[UCGal]

I think it has more to do with declining income and therefore less discretionary income. Most people have some fixed costs (rent, food, gas for the car, etc)… those don’t go away or shrink when your income drops.

The May figures were inflated due to some of the stimulus. June is back to our nominal, sucky economy… less income, but we still have bills, so lower savings.

http://www.ritholtz.com/blog/2009/08/income-falls-13-but/

[UCGal]

I think it has more to do with declining income and therefore less discretionary income. Most people have some fixed costs (rent, food, gas for the car, etc)… those don’t go away or shrink when your income drops.

The May figures were inflated due to some of the stimulus. June is back to our nominal, sucky economy… less income, but we still have bills, so lower savings.

http://www.ritholtz.com/blog/2009/08/income-falls-13-but/

[UCGal]

I think it has more to do with declining income and therefore less discretionary income. Most people have some fixed costs (rent, food, gas for the car, etc)… those don’t go away or shrink when your income drops.

The May figures were inflated due to some of the stimulus. June is back to our nominal, sucky economy… less income, but we still have bills, so lower savings.

http://www.ritholtz.com/blog/2009/08/income-falls-13-but/

[UCGal]

[quote=CricketOnTheHearth]Oh yeah!

That ‘un’s a classic!

I guess what I needed drummed into my head is that the *responsibility* for the mortgages is also divided into teeny tiny bits… the people managing (servicing) them have absolutely no skin in the game.[/quote]

One of the better suggested reforms I’ve heard would require loan originators (who often act as servicers, as well) keep some skin in the game on the mortgage for a period of x-years after the loan is made. If the underwriters had to hold the loan longer, they’d underwrite more conservatively.

Example:
You loan a coworker $100 to cover their rent shortfall till the next day (payday?). You don’t have much worry that they’ll pay you back, since the time period is so short.

Now make the same loan but make it for a year… lots of variables and risks come into play. They could lose their job, they could die, etc… Even if they’re an upstanding person, the risks are higher the longer the term of the loan.

Translate that into mortgages. In the old days (back before the big GSE’s started buying up mortgages) banks made loans locally and new their customers. They did full underwriting and were very conservative. They had to be because they HELD the mortgage for the life of the loan. When banks started selling off the mortgages, the underwriting started changing… they only had to have confidence the loan wouldn’t default before they were able to sell it off. A much shorter period (6months to a year, typically).

It’s been suggested that loan originators be held on the hook for defaults for a period of years after the loan is sold. If the loan defaults, it would automatically revert to the originator/servicer. Kind of like bad seafood.

[UCGal]

[quote=CricketOnTheHearth]Oh yeah!

That ‘un’s a classic!

I guess what I needed drummed into my head is that the *responsibility* for the mortgages is also divided into teeny tiny bits… the people managing (servicing) them have absolutely no skin in the game.[/quote]

One of the better suggested reforms I’ve heard would require loan originators (who often act as servicers, as well) keep some skin in the game on the mortgage for a period of x-years after the loan is made. If the underwriters had to hold the loan longer, they’d underwrite more conservatively.

Example:
You loan a coworker $100 to cover their rent shortfall till the next day (payday?). You don’t have much worry that they’ll pay you back, since the time period is so short.

Now make the same loan but make it for a year… lots of variables and risks come into play. They could lose their job, they could die, etc… Even if they’re an upstanding person, the risks are higher the longer the term of the loan.

Translate that into mortgages. In the old days (back before the big GSE’s started buying up mortgages) banks made loans locally and new their customers. They did full underwriting and were very conservative. They had to be because they HELD the mortgage for the life of the loan. When banks started selling off the mortgages, the underwriting started changing… they only had to have confidence the loan wouldn’t default before they were able to sell it off. A much shorter period (6months to a year, typically).

It’s been suggested that loan originators be held on the hook for defaults for a period of years after the loan is sold. If the loan defaults, it would automatically revert to the originator/servicer. Kind of like bad seafood.

[UCGal]

[quote=CricketOnTheHearth]Oh yeah!

That ‘un’s a classic!

I guess what I needed drummed into my head is that the *responsibility* for the mortgages is also divided into teeny tiny bits… the people managing (servicing) them have absolutely no skin in the game.[/quote]

One of the better suggested reforms I’ve heard would require loan originators (who often act as servicers, as well) keep some skin in the game on the mortgage for a period of x-years after the loan is made. If the underwriters had to hold the loan longer, they’d underwrite more conservatively.

Example:
You loan a coworker $100 to cover their rent shortfall till the next day (payday?). You don’t have much worry that they’ll pay you back, since the time period is so short.

Now make the same loan but make it for a year… lots of variables and risks come into play. They could lose their job, they could die, etc… Even if they’re an upstanding person, the risks are higher the longer the term of the loan.

Translate that into mortgages. In the old days (back before the big GSE’s started buying up mortgages) banks made loans locally and new their customers. They did full underwriting and were very conservative. They had to be because they HELD the mortgage for the life of the loan. When banks started selling off the mortgages, the underwriting started changing… they only had to have confidence the loan wouldn’t default before they were able to sell it off. A much shorter period (6months to a year, typically).

It’s been suggested that loan originators be held on the hook for defaults for a period of years after the loan is sold. If the loan defaults, it would automatically revert to the originator/servicer. Kind of like bad seafood.

[UCGal]

[quote=CricketOnTheHearth]Oh yeah!

That ‘un’s a classic!

I guess what I needed drummed into my head is that the *responsibility* for the mortgages is also divided into teeny tiny bits… the people managing (servicing) them have absolutely no skin in the game.[/quote]

One of the better suggested reforms I’ve heard would require loan originators (who often act as servicers, as well) keep some skin in the game on the mortgage for a period of x-years after the loan is made. If the underwriters had to hold the loan longer, they’d underwrite more conservatively.

Example:
You loan a coworker $100 to cover their rent shortfall till the next day (payday?). You don’t have much worry that they’ll pay you back, since the time period is so short.

Now make the same loan but make it for a year… lots of variables and risks come into play. They could lose their job, they could die, etc… Even if they’re an upstanding person, the risks are higher the longer the term of the loan.

Translate that into mortgages. In the old days (back before the big GSE’s started buying up mortgages) banks made loans locally and new their customers. They did full underwriting and were very conservative. They had to be because they HELD the mortgage for the life of the loan. When banks started selling off the mortgages, the underwriting started changing… they only had to have confidence the loan wouldn’t default before they were able to sell it off. A much shorter period (6months to a year, typically).

It’s been suggested that loan originators be held on the hook for defaults for a period of years after the loan is sold. If the loan defaults, it would automatically revert to the originator/servicer. Kind of like bad seafood.

[UCGal]

[quote=CricketOnTheHearth]Oh yeah!

That ‘un’s a classic!

I guess what I needed drummed into my head is that the *responsibility* for the mortgages is also divided into teeny tiny bits… the people managing (servicing) them have absolutely no skin in the game.[/quote]

One of the better suggested reforms I’ve heard would require loan originators (who often act as servicers, as well) keep some skin in the game on the mortgage for a period of x-years after the loan is made. If the underwriters had to hold the loan longer, they’d underwrite more conservatively.

Example:
You loan a coworker $100 to cover their rent shortfall till the next day (payday?). You don’t have much worry that they’ll pay you back, since the time period is so short.

Now make the same loan but make it for a year… lots of variables and risks come into play. They could lose their job, they could die, etc… Even if they’re an upstanding person, the risks are higher the longer the term of the loan.

Translate that into mortgages. In the old days (back before the big GSE’s started buying up mortgages) banks made loans locally and new their customers. They did full underwriting and were very conservative. They had to be because they HELD the mortgage for the life of the loan. When banks started selling off the mortgages, the underwriting started changing… they only had to have confidence the loan wouldn’t default before they were able to sell it off. A much shorter period (6months to a year, typically).

It’s been suggested that loan originators be held on the hook for defaults for a period of years after the loan is sold. If the loan defaults, it would automatically revert to the originator/servicer. Kind of like bad seafood.

[UCGal]

I would be laughing hard if it didn’t ring so true.

[UCGal]

I would be laughing hard if it didn’t ring so true.

[UCGal]

I would be laughing hard if it didn’t ring so true.

[UCGal]

I would be laughing hard if it didn’t ring so true.

[UCGal]

I would be laughing hard if it didn’t ring so true.

[UCGal]

[quote=SK in CV]Great post analyst.

When homebuyers and lenders enter into mortgage contracts, each side takes on risks. Included in the risk that the lender assumes, is that the collateral will maintain value in excess of the loan amount. When that doesn’t happen and a homeowner continues to make payments, for whatever reason, they are performing above and beyond the implied expectations of the contract.

I find it no more immoral for borrowers to stop paying in these circumstances than for the lender to foreclose. (Actually, I don’t think ethics or morals should even be a consideration. Lender corporations, despite the courts treatment of them as a “person”, rarely act out of ethical or moral considerations. They act based of legal considerations.)

Things get a little bit dicier for recourse loans, risks are greater for the borrrower, more options exist for the lender. But morals and ethics still don’t come into play in any greater degree. Risks are still taken by the lender. And the legal consequences of failing to pay are spelled out in the contract. Both borrower and lender have to live with those consequences.[/quote]

I would argue that to stop paying while continuing to live in the home is unethical. It’s trying to play both sides. Breaking the contract but still reaping the benefits (occupation of the house.)

I believe that there is plenty of blame and pain to share among the parties to the contract – borrower loses downpayment and takes credit hit. Lender takes hit to investment and has costs associated with reselling the property. But if the person doesn’t vacate and chooses to not pay – in some ways, that’s theft. It’s kind of like “dining and dashing”. They are reaping the benefits without the costs.

[UCGal]

[quote=SK in CV]Great post analyst.

When homebuyers and lenders enter into mortgage contracts, each side takes on risks. Included in the risk that the lender assumes, is that the collateral will maintain value in excess of the loan amount. When that doesn’t happen and a homeowner continues to make payments, for whatever reason, they are performing above and beyond the implied expectations of the contract.

I find it no more immoral for borrowers to stop paying in these circumstances than for the lender to foreclose. (Actually, I don’t think ethics or morals should even be a consideration. Lender corporations, despite the courts treatment of them as a “person”, rarely act out of ethical or moral considerations. They act based of legal considerations.)

Things get a little bit dicier for recourse loans, risks are greater for the borrrower, more options exist for the lender. But morals and ethics still don’t come into play in any greater degree. Risks are still taken by the lender. And the legal consequences of failing to pay are spelled out in the contract. Both borrower and lender have to live with those consequences.[/quote]

I would argue that to stop paying while continuing to live in the home is unethical. It’s trying to play both sides. Breaking the contract but still reaping the benefits (occupation of the house.)

I believe that there is plenty of blame and pain to share among the parties to the contract – borrower loses downpayment and takes credit hit. Lender takes hit to investment and has costs associated with reselling the property. But if the person doesn’t vacate and chooses to not pay – in some ways, that’s theft. It’s kind of like “dining and dashing”. They are reaping the benefits without the costs.

[Author]

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