fraud is found, each party supposedly is entitled to shove the loan back down the chain or to sue the party preceding it, down to the borrower. But, in the go-go days, nobody really gave this a thought, it was only CYA fine print. As Tanta said, people didn’t give any more thought to the possibility of being sued that they did to the possibility of house prices falling.

[Daniel]

Totally agree, Russell. Most people didn’t realize what they were getting into, and fraud (or “fudging”, if you will) was so pervasive that it was more or less considered acceptable practice. “Everybody’s doing it”, as they say.

But, since analyst’s argument is legal and not moral, we can take that line to its logical conclusion. Many mortgage brokers should probably be in jail, if law was to be followed. Some borrowers, too. And a lot of other people up and down the chain. You know, those loan documents have quite a few dotted lines to sign on, for all parties involved. I remember a post by Tanta at CR, long ago, about “representations and warranties”. Every party in the chain makes “representations and warranties” to the next party that the loan docs are basically sound. The borower promises the mortgage broker that he didn’t lie, the broker promises the mortgage lender, the lender promises the Wall Street bank, and the Wall Street bank promises the final bagholder investor. If fraud is found, each party supposedly is entitled to shove the loan back down the chain or to sue the party preceding it, down to the borrower. But, in the go-go days, nobody really gave this a thought, it was only CYA fine print. As Tanta said, people didn’t give any more thought to the possibility of being sued that they did to the possibility of house prices falling.

[Daniel]

Totally agree, Russell. Most people didn’t realize what they were getting into, and fraud (or “fudging”, if you will) was so pervasive that it was more or less considered acceptable practice. “Everybody’s doing it”, as they say.

But, since analyst’s argument is legal and not moral, we can take that line to its logical conclusion. Many mortgage brokers should probably be in jail, if law was to be followed. Some borrowers, too. And a lot of other people up and down the chain. You know, those loan documents have quite a few dotted lines to sign on, for all parties involved. I remember a post by Tanta at CR, long ago, about “representations and warranties”. Every party in the chain makes “representations and warranties” to the next party that the loan docs are basically sound. The borower promises the mortgage broker that he didn’t lie, the broker promises the mortgage lender, the lender promises the Wall Street bank, and the Wall Street bank promises the final bagholder investor. If fraud is found, each party supposedly is entitled to shove the loan back down the chain or to sue the party preceding it, down to the borrower. But, in the go-go days, nobody really gave this a thought, it was only CYA fine print. As Tanta said, people didn’t give any more thought to the possibility of being sued that they did to the possibility of house prices falling.

[Daniel]

Totally agree, Russell. Most people didn’t realize what they were getting into, and fraud (or “fudging”, if you will) was so pervasive that it was more or less considered acceptable practice. “Everybody’s doing it”, as they say.

But, since analyst’s argument is legal and not moral, we can take that line to its logical conclusion. Many mortgage brokers should probably be in jail, if law was to be followed. Some borrowers, too. And a lot of other people up and down the chain. You know, those loan documents have quite a few dotted lines to sign on, for all parties involved. I remember a post by Tanta at CR, long ago, about “representations and warranties”. Every party in the chain makes “representations and warranties” to the next party that the loan docs are basically sound. The borower promises the mortgage broker that he didn’t lie, the broker promises the mortgage lender, the lender promises the Wall Street bank, and the Wall Street bank promises the final bagholder investor. If fraud is found, each party supposedly is entitled to shove the loan back down the chain or to sue the party preceding it, down to the borrower. But, in the go-go days, nobody really gave this a thought, it was only CYA fine print. As Tanta said, people didn’t give any more thought to the possibility of being sued that they did to the possibility of house prices falling.

[Daniel]

Great post, analyst. One comment, though: everything you’re saying holds true only if no fraud or misrepresentation was made in the loan application. I believe, and I strongly believe that, a majority of loans made at the 2005-206 peak involved fraud in one form or another. It could be a vast majority (as in 80% of loans or so). I’m not kidding. A lot of fraud went under the radar.

True story: friend bought house in 2005, he’s OK, no problem paying the loan, everything fine, right? Well, he just refinanced to take advantage of lower rates and noticed that the mortgage broker inflated his income by 40% on the original application. Now, he’s not about to do anything about it, and I’m sure everything will turn out OK for him (he’s got a good job and everything), but think about it for a minute: here is a super-prime guy who’s stunned to find a serious misrepresentation on his loan documents. Want to bet how the subprime / option ARM / stated income / no doc applications look like? Please! Fraud was absolutely overwhelming in those years.

And another story, this time about “morality”: another friend bought in 2005, sold 2008 due to relocation, lost a lot of money in the process. He didn’t short sell, but took out an unsecured loan to pay off his original lender, and he’s now paying back that loan. He’s got very good income, too, but he could have very well walked away. Whether it was a moral or business decison on his part I don’t know (maybe he judged that it’s worth paying to avoid damage to his credit). But here you have it: someone who could have easily walked away, but instead decided to bite the bullet.

[Daniel]

Great post, analyst. One comment, though: everything you’re saying holds true only if no fraud or misrepresentation was made in the loan application. I believe, and I strongly believe that, a majority of loans made at the 2005-206 peak involved fraud in one form or another. It could be a vast majority (as in 80% of loans or so). I’m not kidding. A lot of fraud went under the radar.

True story: friend bought house in 2005, he’s OK, no problem paying the loan, everything fine, right? Well, he just refinanced to take advantage of lower rates and noticed that the mortgage broker inflated his income by 40% on the original application. Now, he’s not about to do anything about it, and I’m sure everything will turn out OK for him (he’s got a good job and everything), but think about it for a minute: here is a super-prime guy who’s stunned to find a serious misrepresentation on his loan documents. Want to bet how the subprime / option ARM / stated income / no doc applications look like? Please! Fraud was absolutely overwhelming in those years.

And another story, this time about “morality”: another friend bought in 2005, sold 2008 due to relocation, lost a lot of money in the process. He didn’t short sell, but took out an unsecured loan to pay off his original lender, and he’s now paying back that loan. He’s got very good income, too, but he could have very well walked away. Whether it was a moral or business decison on his part I don’t know (maybe he judged that it’s worth paying to avoid damage to his credit). But here you have it: someone who could have easily walked away, but instead decided to bite the bullet.

[Daniel]

Great post, analyst. One comment, though: everything you’re saying holds true only if no fraud or misrepresentation was made in the loan application. I believe, and I strongly believe that, a majority of loans made at the 2005-206 peak involved fraud in one form or another. It could be a vast majority (as in 80% of loans or so). I’m not kidding. A lot of fraud went under the radar.

True story: friend bought house in 2005, he’s OK, no problem paying the loan, everything fine, right? Well, he just refinanced to take advantage of lower rates and noticed that the mortgage broker inflated his income by 40% on the original application. Now, he’s not about to do anything about it, and I’m sure everything will turn out OK for him (he’s got a good job and everything), but think about it for a minute: here is a super-prime guy who’s stunned to find a serious misrepresentation on his loan documents. Want to bet how the subprime / option ARM / stated income / no doc applications look like? Please! Fraud was absolutely overwhelming in those years.

And another story, this time about “morality”: another friend bought in 2005, sold 2008 due to relocation, lost a lot of money in the process. He didn’t short sell, but took out an unsecured loan to pay off his original lender, and he’s now paying back that loan. He’s got very good income, too, but he could have very well walked away. Whether it was a moral or business decison on his part I don’t know (maybe he judged that it’s worth paying to avoid damage to his credit). But here you have it: someone who could have easily walked away, but instead decided to bite the bullet.

[Daniel]

Great post, analyst. One comment, though: everything you’re saying holds true only if no fraud or misrepresentation was made in the loan application. I believe, and I strongly believe that, a majority of loans made at the 2005-206 peak involved fraud in one form or another. It could be a vast majority (as in 80% of loans or so). I’m not kidding. A lot of fraud went under the radar.

True story: friend bought house in 2005, he’s OK, no problem paying the loan, everything fine, right? Well, he just refinanced to take advantage of lower rates and noticed that the mortgage broker inflated his income by 40% on the original application. Now, he’s not about to do anything about it, and I’m sure everything will turn out OK for him (he’s got a good job and everything), but think about it for a minute: here is a super-prime guy who’s stunned to find a serious misrepresentation on his loan documents. Want to bet how the subprime / option ARM / stated income / no doc applications look like? Please! Fraud was absolutely overwhelming in those years.

And another story, this time about “morality”: another friend bought in 2005, sold 2008 due to relocation, lost a lot of money in the process. He didn’t short sell, but took out an unsecured loan to pay off his original lender, and he’s now paying back that loan. He’s got very good income, too, but he could have very well walked away. Whether it was a moral or business decison on his part I don’t know (maybe he judged that it’s worth paying to avoid damage to his credit). But here you have it: someone who could have easily walked away, but instead decided to bite the bullet.

[Daniel]

Great post, analyst. One comment, though: everything you’re saying holds true only if no fraud or misrepresentation was made in the loan application. I believe, and I strongly believe that, a majority of loans made at the 2005-206 peak involved fraud in one form or another. It could be a vast majority (as in 80% of loans or so). I’m not kidding. A lot of fraud went under the radar.

True story: friend bought house in 2005, he’s OK, no problem paying the loan, everything fine, right? Well, he just refinanced to take advantage of lower rates and noticed that the mortgage broker inflated his income by 40% on the original application. Now, he’s not about to do anything about it, and I’m sure everything will turn out OK for him (he’s got a good job and everything), but think about it for a minute: here is a super-prime guy who’s stunned to find a serious misrepresentation on his loan documents. Want to bet how the subprime / option ARM / stated income / no doc applications look like? Please! Fraud was absolutely overwhelming in those years.

And another story, this time about “morality”: another friend bought in 2005, sold 2008 due to relocation, lost a lot of money in the process. He didn’t short sell, but took out an unsecured loan to pay off his original lender, and he’s now paying back that loan. He’s got very good income, too, but he could have very well walked away. Whether it was a moral or business decison on his part I don’t know (maybe he judged that it’s worth paying to avoid damage to his credit). But here you have it: someone who could have easily walked away, but instead decided to bite the bullet.

[Daniel]

It has nothing to do with compassion, poor/rich, homeless, etc. A house is not a toaster or a car. You can’t move it from one place to another. If there are too many houses in one place (because people are leaving), then there are simply too many houses. Do you think homeless folks from San Diego would go to Detroit if they were offered free shelter there? I really doubt that. After all, some of those houses sold for $1 (the median price in the city of Detroit was $6,000 last month). I’m pretty sure even the homeless have $1 to spare.

It may seem frustrating for those of us leaving in crowded cities with housing shortages, but houses in some decaying cities like Detroit and Flint are as useful as houses at the North Pole.

[Daniel]

It has nothing to do with compassion, poor/rich, homeless, etc. A house is not a toaster or a car. You can’t move it from one place to another. If there are too many houses in one place (because people are leaving), then there are simply too many houses. Do you think homeless folks from San Diego would go to Detroit if they were offered free shelter there? I really doubt that. After all, some of those houses sold for $1 (the median price in the city of Detroit was $6,000 last month). I’m pretty sure even the homeless have $1 to spare.

It may seem frustrating for those of us leaving in crowded cities with housing shortages, but houses in some decaying cities like Detroit and Flint are as useful as houses at the North Pole.

[Daniel]

It has nothing to do with compassion, poor/rich, homeless, etc. A house is not a toaster or a car. You can’t move it from one place to another. If there are too many houses in one place (because people are leaving), then there are simply too many houses. Do you think homeless folks from San Diego would go to Detroit if they were offered free shelter there? I really doubt that. After all, some of those houses sold for $1 (the median price in the city of Detroit was $6,000 last month). I’m pretty sure even the homeless have $1 to spare.

It may seem frustrating for those of us leaving in crowded cities with housing shortages, but houses in some decaying cities like Detroit and Flint are as useful as houses at the North Pole.

[Daniel]

It has nothing to do with compassion, poor/rich, homeless, etc. A house is not a toaster or a car. You can’t move it from one place to another. If there are too many houses in one place (because people are leaving), then there are simply too many houses. Do you think homeless folks from San Diego would go to Detroit if they were offered free shelter there? I really doubt that. After all, some of those houses sold for $1 (the median price in the city of Detroit was $6,000 last month). I’m pretty sure even the homeless have $1 to spare.

It may seem frustrating for those of us leaving in crowded cities with housing shortages, but houses in some decaying cities like Detroit and Flint are as useful as houses at the North Pole.

[Daniel]

It has nothing to do with compassion, poor/rich, homeless, etc. A house is not a toaster or a car. You can’t move it from one place to another. If there are too many houses in one place (because people are leaving), then there are simply too many houses. Do you think homeless folks from San Diego would go to Detroit if they were offered free shelter there? I really doubt that. After all, some of those houses sold for $1 (the median price in the city of Detroit was $6,000 last month). I’m pretty sure even the homeless have $1 to spare.

It may seem frustrating for those of us leaving in crowded cities with housing shortages, but houses in some decaying cities like Detroit and Flint are as useful as houses at the North Pole.

[Daniel]

Actually, this makes perfect sense. If you choose to lock your rate, you are actually paying for this privilege (the .25%-.375% you are mentioning). But locking the rate has become so commonplace, people don’t even realize that this comes with a cost.

It’s just like credit card merchant fees that are rolled into the final cost that customers pay. You can’t get a discount at Ralphs for paying cash. Only when some merchant (usually some odd gas station) posts a different (lower) price for cash purchases, we see what those costs actually are.

Your lender is just like the gas station that offers a discount for paying cash: it makes the cost transparent.

[Author]

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