Law School Discussion

Tough Times

Re: Tough Times
« Reply #10 on: November 25, 2008, 06:39:52 PM »
<rant>

I get really irritated at the whole thing. Alot of the problems are manufactured by people who put too much stock in the, pun unintended, stock market. The stock market is not the economy and when big banks like citi that were doing fine go under because a lot of people have all these irrational fears I just throw up my hands.

There are only two real problems with the economy: loss of home values (making it worthless for people to continue trying to make mortgage payments) and fear. There is plenty of money changing hands out there for people to invest in the stock market, they are afraid. There is plenty of money for banks to lend, but they are afraid to do it because their investors are irrational. If their stock tanks they have to explain why even when it has nothing to do with their business practices.

Lindsey Graham, much though I loathe admitting it, was right when he said it is a "mental recession."

</rant>

I never understood the bolded. Why is it worthless to continue paying back money you borrowed?

dischord

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Re: Tough Times
« Reply #11 on: November 25, 2008, 07:08:47 PM »
Because they're probably going to take a loss on that money.  A mortgage is simultaneously a debt and an investment.

Re: Tough Times
« Reply #12 on: November 25, 2008, 07:12:18 PM »
Because they're probably going to take a loss on that money.  A mortgage is simultaneously a debt and an investment.

The housing market is a market (obv,) so one should expect a rise and fall in home values, right? Particularly people who bought at the peak of a market. I just don't think of a home as a short-term investment. It's not always a low-risk longer-term investment, either. I just don't understand how people can say "Well, my home is worth less than I paid for it, so I'm going to walk away."

dischord

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Re: Tough Times
« Reply #13 on: November 25, 2008, 07:19:33 PM »
Well, I think there's a couple issues there, both of which have to do with the bubble -- some markets were so inflated or have dropped so much that there's (seemingly) no potential for recovery, and a lot of people tried to flip houses, which is inherently not a long-term investment and also not really one worth making for any reason other than profit (unlike a primary home).

I also think that the bubble and the potential for profit was a huge incentive for people to take out unfavorable mortgages -- they thought, oh, I can afford this because I'll make the money back.  Some of these mortgages were so crappy, though, that even when the market recovers that won't be the case.  I think now the logic has flipped -- people are now like, Oh my god, I can't possibly afford this mortgage and even if I make payments it's just throwing money down the toilet so I may as well just file for bankruptcy/let it default/whatever.

I'm not saying that any of this was a good idea -- obviously it was pretty stupid.  Also, my personal opinion is that most mortgages are going into default because their owners just flat-out can't afford to pay, not because they just don't want to.

Re: Tough Times
« Reply #14 on: November 25, 2008, 07:26:47 PM »
I understand the people with mortgages that became unaffordable after a rate reset (though borrowers are just as culpable as lenders/brokers for that) or a job loss (unavoidable, understandable) or similar situations. But I don't have much sympathy for "flippers." It's like any other failed business venture IMO.

I was just responding to the whole concept of "it's 'worthless' to continue paying my mortgage because my home value dropped." Or ripping fixtures out/gutting the house/trashing the property right before foreclosure. Those people are definitely the minority, but they're only exacerbating the problem by increasing default rates and depressing the market through foreclosure sales and all of that.

dischord

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Re: Tough Times
« Reply #15 on: November 25, 2008, 07:36:26 PM »
How common is it that people are just not paying even if they can make payments?  That just seems so counterintuitive that I can't even believe it's happening, but it seems like the world is just generally turning upside-down nowadays.

That said -- and I'm NOT saying this is right, especially from the standpoint of collective action, I'm just making an observation -- I can sort of see a sort of populist logic behind trashing a house where you've been foreclosed on because of dire economic straits.  I mean, there you are, screwed over by high healthcare costs or having been laid off or what have you, in default and being kicked out of your house.  The bank gets to take back your property -- they own what was yours -- and all you're seeing on the news perhaps is that your lender is one of the beneficiaries of a multi-billion dollar bailout. 

I would imagine that a lot of people who would have taken these awful loans in the first place aren't really in a position to understand the complexities of the government's response to this, and might be prone to some very Manichean thinking about the bailout in relation to their own problems.  Plus, people do really irrational things when there's widespread panic. 

I think the only real conclusion we can draw here is that these are strange times.

Re: Tough Times
« Reply #16 on: November 25, 2008, 07:43:42 PM »
How common is it that people are just not paying even if they can make payments?  That just seems so counterintuitive that I can't even believe it's happening, but it seems like the world is just generally turning upside-down nowadays.

Well, this is kind of what I'm wondering. But with people using their homes as ATMs for the past several years, and then hearing that people are deciding not to pay their mortgage, it makes me wonder exactly what's going on.

Quote
That said -- and I'm NOT saying this is right, especially from the standpoint of collective action, I'm just making an observation -- I can sort of see a sort of populist logic behind trashing a house where you've been foreclosed on because of dire economic straits.  I mean, there you are, screwed over by high healthcare costs or having been laid off or what have you, in default and being kicked out of your house.  The bank gets to take back your property -- they own what was yours -- and all you're seeing on the news perhaps is that your lender is one of the beneficiaries of a multi-billion dollar bailout. 

I would imagine that a lot of people who would have taken these awful loans in the first place aren't really in a position to understand the complexities of the government's response to this, and might be prone to some very Manichean thinking about the bailout in relation to their own problems.  Plus, people do really irrational things when there's widespread panic. 

I think the only real conclusion we can draw here is that these are strange times.

I understand the bitterness and everything, and I agree that these are strange times. I think better financial literacy among the average Joe or Jane would go a long way to avoiding these situations in the future. Maybe not, though.

Full disclosure: I live in a metro area with one of the highest foreclosure rates, not due to soaring home values or speculation though, but to job loss.

dischord

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Re: Tough Times
« Reply #17 on: November 25, 2008, 07:55:25 PM »
I definitely think the former question is related in a way to the latter (possible) solution you mentioned.  I definitely think it's a problem that even a lot of very well-off people in this country make ridiculously destructive financial decisions, either just because they think they can or because even they don't have a f-ing clue. 

I mean, it's really tragic that lenders were preying on people who just plainly were not wealthy enough to own homes, and that they're really bearing the brunt of the fallout here.  But then you look at these people who have really high incomes but took out ridiculous amounts of credit to buy their 5th SUV or something . . . and I can't decide if we've gotten to the point where people are really that financially illiterate (and therefore also aren't fazed by damaging their credit scores as a result of not paying off their mortgages) or if there's just something else wrong? 

IMO this is a really depressing conversation.

Re: Tough Times
« Reply #18 on: November 25, 2008, 11:46:16 PM »
A young president whose economic policies are dubious at best.

Yeah, and thank god he is getting his ass kicked out of office in a few months after eight years of his bull.

Re: Tough Times
« Reply #19 on: November 26, 2008, 12:16:08 AM »
<rant>

I get really irritated at the whole thing. Alot of the problems are manufactured by people who put too much stock in the, pun unintended, stock market. The stock market is not the economy and when big banks like citi that were doing fine go under because a lot of people have all these irrational fears I just throw up my hands.

There are only two real problems with the economy: loss of home values (making it worthless for people to continue trying to make mortgage payments) and fear.
There is plenty of money changing hands out there for people to invest in the stock market, they are afraid. There is plenty of money for banks to lend, but they are afraid to do it because their investors are irrational. If their stock tanks they have to explain why even when it has nothing to do with their business practices.

Lindsey Graham, much though I loathe admitting it, was right when he said it is a "mental recession."

</rant>

It's a little bit more complicated than that.  I had someone who works as a small business lender lay-it out for me a few weeks ago in a ten-fifteen minute rant he gave that was perhaps the most lucid explanation I've heard yet, since he has witnessed everything first hand as this mess unfolded starting in the early part of the decade. 

I wish I could be as succinct in my reply as he was, but in short it is not just the housing bubble with people who couldn't afford houses being granted loans that far exceeded their capacity to pay.  This is part of it, but it's also a massive scapegoat being used to obfuscate the greed and market manipulations that was happening elsewhere by people who should have known better. 

First off, in 1992 the deregulation of Fannie and Freddie led to less oversight, which should have stopped those loans from being made and ultimately sold on the open market.  This helped lay the foundation.  Secondly, when the banks wanted to be able to offer additional services and deregulation allowed them to do so - with the caveat that they also had to lend to higher risk borrowers as well (a Clinton add-on).  Here was a double whammy, banks having some of their restrictions loosened which put them into a riskier position and at the same time having to make more credit risky loans as part of the agreement.

I forget the exact impetus about 2002-2003 that started it (it was a government program to fix the economic downturn at the time), but because of the greater returns expected in real estate, massive amounts of credit was flowing into the real estate market from other sources looking to capitalize on the higher gains (this started about 2002 2003 when the small business lender I noted above noticed it was harder to secure small business loans), and banks were asking for adjustments in their lending ratios that put them all at much riskier positions while our democratic congress stood idly by and watched (well, not exactly idly, Dodd who sat on the Finance committee that was suppose to oversee these regulations enjoyed some dubious VIP loans from countrywide - go figure).  Then there were the credit default derivatives which added another layer of complexity to the mess which I don't feel capable enough to give a fully lucid explanation as to how they only compounded the mess we're in.

While the mortgage defaults on many of these homes started the process of the house of cards collapsing, lets not forget that it was that the house was already poorly build to begin with, which poor judgment and greed marring decisions throughout the entire framework. 

So all of this amounts to a sudden dramatic shortening of the available amount of credit (which brings us to about 2-3 months ago) - and this is where the person I mentioned earlier has seen first hand the *&^% we're in.  He can no longer get credit for businesses.  Don't think just home and car loans, but it became suddenly very difficult for him to secure loans for small businesses (that represent 70% of our businesses) so that they could stay open.  For instance, he had one client with signed government contracts in hand and needed financing to allow her to continue operating and he wasn't able to secure money for her.  So businesses which may have normally been sustainable are now finding themselves unable to continue operations, which is leading to more people who are out of work, which only compounds the problem further. 

So what did our government do? Well hey offered 700 billion to banks so they could continue lending.  That money was suppose to be used to provide credit for our country to continue operating.  And what did these assholes do with the money.... they want to buy other troubled banks and give themselves bonuses ("Well we have to retain the talent who screwed it all up in the first place").

And do you really think the slowdown in manufacturing and less people going out for sunday drives is the reason gas prices have dropped nearly 60% in the past few months?  These assholes manipulating the oil exchanges are getting screwed by this and the true cost of gas without their manipulations is becoming apparent.   

Think Enron and WorldCom, but across the entire financial sector.

I'll admit to only having a moderate understanding of this mess, but if the American population had a better idea of the *&^% that's been going on (instead of watching American-f-ing-Idol), I think we'd be in the middle of a revolution with regular public executions of some of these assholes.

Edit: Cleaned up a few items on second reading.  Also, I was harsh on some democrats and want to point out the republicans also had their hand in f-ing us as well, so don't think I was just being partisan.