Is this the subprime apocalypse? (Or is it just a scary story?)
In February, I posted here about Roubini Global Economics' prediction that defaults in subprime mortgages would ripple through the financial system and set off a recession. The next week, the stock market tanked, and lots people blamed subprimes. What's the link between subprimes and the rest of us? Here's how I summed it up last month:
[The] argument is pretty simple: Mortgage borrowers with the worst credit are defaulting, and the financial institutions that own these loans are taking a hit they didn't see coming. That's going to make them more cautious about lending money--and not just to subprime borrowers, but even to those of us with sparkling credit scores. What's more, Roubini observes, even many prime borrowers are low on savings and haven't had a serious raise for a while. And falling real estate values have taken some of the air out of their home equity.

Stir this witches brew together long enough and you get a very unhappy consumer. We're about due for an economic slowdown as it is. Roubini thinks the credit crunch might turn that slowdown into a "hard landing."
Actually, I oversimplified things a little bit here. You might, while reading this, picture in your head a single bank that has given out some loans to prime borrowers, and some other loans to subprime borrowers. When the subprime borrowers start missing payments, a nervous bank president looks at his balance sheet and calls the head loan officer and tells him to tighten up lending requirements across the board. While that's not a bad way to think about it, in reality we're not talking about individual banks but an entire financial system. Banks sell their mortgages, which get bundled into trade-able securities, which in turn become the raw material for all manner of fancy financial derivatives. This stuff ends up on the books of mutual funds, hedge funds, insurance companies, pension funds, etc. (Yes, I'm oversimplifying here, too.) Yesterday in the New York Times, Gretchen Morgenson painted a vivid, rather scary picture of this market, strongly suggesting that it's set to go pop! in our faces any day now. Felix Salmon raises some questions about the Times analysis here.

So what's going to happen? I dunno. But when I'm weighing the likelihood of a prediction coming true--or worse, making a prediction myself--I try to remember some of what I've learned from psychologist Philip Tetlock. He's made a study of expert predictions, and he's found that they really aren't very good. They do about as well, he says, as "the moderately attentive reader of good newspapers."

That doesn't mean you shouldn't listen to experts like Roubini; you just shouldn't overvalue them. But what's even more interesting about Tetlock's work is why experts make mistakes. One problem experts tend to have is loquacious overconfidence: They have a lot of information, so they can put together very convincing stories to describe extreme outcomes. Tetlock also found that experts were more likely to predict extreme events if they were forced to imagine specific story-lines. For example, they were more likely to predict the disintegration of Canada if they were asked to put odds on a set of scenarios--such as an economic downturn, combined with political victories for Quebec separatists--than they were if they were just asked about the chances Canada breaking up. Imagination is powerful.

I'm no expert. But three weeks ago, if you had asked me whether subprime mortages were a threat to the economy I would have shrugged and said, "Ehhhh.... probably not." Statistically, that's a fairly safe response. The status quo has a way of staying that way, give or take. But in the past few weeks I've been reading Roubini, Morgenson and Salmon, and blogs like Calculated Risk. I'm talking about this stuff at the office, and I'm following the anxious comments on the subject on this blog. I'm learning all about CDOs, HELs, AltAs and the ABX. (Three weeks ago, if Alex Trebek had asked me what those were, I'd have answered, "What are the worst fraternities in Urbana-Champaign?") I have lots of information now. Suddenly, the possibility of a housing credit crunch that breaks the economy is much more vivid to me. That doesn't necessarily mean it is any more likely.

Update 3/14: See my new post for more on our credit-cruch conversation.
Posted by Pat Regnier 4:40 PM 207 Comments comment | Add a Comment

Hi. I liked your post.

I would like to add however, that oddsmakers in Vegas allow you to bet on any kind of sport. Its predicting the future.

What they found was that no matter how you try to predict the future, you will be wrong more times than right. Regardless of what you do or what you know.
Posted By Tom Davie, Palm Bay, Florida : 11:24 AM  

Good points Pat. What continues to amaze me are some of the predictions that point to complete economic catastrophe. Yesterday Bill Fleckentstein said there was about to be a credit freeze in housing. I disagree.

There are certainly things to be concerned about, but a complete economic collapse is not one of them.

The other concern generated by all this talk of "tightening" is that first time home buyers won't be able to purchase. This as well is not true.
Posted By Nigel Swaby, SLC, UT : 11:42 AM  

Dude, what about Shiller? Ask your psychologist buddy about him.

He also predicts a significant decline in housing prices.

BTW did you hear what Sigmund Freud said about denial.
Posted By Sacramento, CA : 11:54 AM  

Nigel,
Fleck had some numbers and data to back his post, and one cannot deny his recent prescience regarding the mortgage market. Would you care to share some reasons why you don't think there will be a credit crunch in housing?
Posted By Nicole, Washington DC : 12:02 PM  

This situation together with the fact that Bank of America intends to give credit cards to illegal aliens will no doubt end up causing a debacle similar to the Savings Bank collapse of some years ago which the taxpayers ended up paying for.
Posted By Peter Alford - Massachusetts : 12:10 PM  

The problems envisage with subprimes are simply a symptomatolody of the basic errors in the free trade we have embraced. Free trade is giving free a wealth of have nations to have-nots. At end you would have given free even the silverware of the house. When you have reached that stage then you would have no collateral for anything except your own soul.
Posted By Rudy, Toronto, Ontario, Canada : 12:13 PM  

Pat Regnier must be hurt at his falling home price from this desperate attempt to spin this article.

It is ALREADY happening, Pat..Wake up!
Posted By Andrew Johnson. Rockville, MD : 12:13 PM  

Funny. I thought you were talking about me! The last few weeks I've digested so much information that my mind has been racing with extreme scenarios. But will they really happen? I guess that's the million dollar question. Spread your risk. In the end that is the only advice I can think of that will generate any kind of predictable result.
Posted By Troy, Seattle WA : 12:19 PM  

the housing market will crash. this is just the start. see: housingdoom.com and boycotthousing.com.
Posted By J. Hamers silicon valley,ca : 12:20 PM  

Good ol Greenspan caused this entire slump. Why doesn't anyone realize that it is Alan Greenspan that screwed 25% of American mortgage and credit card holders. He raised the prime rate 18 times and increased my mortgage and credit card payments accordingly. This increased my own mortgage payment from 740.00 to 1600.00 in a year and a half. Now I am nearing bankruptcy and honestly don't care anymore. I have been just barely holding it together for nearly a year now and because of the realestate slump my house lost 35,000 in value and now i am upside down on the house and cannot refinance into a fixed mortgage. I have been in finance for 20 yrs and have never seen a nightmare like this. An easy solution reduce the prime rate back down to a reasonable level. So those of us who have adjustable mortgages can actually keep our homes and not destroy the market even more with 1000's of foreclosures.

Dominic M. Mac
Posted By Dominic M. Mac, Waterford, Michigan : 12:21 PM  

Did you read this:

Cognitive biases potentially affecting judgment of global risks

Eliezer Yudkowsky

http://www.singinst.org/ourresearch/publications/cognitive-biases.pdf
Posted By Alexei Turchin, Moscow, Russia : 12:22 PM  

Andrew,

For the record, I rent. and I wouldn't deny for a moment that real estate a.) got way too expensive and speculative, and b.) is in a downturn that may last for a while. The open questions are whether a credit crisis is coming that will hit even prime borrowers, and whether this will trigger a "hard" economic landing.
Posted By Pat Regnier, New York, NY : 12:26 PM  

Fleckenstein runs a hedge fund and I suspect he hears plenty of whispers from the smart money. I won't say he's always right - smart money isn't always right - but I listen pretty carefully to what he says and what he implies.

I keep having images flash in my head of a flaming plane spiraling toward the ground; the pilot looks over to the co-pilot and says, "Don't worry, someone will pull us out of this soon...."
Posted By Brandon, Ann Arbor, MI : 12:29 PM  

Pat,

You will no doubt have many people like Peter and Rudy post that you are a shill of the REIC (Real Estate Industrial Complex). Or that you are a bitter home owner.

Take a look at some housing blogs and you will be amazed at the paranoia out there. The black helicopter crowd has found a new home (no pun intended) and it's in the housing crash area. In this world San Diego home prices will plummet 90% (or more like SD was supposed to have plummetted 90% by now but the statistics are all being fudged). A global depression is already underway. Hyperinfltion is also underway, which is amazing given that hyperinflation and a global depression are like oil and water.

Istead of black helicopters these people now see conspiracies involving illegal aliens, Bank of America, mortgages, free trade, China, Bernake and god knows what else. Same paranoid people, just a new set of ideas.

They are however quite entertaining to watch.
Posted By Ed in Las Vegas : 12:30 PM  

"I'm learning all about CDOs, HELs, AltAs and the ABX. (Three weeks ago, if Alex Trebek had asked me what those were, I'd have answered, "What are the worst fraternities in Urbana-Champaign?") I have lots of information now. Suddenly, the possibility of a housing credit crunch that breaks the economy is much more vivid to me. That doesn't necessarily mean it is any more likely."

you're right. they all existed BEFORE you even knew what they were so the odds of them tumbling down has not changed... just your "awareness" of them has.
Posted By arlington, va : 12:32 PM  

Pat,

"Mortgage borrowers with the worst credit are defaulting, and the financial institutions that own these loans are taking a hit they didn't see coming" couldn't be more wrong. Oh yes, they saw it coming.

The only reason I wouldn't lend money to my brother-in-law is because of his ability to pay back. C'mon, anyone with half a brain would never lend money to a guy with a low paying job, no savings - hence no reserves. On top of that, the guy has problem paying his bills because he always borrow more than he can pay back.

And the subprime lenders are willing to lend this guy half a million dollars!!!

Their ability to predict was affected because of those big commision checks (or those big bonus checks for ops). And also, they were calculating that even if these defaults hit, the home value increase should cover the loss itself. And there we have New Century Mortgage.
Posted By Patrick T. - Houston, TX : 12:33 PM  

Those of us who watched first hand the housing collapse in Texas in the mid-80's hoped we would never see that again.. it was pretty awfull. All of us had neighbors who mailed their house keys back to the bank, and moved out in the middle of the night. Housing values in Houston have just returned to levels before the collapse: after 20 years. Reason for collapse ? Oversupply. Today you have oversupply plus overextended owners, plus credit crunch, oh my. Looks worse.
Posted By G. Daniel, overseas in the Benelux since relocation Texas with a mortgage higher than sales price. : 12:38 PM  

well written pat, but all the blogs are missing the big story here, such as, how the big banks got scammed...i am an a/e in the subprime sector and still lending strong....but under tighter guides of course, but the story not being told is the consumer that scammed the industry into this mess....we are to blame for sure, but we lent money, which is not illegal, the consumer scammed the lenders which is illegal. i would be happy to elaborate.
Posted By tom, miami, fl : 12:41 PM  

This is an FYI disclosure: the second post on this topic from "Nigel" comes from a perennial housing bull who is also trying to plug his own blog.
Posted By skibum, Bay Area, CA : 1:11 PM  

Yes, it is true that banks are still lending, but due to the change in markets - it will end up costing many people through higher interest rates and mortgage insurance due to lower market values. That is less money for them to spend elsewhere. I should know, I just refinanced and due to the decrease in my market value, it will end up costing me more than it did two years ago.
Posted By Dennis, Ankeny, Iowa : 1:12 PM  

Gambling is what is was and still is. What I would like to see is a chart showing what the historical trend in housing should be and go back to the beginning of this mess and extrapolate a line up what the price should be. That is the price I would give to a potential seller, nothing more and nothing less.
Posted By Andrew, Aliso Viejo, CA : 1:16 PM  

With the population growing at less than 1% per year and overall costs increasing by less than 5% per year, a real estate growth rate of 10% to as much as 20% was not sustainable in the long term.

The Real Estate boom was due to lax lending standards, zero down paymemnt permission and low initial loan rates.

These factors enabled people with limited resources and functionally no cash reserves to enter the real estate market.

The escalation of these teaser rates, a general increase in mortgage rate and a declinehome values will cause defaults.

These factors will initiall impact the sub-prime market, but then will most likely spread to the qualified first-time buyer market. As turbulence increases, the problems in the real estate market will spread to its suppliers and then to the job market.

Most likely the problem will become quite extensive over the next 12 to 24 months.
Posted By Kenneth Jaggers, Corona del Mar, CA : 1:25 PM  

"Consumers scammed the industry" ??
That's the most novel comment I've heard in the last year !!

The lenders are the sole party to blame
EVERY time around, when they arm people
with more and more dollars to keep bidding up the price, against all the other people who have been similarly armed with loans, who's only purpose is
to generate bigger and bigger commissions. When the lending stops and
the bidding dollars are gone, what's supposed to happen?

Again, the point must be made that this
will be a very geographically influenced correction, and there are many enclaves that will not be very
impacted.
Posted By R Schier Norwalk,CT : 1:28 PM  

If subprime borrowers can no longer buy homes which in turn fuels our economy with the buy-sell secrenio. If you think we have a lot of homes for sale now on the market, just wait for that to happen. Builders will stop building and Building Material Distribution companys will go bankrupt. If this economy doesn't prove to our government that Americans are not getting paid enough and should hold major companies responsible for pay raises to keep up with economic times, then America will be bankrupt in ten years.
Posted By Paula, Atlanta Georgia : 1:33 PM  

With a weak consumer and other slowing economic news, I think we are due to see a slow down in the stock market with or without the subprime meltdown. WITH the subprime meltdown, it just adds more pressure to an already weak market.

www.marketflavor.com
Posted By Aaron San Francisco, CA : 1:34 PM  

Start Preparing for the next
GREAT DEPRESSION!
Posted By Robert R. St Cloud, MN. : 1:37 PM  

DUDE what the hell are you talking about it looks like your rambling on this in no way helps me or anyone figure out what is going on you keep talking about sonme Roubini dude and Canada who cares ??? talk about real stuff and whats really going on in TODAY"S market
Posted By Franchesco Laguna Beach : 1:40 PM  

It's simple. If you're stuck with an upside down mortgage or didn't convert your ARM to a FRM in the last 18 months, you're either greedy or stupid.
Posted By Jeff, Greenwich, CT : 1:44 PM  

Kennth,

You are right on the money.
Posted By Andrew, Columbus OH : 1:46 PM  

In regards to Subprime lenders, everyone asks how did this happen?

It's called crappy underwriting from the "big boys". Approving 100% financing (approx. $4500/mth) for a stated wage-earner for a $600k purchase for a borrower who makes $40k/yr is not called responsible u/w.

The over inflated house prices also caused this. Making it impossible for anyone to qualify for a home (3brm, 2bth, 1500 sq. ft.)@ $600k.

So before anyone says it's the guidelines of these lenders, that is not the problem. It's the push to keep volume up which makes shareholder's happy.

And now for those of us still in the subprime wholesale mortgage biz, we will ALL suffer because of incompetent underwriter's of subprime loans. Bottom line is if a borrower can't afford the payment (debt qualify), then why approve them? It's been happening for 2yrs now and it's going to get alot worse before it gets better....this is only the beginning.
Posted By Anonymous : 1:50 PM  

Just like Greenspan said, a recession is imminent. This just feels too much like the early 90's, and we are simply due. How's that for a technical analysis? Hang on to your hats, it's going to get ugly in the next year or so. Then it'll take another couple of years to pull out. I'm not getting that home equity loan after all, because I don't think we've seen anything yet.
Posted By Sarah Drumlin, Prospect, CT : 1:52 PM  

Defaulting subprime loans themselves are not much of an issue-- the total value lost is not all that large compared to, say, a few airlines and auto manufacturers losses over a few years-- but the lemming problem could be an issue. Lenders get pressured by the investment banks and other funding sources; the lenders tighten credit; interest rates rise and causes more defaults; which results in a virtuous downward spiral. This could indeed be a problem. Especially if everyone stops investing to see what happens.

But the root magnitude of the loss simply isn't very great. The subprime loans are backed by something real which has value, so for example:
suppose there is usd1000Bn in subprimes.
suppose 30% defaults
suppose 1 year of payments was made at 5% simple before default
suppose 60% gross average recovery after expenses (property liquidation, lower return for 2nds, legal fees, etc.)

Very broadly, this is a real loss of usd100Bn, a significant amount of which is born by investment banks and other financial institutions which only cry crocodile tears for something that small (they are well aware of the risk/reward, and if they weren't they are in the wrong line of business. A few tears helps distract the unwashed masses from the huge bags of money accumulating elsewhere).

Regardless, the loss is too small to be really significant to the economy compared to the past losses withstood such as Amaranth, GM, Ford, Delta, .... The real risk is the lemming effect of everyone running for the exits at once and being crushed in the resulting recession.

The latter panicy response is why it might be a very good investment to buy the "distressed" subprime portfolios (as has been observed to be happening), which may be underpriced. Or may not. How much risk can you take for what reward?
Posted By Mike H,Rhinebeck,New York : 1:58 PM  

If you remove buyers from a market by restricting capital and increase the supply of the product they would have purchased, the result will be greater supply and lower demand which leads to lower prices...period. Unfortunately, most Americans have been using their home as an ATM machine and that too will end. Remember 1988? You will.
Posted By Jeff Martin East Northport NY : 1:59 PM  

There is no Question housing prices will continue to decline. What has happened is restrictions for first time homebuyers have gotten tighter. In a stabilizing housing market (it was just starting to stabilize), we need people to go out and buy houses to help prices come up. What we have done is effectively DECREASE the # of new homebuyers out there (by increasing eligibility requirements). Same number of houses for sale, fewer buyers, leans prices drop. No expert needs to point this out.
Posted By Kris Mailepors, Dover NH : 2:03 PM  

The mortage/credit industry PUNISHES those who can least afford obscenely higher interest rates (the poor and those with "bad" credit). I hope they take a REAL bath!

These lending predators belong behind bars AS MUCH AS any other type of criminal.
Posted By Carolyn Gray, Jupiter, FL : 2:04 PM  

It'll be very interesting for someone working as an A/E in the subprime sector to elaborate how the consumers scammed the lenders. So, Tom from Miami, Fl, please entertain us with your theory.

I hope to change my view after your explanation. Currently, I believe the scam lies along the Loan Officers, their sale Managers, Brokers, Loan Processors, Account Executives, Set up Technicians, Underwriters, Jr. Underwriters, Closers, Funders, Post Closers, Quality Controllers, and their Operations Managers.

So, I am looking forward to see how this scam works to perfection...bypassing all these professionals.
Posted By Patrick T., Houston, TX : 2:05 PM  

I predict America will be on the verge of Bankrupcy in a decade or so, It is a wake up and wake up call for all of us. We should slow the spending and start saving if not the dooms day is very near. China & India will take over the entire world's econamy which is already happening !!
Posted By Rao, Hatfield, Pa : 2:06 PM  

About 4 years ago when the housing market was really hot in ATL a seller try to get me and my gf to buy a 400k home when we only brought home 120k. We said that was out of our budget which in turn she said no problem get an interest only loan and turn the house in 5 years. "No one stays in the same home more than 5 to 7 years" she said. My somewhat nieve gf thought maybe she was right. Me on the other hand thought what if? What if we can't sell that house in 5 years due to a downturn, what if one of us loses our jobs, what if we get stuck with having to pay that principle. I don't know how well the people who bought those houses are living but I live in a nice ranch on a basement with only a $800 house payment and utilities as bills with 2 years of income saved up for when things get worse. And that's after taking a 20% pay cut and having to pay my part of my health insurance. The banks knew what they were doing, now they can pay for their stupidity. The only problem is the ones who planned ahead are going to pay for it in some way or another in our taxes. What's the old saying- you can't get blood out of a turnip.
Posted By Scott-ATL, GA : 2:07 PM  

All of the loans, prime or subprime are backed by collateral (a house). If the borrower defaults the bank doesn't necessarily loose the money loaned. It is just delayed in getting repayed until it can forclose and sell the asset. In many cases except for those that bought very recently the asset (house) is probably worth more than the borrower owes.
Posted By Pete, Gilbert AZ : 2:14 PM  

Econ 101 taught me that assets, liabilities and equity means that if these 'subprime' loans default and go into foreclosure, then the bank takes it's mostly 'interest only' payments that it has received so far on these type of loans and laughs all the way to the....bank! Beside that now they have an asset they can sell and retire the loan and probably still make money. Unless the home is in an area that the housing prices fall significantly and STAY DOWN for a few years I don't see a major 'hit' to the overall economy just because some subprimes borrowers go back into the rental market....me being one of them...probably.
Posted By Paul, Stockton, CA : 2:15 PM  

Will housing lead to a financial crisis? Why shouldn't it?? Only a few months ago the lending standards were and continue to be so lax that the ONLY prequalifier to obtaining a home mortgage was a pulse.

Just like the stock market, when schmos on the street think they can flip real estate with a McDonald's income and no knowledge/experience, the fun is over.

Exactly how many of these folks as well as hard working americans, got sucked into option ARMs or interest only scams on the basis that they could simply flip in a few weeks? A lot.

if we come from the perspective that a mojority of America's wealth and spending is directly tied to real estate ownership, and that entire market is collapsing, then how could the entire financial network NOT be affected negatively?
Posted By Florida, Home of Foreclosures! : 2:18 PM  

Lend money recklessly to people who can't afford to buy houses, and then be "surprised" when they don't pay you back? The next thing you know we'll all be "surprised" when the cost of beef goes up because of all the corn being converted (also recklessly) to ethanol instead of animal feed!
Posted By Don Fredrick, Mount Prospect, IL : 2:23 PM  

Losing the subprime buyer will expose the entire housing market as the enormous game of musical chairs that it has been. Now that the music has stopped, who is left without a chair? The subprime buyers will walk away from their speculative, overleveraged investments and the banks will get stuck with worthless housing stock. Many strong credits will also lose a main source of income(home equity) and run into trouble attempting to sell their investment properties. That's when it will get interesting.
Posted By Ben Magoun, Naples,Florida : 2:29 PM  

I have no sympathy for the lenders, the flippers or anyone who bought into the real estate market by overextending their limits. It is time to pay your debts and pay the piper. The greed I have seen during the boom and the spin the realtors and the mortgage folks put on things to dupe people will surely come back to bite them in their wallets.
Posted By MP, Hartford Ct : 2:41 PM  

As some one that originates sup prime loans I feel like a few things are being overlooked

Energy Prices\
When some one that has a history of struggling financially is hit as hard as we have been with utility bills trippling and gasoline prices doubling something has to give.... many of them are hanging them up and moving to Relatively less expensive apartments

The Rodeo has just started/
With many of the programs that that helped folks get into homes a couple of years ago evaporating you will find many of these borrowers struggling to keep their homes when their arms adjust upward and energy prices remain high

Downward Spiral Housing Market/
With the programs gone you have less buyers... Apartment rents are relativley low due to the housing boom so why buy... The median home price will fall because of higher interest rates and higher funds to close... Investors walk away from rental homes because the property surplus allows renters to buy for cheap or rent apartments for cheap

The Fix\
The fed needs to lower interest ratres.. The knee jerk pulling of no money down programs need s to be replaced with a 3% in the transaction requirement or the elimination of financing some types of closing costs

Energy prices are the problem\
We had to raise rates to fight inflation... Energy costs are one of the largest inputs.... The increwased default rate is just a SYMPTOM not the problem....

Rental Properties underwriting guidlines were tooo loose how many of these properties are rentals....
Posted By Bruce Flower Mound TX : 2:52 PM  

If this were airlines or automakers, the federal government would be falling all over itself to bail the thing out. It's actually much more serious than that, but our current administration is far more interested in other things at the moment.

Wonder what would happen if there was a new GSE a la FNMA and FHLMC and GNMA to address solely the subprime market? Oh, wait, that won't happen because Bernanke is trying to convince the average American that it's the two big GSEs (FNMA and FHLMC) that are going to wreck the economy with the amount of outstanding debt they service. (Well, duh, what the heck were they created for, if not to purchase mortgage debt? Gee, Ben, you don't look blonde on TV.)

It makes you wonder how bad this is all going to have to get before the current resident of 1600 Pennsylvania realizes that it's going to be a worse hit to the economy overall than 9/11 or the possibility of Chrysler tanking.
Posted By Donna, Oklahoma City, OK : 2:53 PM  

Very good points, Pat. I do think the story really isn't in the "number" of defaults, it's a bigger story in how defaults effect the ways financial institutions manage the availability of credit.

I'm particularly intrigued as to whether some babies are being thrown out with the bathwater as of late.

Although I understand the differences and associated risks between prime and sub-prime lending, my personal experience is that reputable lenders seem to take little risk when it comes to mortgage defaults. Responsible lenders had options to require: minimum down payments, private mortgage insurance, favorable terms for adjustable rate mortgage, etc.. And, ultimately, they can foreclose.

I know banks would prefer to sit back and collect interest without managing damage control. But, sub-prime or not, the long-term question for the sector also seems to be how to sort out those who had the foresight to build in a sufficient measure of risk-control from those lenders who measured their success during the housing boom strictly by the number of mortgages they wrote.

Any ideas??
Posted By Kent, Iowa City, IA : 2:56 PM  

History has a tendency to repeat itself. Look at the 70's when the Farm Credit system and Banks loosened their credit standards during the runup in ag land values. When the values could no longer support themselves because they couldn't cash flow, the market crashed bringing down a record number of bank failures in the Midwest not seen since the Great Depression.

Currently, too many banks placed the first mortgage loan in the seconday market but carried back a home equity loan to basically finance 90 to 100% of the purchase. Even though the bank won't be affected by the secondary market loan defaulting, their home equity loan will default. They will revise their credit standards by not allowing 90-100% financing and credit will eventually tighten.

The Banks that didn't chase the market will come out basically clean. We are already seeing a higher number of foreclosures where standards were relazed over the past 3-4 years. This will force the secondary market funders to rethink their credit standards and tighten them as well.
Posted By Roy Budlong, Fort Atkinson, WI : 2:58 PM  

I'm sorry but I had to laugh at the guy blaming Greenspan for his credit problems. Rates are still at an all time low buddy. If you couldn't afford your home at 7% then perhaps you shouldn't have bought it... Your upside down financial situation is humorous to me only because you're "an accountant for 20 years". You didn't think an ARM loan was a bad idea after the first 17 rate hikes? What were you waiting for to get into a fixed loan? I got rich in the same time span you got turned upside down. Don't blame Greenspan, blame yourself. By the way, what accounting firm do you work for? I need to know who to steer clear from.
Posted By Phoenix, AZ : 3:06 PM  

So glad to see you quote Tetlock whose work on this issue has been all too often over-looked.

If you are trying to get on the evening news you can say whatever you want. If you are trying to predict the future, you should pay attention to Tetlock's careful work on the subject.
Posted By Kris, Erie PA : 3:13 PM  

It is baffling to me and difficult to comprehend why these sub-prime lenders and private investors would dream up loans that only require a 580 credit score for 100% financing that would allow the seller to pay up to 6% of the closing costs, so absolutley no money down for the borrower(s) - (not even the first year homeowners insurance)- no reserves in the bank for a rainy day - didn't matter if you owed collections as long as they were more than two years old, or an aggregate amount of $2,000 or less, or if it was a medical collection it did not need to be paid. Plus, it's a 2 or 3 year adjustable arm with a 5% cap for the first adjustment period, which means if the interest rate started at 7.5%, then the first time it adjusts it could jump up to 12.5% (hello, shouldn't we see if the borrower can afford this payment?) These are all the makings of a high risk loan ..... and higher risk loans receive higher interest rates .... so, the sub-prime market and the private investors knew there was risk involved but now are boo hooing all the way to the bank because they are loosing a little money (they do get the house when it goes into foreclosure.) I don't feel sorry for the million and billion and trillion dollar lenders like Ameriquest that go under. The bottom line is the borrower knows whether or not they can afford to own a home. If they don't, then perhaps our education dollars should be teaching this as a fundamental on the high school level called "life 101". If the borrower is getting behind on their housepayment then they should probably get a 2nd job until their house sells. Let's not even get started on the prime stated/stated loans - smoke and mirror loans from the Alt A and Fannie and Freddie lenders. Now, the broker is being held responsible for these too? C'mon .... let's quit passing the buck ... lenders should have never allowed these types of loans in the first place.
Posted By mmulva, Crosslake, MN : 3:32 PM  

i am a subprime underwriter. the question (has the housing and lending down turn hit a bottom?) well we just tightened our guidlines last week and all they did was raised the credit score (620 to 640)needed to buy a home you can not afford with no money down. the housing bulls that say things are different this time becuase employment is strong. well employment is going to need to be very strong becuase borrower's are going to need 3 full time high paying jobs to afford their mortgage payment. the affect subprime will have on housing and the economy has not even started yet. also i blame greenspan for lowering rates to much which forced him to raise 17 straight times. we should bite the bullet and let home prices fall so the average american can afford and average american home. otherwise we will have to double peoples salarys and since the market does not like a .4% wage increase i do not think they will like a 40% increase in wages, maybe that is why compamines are trying to outsource all our jobs.
Posted By Phillip in florida : 3:34 PM  

Pat, As a longtime mortgage broker, 20 years, I read with interest - no pun intended - your story. Very good insight and humor! Tempest in a teapot.
Posted By Michael O'Connor Westlake Village, CA : 3:53 PM  

From an article here on CNN-Money is a quote from David Lereah, the chief economist for the National Association of Realtors: "I expect prices and sales to be modestly growing by June in most of the country. But we'll have to go into 2008, maybe even 2009 before we get even close to the peaks we saw in late 2005 or early 2006."

This is the same guy who, last year, was telling everyone that home price gains may slow down a little but the good times were still a'rollin'! Anytime this Realtor(R) cheerleader makes a rosy forecast, you'd better hang on to your hat.

With most of the middle-class wealth wrapped up in their homes, a price collapse would mean a drop in wealth for the middle class (and home-owning poor). As banks tighten up their credit, it's only going to tighten for the middle class. Banks will find someplace to put their money and it's going to divert even more-so to the wealthy and corporations (with wealthy owners). The already widening wealth gap in the U.S. is about to get a lot worse.
Posted By Brandon, Ann Arbor, MI : 4:04 PM  

Eventually, someone has to pay for lunch...
Posted By Ottawa, Canada : 4:13 PM  

My concern is that far too many people have been living beyond their means. Too many people taking out equity loans betting the fact that their house will increase in price and they will just sell the house in a flash.

Now that things are starting to hit the fan people are going to stop spending their money (money they really never had to begin with) and the economy is going to get a lot worse for everyone. I don't see a Great Depression, but I can see a very big recession coming soon.
Posted By Jack, Phoenix, AZ : 4:17 PM  

Lets see if I can figure this out.
Greenspan and Bernanke manipulate the economy by adjusting interest rates.
Hundreds of billions are squandered in Iraq.
The trade deficit skyrockets to nearly a trillion.
The federal deficit is out of control.
The trillion dollar national debt doubles.
Real estate prices decline.
Homeowners tap their home equity to buy new cars and take vacations.
Energy prices continue to escalate.
But hooray, inflation is in check! We have nothing to worry about?
Posted By Walter of Princeton, NJ : 4:19 PM  

I think both parties are to blame equally.
The average American for letting themselves be stupid with their finances, as well as the lending institutions for allowing, no, perpetuating our continued financial stupidity.
For some reason, the glamor and glitz of Big Screen (oooooo) TV's that cost upwards of $8000.00, the Mercedez or BMW for $60,000.00, the home that's half a million, ALL of the reasons and items people feel these days they can't live WITHOUT, seem to be what's REALLY the problem.
Me, I can live with my 2006 Ford Taurus that cost me $12,500.00...I can live with my 27" Panasonic Television, I can live with my (although not pretty or upscale) $900.00 a month apartment on my $60,000.00 a year job.
I may seem like a schmuck cutting coupons, or buying the yellow american cheese thats on SALE instead of what i like the most...or actually comparison shopping...

It's our greed, our aesthetic proclamation, and our overall stupidity (from both sides) that creates this type of scenario...yes, I too have a propensity for oversimplifying...yet, in this case I'm sure it's warranted due to it being a complex problem now, where it was a simple case of basic arithmetic that could have avoided it to begin with.
Posted By Tom, Elmwood Park NJ : 4:25 PM  

Fleck had some numbers and data to back his post, and one cannot deny his recent prescience regarding the mortgage market. Would you care to share some reasons why you don't think there will be a credit crunch in housing?

Nicole,

Even a broken clock is right twice a day. Preach doom and gloom as long as he has and eventually you'll be right. If you want to feast on numbers, take a look at this article.
Posted By Nigel Swaby, SLC, UT : 4:33 PM  

Mortgages are defaulting because of Adjustable Rate Mortgages are maturing.
Why don't lenders convert these Adjustable Rate Mortgages to Fixed Rate Mortgages at the orignial interest rate? This would save the customer as well as the lenders a bunch of money. I sure this would be to easy?
Posted By Steve, Baton Rouge, La : 4:38 PM  

Pat- There is a saying that the chickens will come home to roost. For five years, Americans have enjoyed the luxury of an artificially low interest rate imposed by the Fed. Obviously, when there is an overabundance in the money supply, business and entrepreneurs put that money to work. This has allowed a record amount of new construction and simultaneously, a record number of new home buyers. When the appreciation factor leveled off in the home market (which allowed people the ability to, once again, artificially pull money from the "value" of their home and fuel the economy), we turned to the equities market where stocks have enjoyed a bull market for nearly a year. This will break the economy and we are headed for a recession, and it will not be pretty.
Posted By Matt, Portland, OR : 4:40 PM  

I'm sick to death about people saying that negative things about people who have bad credit. I have run into some bad situations in the past that were out of my control and has slammed us into the subprime bubble. We were due to close on our house with New Century Mortgage on the 23rd of this month and now we are not. NOT ALL OF US pay our bills late or default on our loans!
Posted By Dee, Cleveland Ohio : 4:41 PM  

You must be kidding me: you report on personal finance and you don't know about CDOs, HELs, AltAs and the ABX? What a shame for your readers, many of whom will be facing the mortgage meltdown soon enough, and many of whom would not need to do so if financial reporters like you had done their homework long ago.
Posted By Christopher Carrington, San Francisco, CA : 5:07 PM  

"The mortage/credit industry PUNISHES those who can least afford obscenely higher interest rates (the poor and those with "bad" credit). I hope they take a REAL bath!

These lending predators belong behind bars AS MUCH AS any other type of criminal.

Posted By Carolyn Gray, Jupiter, FL : 2:04 PM"

Carolyn, business is business. Nobody is forcing those people to borrow at higher rates. Nobody WANTS to charge them higher rates, but just like insurance, the rate is risk based. Poor credit means a person is showing a history of defaulting on debt, and odds are that they will most likely continue to be a higher risk to a lender, it is what it is. They have to make up for the risk by charging higher rates. The only alternative for a lender is not to extend credit to them at all.
Posted By Rob Adelman, Eden Prairie, MN : 5:08 PM  

Congratulations on finally "exposing" a topic the housing bear blogs talked about 2 years ago. Once again, mainstream media reports recent history while blogs have the news and critical analysis.
Posted By Chris - Carlsbad, CA : 5:28 PM  

Good information but this appears to be a huge over reaction. There is a need and a place in the market for sub prime lenders, especially when it comes to refinancing people who have equity in their homes that ehy can use to restructure their debt and improve their cash flow. Unfortunately, these types of loans are often misused and sold to people who do not need nor understand them. 100% loans to borrowers who have a poor credit history and are buying a home makes no sense. However, a loan of 80% of the value of a home to help someone restructure their debt does not carry the same risk. Many of these borrowers ended up in a financial mess due to health issues or job loss, incidents that are not likely to reoccur. They deserve financing whether it is sub prime or otherwise in order to have the opportunity to rebuild no only their credit, but their lives as well.
Posted By Steve, Rockville, MD : 5:46 PM  

What will the interest do???
Posted By Anonymous, New Orleans,LA : 5:47 PM  

subprime lenders have been loaning risky money for too long. the banking industry has been preying on bad credit more and more, they need to tighten up. these foreclosures will create opportunity for others to make money. ie rental incomes. and for the prime who cant handle his arm mortgage now, if you cant afford the house with a fixed rate, you cant afford it.
Posted By rusty,statesville nc : 6:00 PM  

If someone can show me a new factory that is hiring, I will show you a large group of people that would love to work with you. Bottom line the American factory worker is now gone you have made most of us find new jobs outside of factories for less money. That is what has driven most of us into refinancing our houses to what we can afford. Thinking that it is going to get better. This is America--Right!!In the Midwest there are so many out of a job it is insane! That is what is fueling the forclosures and bringing the credit scores down. If you don't have a subprime market how will most of the borrowers (workers) get back on there feet and Re-Start the American Dream?
Posted By V. LeRoy, Massillon, Ohio : 6:02 PM  

The market action the last few weeks is a precursor of more pain to come. This subprime debacle will lead to more tight lending restrictions which will cramp the already bad housing market. Middle-low income folks with no savings will be toast.
Posted By Jim Florida : 6:09 PM  

AAAAAAAHHHHH! Quick! I need to sell my house for no reason!!!!!! Get real people! Yes, there will be defaults from people who lose their jobs, etc, but it's won't be any greater an amount than any other year. The economy is doing fairly well. This is not a significant event except for the hype generating short sellers.
Posted By La, mn : 6:12 PM  

Saving ones money insures weathering almost any storm.
Posted By Jeff Davis, Utah : 6:19 PM  

I'm sure this isn't a novel view (and I'm not a finance guy by any means) but in shopping for homes the last three years, I was approached by dozens of realtors who worked with dozens of lenders who *all* tried to sell me on nontraditional (20/80) loans so that "we could buy the house we always dreamed of" and all that crap.

I have no doubt that the industry knew that subprime mortgages and the other risky investments were going to tank because their representatives in Congress changed the bankruptcy laws just in time for stupid consumers to get slapped by unsustainable mortgage payments and credit card rates.

My own naive opinion is that it's going to be very bad for middle america, but the financial industry will make money one way or another. They always do.
Posted By Dan, Anchorage, Alaska : 6:30 PM  

Big Overaction! They are confusing true Subprime with hybrid mortgage loans. True subprime has been holding the economy from a true recession.
I have 24 years as owner of large mortgage firm.
Posted By Scott G. Aliso Viejo, CA : 6:41 PM  

I was an underwriter for a subprime lender - was until my branch closed. Unlike some other subprime lenders we were required to verify that the borrower had a borrower benefit. This means that there payment was going down by either the rate lowering, were paying off other debt to reduce their monthly debt or were switching from adj rate to fixed. It almost always required the broker to lower their fee's - you would be amazed at what some brokers were trying to make on a loan. We were constantly losing loans to the New Century's because they were not requiring a borrower benefit to exist. Yes we were subprime but we were conservative for a subprime lender. To re-group - there is a need for subprime lending. There are many people out there that are credit worthy - responsible underwriting is required. The huge commision fee's can be cut down. The old saying - bad things happen to good people is true. Be responsible.
Posted By karen in Irvine : 7:02 PM  

All you've said is that experts are not likely to be correct, let alone always right. Fair enough. But where is the substantiated evidence and reasoning to prove they are talking gibberish? The predictions re housing troubles is only wrong in one major respect: timing. As usual, things take a little longer to pan out. But I've been reading about the expected problems with subprimes and housing decline for 3 years. It's analogous to naysayers against predictions of Dow at 36,000 and New Economy before the dot com bust. Eventually gravity prevails.
Posted By Tom Ngi, Vancouver, Canada : 7:07 PM  

I can see how people in certain areas may believe there will be no housing bust. However, for those of us in places like California it is obvious. The price of houseing can not increase by 300% over a six year period and sustain without a serious increase in wages. The latter has not happened, and won't.

When civil service workers are priced out you know you have a problem. It does not take an expert to figure out what is on the way, at least here in California. Anyone who thinks this is sustaninable is either insane or a crook.
Posted By Trent Roberts, Long Beach, CA : 7:10 PM  

Bernanke (and his former and current cohorts) has lost control over raising/lowering the long-term interest rates in the US. Remember conundrum? This task now rests in the hands of the Chinese. Want lower rates? Need only convince the Chinese to accept lower interest payments on the US treasury bonds they buy. Wander why equity prices have gone through he roof? Please don't forget that in addition to the lax credits/lending practices, the aggregate money supply in the US has been growing at a rate of approximately 10%/year for the last few years, creating the current 'inflationary' environment. Unfortunately, we have come to depend on inflation. It 'creates' wealth, and bull markets. Instead of taking the punchbowl away, the Feds � added some vodka to it and kept the party going.
Posted By Mike Blum, Washington DC, 20530 : 7:12 PM  

Lenders have been far too aggressive with the programs they have offered. Greenspan raising the Fed rate isn't the cause for blame here. The fed rate cannot stay that low or we would be crushed by inflation. The problem is the ARMs, interest only, and hybrid Option ARMs that have put people in a position of negative equity and raising house payments. What were people thinking when they got into those loans? If you can't afford the payment when it adjusts, get a smaller house. This is a case of greedy lenders wanting to sustain record breaking revenue and consumers lacking in common sense.
Posted By Jack, Overland Park, KS : 7:13 PM  

Any mortgage company that is stupid enough to issue negative amortization loans and not think there will be eventual consequences, deserves to go bankrupt in my opinion. The industry brought this on themselves, pure and simple. What's not fair, is that (as history shows), we the U.S. taxpayers will ultimately end up having to bail out all these crooks and they'll walk away unscathed.
Posted By Cleve Oliver-Noyes, Seattle WA : 7:25 PM  

I agree with Tom from Elmwood Park, NJ - everyone wants to place a blame on someone else. It isn't Alan Greenspan or subprime lenders preying on people - it's people being stupid enough to make a big commitment that they can't afford. There's a bridge over darn near every river, but if someone jumps off, we don't need to talk to the guys who built the bridge. We, as a country, have lived far beyond our means for far too long. Our parents, for the most part, did not HAVE to have cable, or a cellular phone, or internet access, or a new computer, or the Starbucks latte every morning (regardless of which of those items may or may not have existed for your parents, there's always been SOMETHING to blow your money on). They lived within their means (again, for the most part) and did without to make ends meet.

I agree that subprime lenders made it too easy for those without enough means to borrow too much, but no one put a gun to the consumers' heads. If you are old enough to drive to the mortgage lender, you're old enough to read a contract or ask for help if you don't know what you're getting into. And as far as I'm concerned, anyone who bought using an ARM and had any idea of what they were signing were actually begging for it. I'm so tired of everyone whining about how everyone else is to blame. Start living responsibly within your means, whatever they may be, and 140,000 blogs and credit counseling agencies will disappear overnight. Quit trying to buy things you can't afford to impress others and actually save some money. Jeez, people! Take some responsibility for a change, certain lenders might have made it too easy, but without a buyer dumb enough to overextend himself or herself, these problems would not exist. Period.
Posted By Steve, Union Grove, WI : 7:27 PM  

You're no expert? Then why are you writing for a financial magazine? Roubini is very very competent. Your analysis and understanding of the situation in sub-prime is pathetic.
Posted By Paul, Madison, NJ : 7:28 PM  

There is an incredibly simple fix to this problem. I have created a mortgage which would have interest only payments to allow for low affordable payments to the borrower and at the same time the principle would automatically be reduced without ever having to be repaid by the borrower at twice the rate as a traditional mortgage. I know this sounds crazy but it is infallible, and would revolutionize the mortgage industry. The problem is to quote Tesla, "Of all the frictional resistances, the one that most retards human movement is ignorance, what Buddha called 'the greatest evil in the world.' The friction which results from ignorance can be reduced only by the spread of knowledge and the unification of the heterogeneous elements of humanity. No effort could be better spent."
Posted By Scott, St. Paul, Minnesota : 7:38 PM  

Rather than "oversimplifying" as you state, I believe you have over complicated this. Rest assured that banks have calculated the risk in all of their loans. Nothing has happened that would cause these models to fail. The banks new a percentage of the loans would go into default and they, therefore, charge higher rates to make these loans and offset the risk. If, as a shareholder, you allow these banks to get away with saying, " we didn't anticipate the defaults" you deserve to lose money on your investment as well. Any bank making that claim better also be describing how they will clean up their risk management.
Posted By Bill Tokyo, Japan : 7:47 PM  

Hello,

I would like to say this, I blame all the Realtors and Loan officers that were mechanics, waiters, police officers, paper bag boys, and your local teenage hoodlems. When rates hit rock bottom in 2001-2002 that's were everybody and anybody was a Loan officer. Here is a pack of business cards, u are now a Loan Offier good luck. These people never had training, never needed to be licensed and best of all HIGH SCHOOL DROP OUT'S. That coused greedy, money hungry and un-ethical practices. Realtors and Loan officer were concerned about there big paycheks and never thought ONCE about the client. Can the client afford, let's put the client in a 2/28 arm and refinance them 2 years later to keep repeat busines. It's good but where are the ethics in this busines? HELLO, basic economics in HS will tell you that rates will not be the same 2 years from today! Why put them in arms that you know later down the road the borrowers will not be able to afford.
Posted By R.J. Atlanta, GA : 7:48 PM  

Go ahead and watch the unemployment figures while your job/wealth is short-sold.

Most mortgage brokers, contractors and realtors are broadly self-employed, another sixteen million lost jobs from this sector won't affect the unemployment figures either.

If property-values fall 50% nationwide, it still won't be enough living cost reduction to compete in the global market for jobs.

(subprime) People can't pay mortgages without jobs. See ya'll at the bottom.
Posted By Weaver, Redondo Bch, CA : 7:49 PM  

Hi Pat
I am observing this Sub-Prime loan fiasco from Aust. so with my tiny amount of economic knowledge I see a problem of course and many people will lose money but aren't there compensating factors? All the loan defaulters still need a place to live and the Mortgagees have a lot of empty properties. Will the banks possibly get into the Real Estate rental business and replace loan repayments with (smaller) rental payments until the housing inventory overhang is burnt off? At least they would salvage something from the wreck and whole world would not collapse like some of your commentators are predicting!
Posted By G Dullow, Sydney, Australia : 8:00 PM  

Bait and switch.
People are enticed to buy in with teaser loan rates and assurances that the mortgage company will let them refinance. Then when the monthly payments hit the roof, the home owner discovers the lender has since changed the rules and will not let them refinance because they will not qualify.

This happened before. The government encouraged farmers to expand their operations by artificially propping up the price of grain. Then after 20,000 farmers were in hock, the government removed grain price supports and farmers went bankrupt. Don't worry, that farmland was ultimately bought out by large agri-business.
Posted By Doug, Orlando, Fl : 8:09 PM  

My main problem with your otherwise fairly good article is the "they didn't see it coming" part. Yeah, they did, and they also saw it was the kind of deal that the current administration and crew will try to have Joe & Jill Taxpayer bail out: AGAIN, (can you say S&L).
God knows none of the already Very Wealthy and connected will feel any pain from this. When will the blank end.
Posted By Mike Lee, Mt. Dora Florida : 8:12 PM  

To those of you here who suggest the Fed should lower interest rates in response to this subprime (and by extension, housing) mess? Get real. Yes, the Fed will probably throw a bone your way and lower rates a bit this year, but not enough to "save" the housing market. The Fed has bigger fish to fry, namely, keeping the dollar afloat in the global economy so that our bag holders in Asia will continue to buy into our economy.
Posted By skibum, Bay Area, CA : 8:15 PM  

Most everything has been beaten to death here except for one aspect of this whole mess... Credit Scores and Purchasing Power are two different things. For instance, you can make $120k/yr but be perpetualy late on paying your credit card each month for no good reason. Your credit score will suck... you're now a high risk to lenders. On the other hand, the guy who makes $30k/yr and has 6 diferent credit accounts, car payment, TV payment, etc. but manages to pay the minimum each month may have a high credit score hence a great candidate for a $350k loan!!!

In my opinion, part of the problem is that home borrowing is so heavily weighted on credit scores which have nothing to do with the ability of a person to repay a debt.
Posted By John, Phoenix, AZ : 8:20 PM  

There's a lot of talk out there about exotic mortgage products like Option ARM's creating this foreclosure problem. Very untrue. An Option ARM, IF USED CORRECTLY, is the best loan in America. Any loan product can get a borrower in trouble if the monthly payments are too high. An Option ARM gives the borrower payment flexibility and CONTROL over the equity by allowing divesification outside the property.
Posted By Howard Taylor, Boston, MA : 8:25 PM  

I dont really believe that the Financial market will crumble. Yes, their will be an increase in forclosures. But every lender out there has a foreclosure workout department, non of them want to take back the property esp. if there is less tnan 10% equity in a property. I have heard of workout departments lowering payments and rates in order not to foreclose. You always hear about what will happen when the loans will reset at the end of the intro period. A lot of borrowers who are paying good before the reset, but could not afford after the reset will be smart to contact the lender and work out something that would keep the borrower in the house. Do you believe that a lender would force a borrower to pay a new payment they could not afford, thereby forcing a foreclosure in a unfavorable market. Nope not gonna happen that lender will just tell them to keep paying the same payment until the market turns around. The doom and glooms are forgetting that the lenders will do almost anything not to take a home into inventory. The problems with the subprime lenders is that they cut thier profit margins to the point that they could not keep their reserves up enough to handle their buyback provisions of any loan that defaulted within the first 6 months of the loan. These defaults are twice the amount of what they hoped for. They should have had twice or three times the reserve to handle them. They didnt because that would have meant they would not be able to show a higher profit for a short period. This is kind of like enron, but did enron distroy the entire finacial system, or even the entire energy sector. That must be why Mobil went out of business and will never will make a profit again(NOT)
Posted By Doug, Long Beach, CA : 8:28 PM  

Pat I would like to see you bet your entire portfolio on the chance our positive economic cycle will be extended, especially in light of the recent economic indicators showing increasing downside risk. I remember a monsterous economy called Japan and their banking environment. You should review your notes and return to the boy scout motto; Better to have it and not need it, then need it and not have it. Best of luck.
Posted By Mark Anthony, Oxford, CT : 8:43 PM  

you feel for these people who can't make these payments but half of them need to go out and get a 2nd job and quit being lazy. I collect on home mortgages and you would not believe the excuses they make for not going out and getting a 2nd job.
Posted By cheryl ambruse, coon rapids, mn : 8:49 PM  

I have a subprime mortgage - and at the moment I don't have any plans on letting it go into default and having the bank foreclose on my home.

I'll probably wait until my loan servicing company goes bankrupt first..

Seriously though, I don't see what the fuss is about.

So one or two mortgage servicing companies have acted like idiots and given out loans to people without the income to support them.

Not all banks or mortgage companies do this, in fact I'd bet that most don't.

Therefore many of them will not be owning vast numbers of foreclosed properties, and will have no reason to change their lending habits.

As I said I have a subprime mortgage. In about 18 months it goes up a couple percent - but by then I hope to refinance (as long as every panic stricken shareholders don't push credit requirements beyond those of mere mortals).

And even if I can't that doesn't mean I'll suddenly stop paying my mortgage.

Why would I do that? Like most people I considered the higher rates at the time I financed my home - and my guess is that most of those that didn't have already come unstuck at the lower rate.

Given that, I see foreclosures settling down within the next 6-12 months; after which new loan-servicing companies will replace those that committed suicide.
Posted By Gina Nieves, Carson, CA : 9:01 PM  

The foreclosure problem is not limited to sub-prime. Expanded lending guidelines by Fannie Mae and Freddie Mac 7-10 years ago to encourage home ownership started the ball rolling. But the majority of these loans are 3-year fixed with no payment increases. Subprime lenders in turn relaxed their guidelines, but the impact has been greater with subprime because the majority of their loans are done with short-term ARM's. Low start rates for the first 2-3 years that are affordable, but when they adjust the monthly payments become too high. Regardless of the loan type, ANY loan that has a Debt to Income ratio above 45 is only aksing for trouble. As an underwriter for the past 10 years I approved loans with sometimes 65% DTI ratios. After paying withholding taxes, there is no money left to both feed the family and make the mortgage payments.
Posted By Howard Taylor, Boston, MA : 9:08 PM  

All you doom and gloomers must be younger than 40. Does anybody remember the misery index? Loans at 17%, unemployment at 10% and inflation at 14% ??
Wake up people - this is as good as the economy gets. Companies are hiring. Check sites like ThinkResources.com and tell me that there are not any jobs out there. Companies are crying for everything from skilled trades, to engineers, to accountants. Retrain.
Posted By Buddy, Muncie, Indiana : 9:11 PM  

The great majority who are in a bind got their because of their GREED! Any bailout of these greedy persons will be a HURT and PUNISH hard working americans who saw the madness of the recent real estate market for what it was, a mirage and place of greed and lies.
Posted By Peter, Rialto, CA : 9:11 PM  

Sub-prime lenders are like car salesmen who want to sell you more car than you can afford. They don't care if you can actually pay off the car because they just want their commission on the sale. If you can't afford the car, eventually the repo man will come.
Posted By OverExtended in CA : 9:24 PM  

lets all cross our fingers and hope it goes boom! down with the housing bubble and the mess it has created -- no sympathy for all those people who bought houses they couldn't afford.
Posted By MG los angeles, CA : 9:24 PM  

I don't see a direct correlation between lending to people with bad credit and companies getting crushed. My credit score was wrecked when I defaulted on a Student Loan 7 years ago. I've paid my bills on time, yet the default has to remain for 7 years. The score does not match me, a person with a low number, but pays his bills.
Posted By Jamie, Commerce Texas : 9:35 PM  

The sub prime shakeout is a good thing. The sky is not going to fall. Prices are just going to drop to realistic levels as they should. Suggestion that the Fed should lower rates to solve a Micro problem (i.e. so that they can afford their mortgage payments) will be a Macro disaster. Look south of the border to Mexico, Brazil, Argentina, et al. to see how that panned out for them in the past.

Greed is as American as apple pie. Everyone benefited from the house of cards with these BS loans. Homeowners got a house they otherwise could not afford and saw unreal appreciation of their homes, real estate and mortgage brokers made their commissions and mortgage lenders were rolling in cash and looking at their stock values skyrocket. Now that the party is over, everyone but themselves are to blame.

The mortgage banks and wall street are run by Harvard MBA's so they knew the day of reckoning would be here. Just like the dot.com boom, they already cashed in. Sure, you'll read stories about how Bear Sterns lost money on New Century, etc. but how much money did the bank (and more importantly, the folks who run the bank) make BEFORE the implosion?

The real estate and mortgage brokers are sales people. It is their job to sell you their services and products for a commission. That's it. For people who complain that, in hindsight, they were taken for a ride because the agent or broker did not warn them about the risks, etc. what did you expect? Do you expect a sales person at a BMW dealership to tell you that you can't afford the ultimate driving machine because you have low income? Were you expecting a referral to a Hyundai dealership or a lecture on why people with bad credit will always get the worst possible product? I have no doubt that some, if not many, agents and brokers lie. Like a car salesman, that is to be expected. Don't blame them because you have buyer's remorse. Nobody complained when the house they bought with zero down and paying 1% teaser rates were doubling in value. Now that the party is over, suddenly, it is everyone else's fault.
Posted By Calvin, Los Angeles, CA : 9:37 PM  

We are having economic crisis now because we as a nation are to blame for not speaking out and demanding that our school systems all over the US teach our kids how credit affects their lives and it is also our governments' fault for not enforcing it as well. We live in a society where consumers are living way above their means. The average consumer was never taught how to properly use credit without abusing it. The government has made it easy for consumers to file bankruptcy. Lenders making it easy for a consumer to get access to cash for homes consumers can't afford through a stated income loan or interest only loan. Now there are new loan programs called option arm loans which do nothing but add more interest on top of the original balance for the entire loan life. Example, if you have one of these loans, it allows you to pick a payment between paying the Principal and Interest on your qualified rate, paying just the Interest for that month or paying a payment which would equal to a 1% rate each month. It is proven that 7 out of 10 homeowner will pay the lowest payment possible which would be the 1% rate payment because that is all their budget will allow due to high inflation on everything else like gasoline, natural gas, and groceries. Here is how it would effect you. If you qualify for a 6% rate and you continue to pay the 1% rate payment, what will happen, the remaining 5% of that interest you qualify for will be added on top of your original balance. If continued, you will owe 5% more on your balance each year. If you have a $300,000 loan now, in 5 years you will owe about $375,000 and in 10 years you will owe $450,000 just by paying the 1%. Consumers need to be smarter with their decisions. It doesn't take a rocket scientist to figure out if you can afford a new payment or a higher payment. If you earn $3,000 a month after taxes and your utility bills cost $500 and your groceries are $300 and your consumer debt is about $900, and car insurance or medical insurance of about $100. That will leave you with about $1,200 a month. Then gasoline on an average household is about $300 a month. Now we have $900 left for a mortgage would have to include escrow for taxes and insurance. This would get you about a 140,000 house. The average house value in the US is about $208,000. So in order to qualify for the average house most consumers will get in to a stated loan to qualify for the loan intially and then stop paying their consumer debt so they don't lose the house. Other consumers will get into a Adjustable rate loan hoping that their income will increase over the next couple of years. Then you have consumers that are expecting to buy a home with the mentality that the home value will increase in value within a certain number of years expecting to refinance and consolidate all of their consumer debt to compensate for the increased for the fixed rate loan they plan on getting before their current rate adjust higher. Other consumers in the same boat are the consumers getting Interest Only Loans. They too are expecting the house values to increase within a certain number of years. The worst of all is the individuals that do not read before signing a contract usually sign themselves into a loan that puts the temptation of a much lower rate with very high risk of a foreclosure broken marriages due to financial difficulties. My point is this, we need to educate our future Americans about how important credit is and show them how to use it wisely and responsible. Let's educate or sons and daughters now so that one day we will have a strong nation again.
Posted By Jesus, In Heaven : 9:42 PM  

"You aint seen nothen yet"! Forget real estate and consider the oldest and truest economic priniple, "Price is the result of supply and demand." Move any one and you automatically move one of the other elements.
The current real estate market has the normal enfluences - transfers, divorse, death. Those enfluences have not changed. What has changed is the ever growing amount of supply. Those people in the three catagories above have to sell at what ever the price is.
The new owner affecting the market is the investor. No big deal they don't have to sell and they are reluctant to reduce price but the normal market will reduce price. Then there is the variable rate mortage holders (subprime)who have no chose but to panic. There is one more element to consider: the newly developed land and spec home inventory held by developers and national home builders. Toll Brothers just took a big write down and that is just the start.
The supply side only builds, the demand side on shrinks, Boom! We are a long way from any thing that resembles stable. Projection down 15% - 20%. I was there in 1974, 1980, 1989 but this is bigger. Ka Boom!
Posted By MH, Reno, NV : 9:48 PM  

One of the biggest parts to the problems is that the loan officers are paid a percentage of the loan value and rarely have any consequences from the companies they are supposed to represent or the law should the loan go bad. You want to cure/deter this, then there has to be reprecussion for the loan officers.
Posted By Brian,Martin,MO : 9:58 PM  

It is important to note that fluctuations in the marketplace are human thought-driven. Unlike natural catastrophes, over which we have no control, we have every bit of control over our economic and political catastrophes. We create them, and we can prevent them.
Posted By SAM, Atlanta GA : 10:05 PM  

Here are so many potential short sellers waiting for the time when the sky is falling down. Their thoughts are too simple!
Posted By Paul Park, New York NY : 10:06 PM  

why people blame the greed of subprime loan offiers is beyond me. this whole "victimized American" attitude that the baby boomer generation made popular about 15 years ago is getting out of hand.

folks, all salespeople earn commission and are therefore motivated to sell. this should not come as a suprise to us. a mortgage note is one of the most highly regulated contract a consumer can engage in. not only are the payments, terms, rates and all other future consequences clearly spelled out through preliminary disclosures and finalized black and white contracts.....but there is also a large timeframe to consider. from when you commit to financing you have an average of 30 days to number-crunch and review your program with the lender while your loan is being approved- the refinancers even get an extra 3 day right of cancelation. you may also feel free to contact your accountant, paralegal, or any other financial advisor you see fit at any given time.

people know what they are getting into. car accidents happen all the time but you can't blame the auto manufacturer just because they built the vehicle you crashed in. every loan applicant is clearly presented their potential risks but if you decide to override it and use your emotions to dictate a decision that your logic should be governing then you need to respect the probability that there's a higher chance of a negative consequence. i can understand your emotions giving into an extra $5,000 because you wanted leather bucket seats in your brand new car. but if you're going to use that same approach for one of the largest and longest financial commitments ever extended to you that ALSO represents the roof over your family's heads for the next 30 years then......yyyyyeah ok.
Posted By Tony, Corona CA : 10:10 PM  

Oh the evil lender... those that are commenting that the lenders pulled a bait and switch or better yet should just go ahead and let everyone who can't come up with the additional amounts due when their ARM loan (that they opted for, to buy a home they really couldn't afford)goes up just fix the interest rate at a rate from the past need to get a grip. Noone put a gun to anyones head. Yes the lenders took a risk, yes underwriting guidelines beagn to resemble those of credit cards, yes builders took risks, but get real people, take responsibility, noone made you do it. I'm with the others who locked in fixed rate loans on houses we could afford. I'm sad for those that gambled and lost, but look forward to making their loss my gain as the players mentioned above need to start selling the homes they couldn't afford and the Real Estate market get Real!
Posted By Michael, Winnetka CA : 10:16 PM  

As demand diminishes, the suppliers will vanish. Over supply will be soaked up by what demand there is and things will level off. That is a correction, not a panic, not a KA Boom. Some corrections take longer than others, some are more severe. That is the market, up and down, seen it for fifty years, but have always seen real estate go up if you are willing to wait. Real estate is not stocks, a house can�t disappear to nothing like a stock can, it might go down in value but you can still sleep, eat, bbq, and sit out on the lawn with your dog and read a book. And if you wait a while chances are (as history of the housing market will prove) it will go back up in value. People buy homes thinking of an investment but they also buy them for a place to live, to raise a family, as a place to vacation, etc. That�s why the housing market is not going to go KA Boom like some dot-com stocks. Anyone says different might have some kind of political motivation or something.
Posted By Smith, Sacramento, CA : 10:17 PM  

Good ol Greenspan caused this entire slump. Why doesn't anyone realize that it is Alan Greenspan that screwed 25% of American mortgage and credit card holders. He raised the prime rate 18 times and increased my mortgage and credit card payments accordingly. This increased my own mortgage payment from 740.00 to 1600.00 in a year and a half. Now I am nearing bankruptcy and honestly don't care anymore. I have been just barely holding it together for nearly a year now and because of the realestate slump my house lost 35,000 in value and now i am upside down on the house and cannot refinance into a fixed mortgage. I have been in finance for 20 yrs and have never seen a nightmare like this. An easy solution reduce the prime rate back down to a reasonable level. So those of us who have adjustable mortgages can actually keep our homes and not destroy the market even more with 1000's of foreclosures.

Dominic M. Mac


Not that I do not sympathize with Dominic's plight but this is exactly the sort of mentality that has created the housing bubble in the first place. Assuming that it is true that his payment has gone from $740 to $1600 solely based upon the interest rate increases (rather than an expiration of an interest only period), that means that his financing occurred exactly at the bottom of the interest rate cycle. Rather than locking in a slightly higher rate for fixed financing costs in what was a near all-time interest rate low, he either decides to bet on the Fed going to a Japanese-like near 0% rate or he bought much more house than he could truly afford with the hope of flipping it in a handful of years. Either way, neither Alan Greenspan nor current interest rates (which are still historically in-line to the low side) caused this predicament. Instead, a combination of greed at one end of the spectrum and a lack of sound financial education at the other is at the heart of the troubles we face.
Posted By Richard Blanton, Johnson City, TN : 10:19 PM  

I too wonder how Pat can be a senior editor of Money and be learning about these things for the first time. A close family member of mine, who is a respected and well published economist, assures me that the economy is fine and that my fears of a recession are groundless.
It's just that I cannot fathom how loaning money to people who clearly cannot pay it back can not have consequences, and how living on borrowed money both as individuals and as a nation will not be painful when the notes eventually come due.
Posted By BRH Wichita KS : 10:29 PM  

Continuing to cut rates so that all the greater fools conned into buying in an overpriced market don't end up 'upside down' is not the answer.

Its time to pay the piper NOW rather than later after hyperinflation reduces our salaries and buying power to dust. If we keep cutting rates, we'll end up paying for this housing bubble the hard way - with $3.00 gallons of gas. Oops, too late? Make it $10 boxes of cereal then. At least "Buy Real Estate With Zero Down!" seminars will be even cheaper than that.
Posted By The Bruce, Bothell WA : 10:32 PM  

None of this should be of any surprise to anyone who remembers the late 80's.

How does that saying go?
Something about lie on the tracks of history long enough and the train of the future is sure to run you over.

The whole thing makes me wonder just how smart the American consumer really is?

And for everyone complaining about the interest rates........... My mortgage is a fixed 30 year. $2460 a month. I'm paying 6% even. That's 2 points less than my first house was and 12 less than the house my dad bought when he was my age.

It isn't the rates. It's the lack of personal restraint and common sense.

But, IF it weren't for the subprime lenders, the housing boom and the artificial price inflation that came with it would have dried up three years ago.
Posted By Anonymous : 10:38 PM  

At the same time I see all the articles about doom and gloom because of subprime defaults, I see CNN reporting that Citigroup CEO is taking in $26 million. My heart does not bleed for big banks....perhaps working with borrowers and NOT ADJUSTING UP the interest rate would allow the big banks/wall street to still make double in interestthe price of the house over the 30 year life span of the home and avoid another foreclosure. Maybe it's time for BIG BANKS to stop being so greedy! How many people who are about to be foreclosed upon could be saved from foreclosure with, oh let's just say $10, $15 or even $20 million of the $26 million?
Posted By Teresa Anaya, Flower Mound, TX : 10:38 PM  

Where I live the housing market has slowed considerably. I do think we are going to see fallout from the predatory mortgage lending that has occurred. Equity lines of credit are another area where people are going to be in big trouble also. I went in to increase my equity by a small amount, the bank tried to get me to take out 75,000 in a home equity line, no thanks. The middle class is getting hit pretty hard, it gets harder to stay afloat all the time. I saw a retirment calcualtor and a story on a man making 180,000 and how he is saving and able to retire at 50. It seems like unless you make at least 100,000 in America, you have a great deal to worry about.
Posted By Anonymiss, IL : 10:38 PM  

yes, house prices went up in the USA but not nearly as much as europe, india, china, brazil and russia. Bombay commercial costs more per square foot than NYC (and wheres their finances to pay for it?) european commercial brokers are peddling at best 4% yield on commercial real estate! Russia real estate has increased 400%, and China more than tripled in 8 years (but at least in China the BANK IS THE GOVT). Calm down ALL, The United States is the LEAST overinflated than all world real estate prices FOR SURE!
Posted By delane, rancho mirage, ca : 10:41 PM  

HERE IS THE TRUTH. HOW CAN WE NOT BLAME CONGRESS? HOW CAN WE NOT BLAME SUB PRIME LENDING AND THERE HIGH INTEREST RATES? HOW CAN WE??? THEY CLAIM THESE PROGRAMS ARE HERE TO HELP US YET THESE PROGRAMS ARE ONLY RAPING US!! WHOS FAULT IS THAT??? OURS BECAUSE WE DONT HAVE A 620 CREDIT SCORE??? SOME OF YOU PEOPLE NEED TO WAKE UP AND SEE THROUGH THE FOG!!!
Posted By MADMAN, PHOENIX : 10:42 PM  

I'm a Realtor in Phoenix, AZ and we are seeing the effects of all the wacky lending over the past 3-5 years. I personally expect a strong downturn here for at least 18+ months. Many are still in denial (especially sellers) - that is why our inventory levels in the Phoenix MLS has been swelling to a record 45,000+ listings.

Take it from someone who is out in the field - there will be significant pain for sellers as prices come down to more down to Earth levels. The positive of this is that more people will ultimately be able to afford a home here, and we will have a MUCH healthier lender system to boot - with stricter standards.

I'm expecting the usual hearing on Capital Hill, with the heads of the lending industry & big shots at Morgan Stanley and Merrill Lynch throwing up their hands saying they never say this coming...But they did. We in the industry all saw this coming, no question.

What the big shot bankers, traders, wall street tycoons, and hedge funds all created was an old fashioned PYRAMID SCHEME. Yep- just like in the 70's. Some sellers and home lenders got in early, made the big money, bought the nice cars.

But pity the poor lenders and home buyers who got in at the top.
Posted By Brett - Phoenix, AZ : 10:49 PM  

We are still paying for 9/11. After 9/11 Greenspan started lowering interest rates to keep the economy from crashing down around us. By lowering the interest rates it kept the demand up for real estate (and all types of credit) which over time increased housing values beyond a reasonable limit. He used interest rates like a credit card to be paid back at a later date. Its time to start paying more than just the interest, which was inevitable.
Posted By Jim, Denton, Texas : 10:56 PM  

Statistical extremes revert to the mean. Thus, the price of housing, especially in certain east and west coast markets, has to significantly correct itself. With the typical US household now saving $0 a year, a probable correction coupled with subprime loan defaults and climbing mortgages will have an impact on our market, economy, lifestyle, etc. We are in for a mess. We ARE starting to understand how we got into this mess. Funny how no one can provide a logical explanation of what market forces will prevent an economic THUD versus a soft landing. I feel bad for the people who are going to get hurt.
Posted By Dean, Los Angeles : 11:04 PM  

Sub primes aren't the problem, they're just good old fashion loan sharks. A necessary economic evil. The real problem is derivative creation which has soared to over $300 trillion. That's funny money. And the psychology of funny money is that eventually it isn't funny anymore. Look at it another way, global paper asset values have grown to over 140 Trillion with no tangible economics to support them. I'd hold on to my propeller beanie, because the winds are about to change.
Posted By Allen Keehall, Greensboro, NC. : 11:16 PM  

This is to Dominic M. Mac. Dude, you gambled on A.R.M. and lost! Why did you not take a fixed rate so you would know your P+I for the next 30 years. Let me guess; you bought too much house. Greed tastes good at first but it usually ends up bitter. Maybe you bit off more than you can chew? You are not the only one who is hemorraging. The banks will be too. Do not blame Alan Greenspan. Blame yourself. Next time you will be more careful!
Posted By Joel F., Portsmouth VA : 11:34 PM  

The problem most reader are not addressing is the Japanese carry trade. Cheap money is fleeing the U.S. and most developing countries. For 15 plus years smart investors have borrowed monies from the Bank of Japan at 0 to 25% and reinvested it in real-estate (100% profit), the stock market (15% growth) and 10-year notes (4.50% yield). Recently, the Bank of Japan raised rates to .50% - with more rate increases on the way. In addition, the Bank of China has been slowing their growth. Smart investors have been unwinding their assets for the last several years and are sitting on the sidelines with cash. CHEAP money is gone, which will hurt all of us. My question is - where will the money go? Not to real-estate or the stock market. Maybe a flight to quality is in the cards? 10-year notes.
Posted By S.R.J Chicago IL : 11:49 PM  

Another problem is Freddie Mac and Fannie Mae thought giving 'liar loans' out was acceptable because they didn't want to let subprime folks 'miss out' on the appreciation madness happening. Talk about the government goosing the market!!!!!!!!!!
Posted By Billy Bathgate, Norwalk, CT : 11:53 PM  

I'm a loan officer. I've put borrowers into sub-prime loans, FHA/VA, Option ARMS and prime loans. All of these loans are/were good loans. I stay in contact with my borrowers. Out of the 450 loans that I've done in the last 5 years, two borrowers have defaulted. Is that my fault? Is it the borrower's fault? Is it the lenders fault? Probably a little of each. Were some sub-prime guidelines to loose? Absolutely!
However, we are consumers and we want the American Dream. A mortgage, no matter the type, can be your best friend or your worst nightmare. Make your payments on time and your credit score will reflect that. Don't and they won't. When you purchase a home--it's the big time. I agree with many others that borrower's need to step up to the plate and do what it takes to make their payments. The economy is/has always changed. Home prices do/have always gone up and down.
Do I believe the housing market will worsen? Absolutely. Will it rebound. Yes! It will get worse before it gets better, but I don't believe the sky is falling. Many people will take advantage of the many opportunities that will be presented. Bottom line for folks in my industry--educate your borrowers. Yes, I have two borrowers that have defaulted on their mortgages. However, I have done several refinances converting folks from sub-prime to prime loans or they've moved up to another home. That's how I've taught my borrower's to think and the majority have followed through. There will be some lenders that won't weather this storm, just like some borrowers, but in the end people will still buy homes, lenders will still lend and our economy will prosper.
Posted By Kevin McCarron, Dallas, OR : 12:01 AM  

Before you continue to push all of the blame on Sub Prime lenders why don't you take a hard look at the Prime side. Primarily the Pay Option Arm or NegAm Loan. The teaser rates on this program sucked consumers in by offering start rates at 1 to 2%. After the teaser period the loans start to escalate making it near impossible for some to keep up with their payments. An additional risk that has become very popular is the "Stated" loan. Come on! A W-2 wage earner wants to "State" his income. In MOST cases the income is overstated. In other cases the income is very over stated. Most mortgage brokers will tell you that the borrower HAS to go stated and can not go Full Doc. Even the W-2 wage earner. Stated income loans should be completely eliminated as options for borrowers! Yes, this is also known as the Liar Loan!
Posted By Tim, Plainfield, Indiana : 12:02 AM  

This is for Scott who smokes too much methamphetimine. He said:

There is an incredibly simple fix to this problem. I have created a mortgage which would have interest only payments to allow for low affordable payments to the borrower and at the same time the principle would automatically be reduced without ever having to be repaid by the borrower at twice the rate as a traditional mortgage. I know this sounds crazy but it is infallible, and would revolutionize the mortgage industry. The problem is to quote Tesla, "Of all the frictional resistances, the one that most retards human movement is ignorance, what Buddha called 'the greatest evil in the world.' The friction which results from ignorance can be reduced only by the spread of knowledge and the unification of the heterogeneous elements of humanity. No effort could be better spent."

Posted By Scott, St. Paul, Minnesota : 7:38 PM

What Scott is saying is that EVERYONE who cannot afford to pay for something THEY DO NOT DESERVE should get it paid for by someone else! Scott your brain has rotted; your teeth have fallen out... set down that pipe and go get help!!!
Posted By Leo_J,, Portsmouth VA : 12:04 AM  

"Jesus saves. Moses invests". Jesus - H - Christmas in March... what are you talking about? Why should schools teach children about credit? Where are the parents? Why they are too busy buying their kids cell phones, video games, TV's, etc., for Christmas presents on EXTENDED-CREDIT they themselves cannot afford! The parents are stupid and broke like all of the USA! I think the mentality of this country SPEND EVERYTHING NOW, NOW, NOW! is our own defeat. Just go back to heaven or do something useful; turn water into wine.
Posted By Leo_J., Portsmouth VA : 12:16 AM  

As a real estate agent 18 months ago, I saw this coming. Not only were lenders coming out of the woodwork, offering whatever people wanted, I saw many loans with origination fees abouve 2%! First time buyers are told, this is normal...No big deal.

Pardon me, but isn't the reason that there is PMI, to prevent people who can't afford homes from buying them?

Instead the lenders issue 80/15/5-s or worse...80/20/5-s and the people come in without a dime down besides their EMD.

I can't tell you how many deals I turned away from, hearing lenders tell INVESTORS (not Owner-Occupants) that you should be able to buy multi family dwellings with no money down and have cashflow...If there's no cashflow raise rents!!! WOW....

I also love the NAR, Local Real Estate Analysts and such who say they expect a return to "normal" market conditions with 3-4% appreciation per year. Starting when 2025?
Posted By Troy Las Vegas, NV : 12:16 AM  

Greenspan is the only one to blame. Didn't he suggest people choose ARMs?
Congress must investigate him and his relation to Wallstreet.
On a separate note I think the housing market has become very similar to .com bubble stock market. People think their sheds cost a million and they are all living in a villa overlooking central park. Wakeup everybody, your home is not what you think it is. Or you paid, maybe %90 less.
Posted By Jack Holmes, FL : 12:20 AM  

Subprime lender going into default...shocking??? Its almost as shocking as possibly losing money in the stock market.

There is a reason why these loans are called subprime. Interest rates eventually had to go up from historic lows. Subprime borrowers already stretched to borrow based on lower rates of course they'll default when rates go up. If Citibank or Bank of America were going under I'd be worried. Who the heck heard of New Century or Novastar or Accredited Home Lenders? They must be those spam mailers I've been getting about 1% loans. LOL
Posted By MONEYmag for Idiots Oakland, CA : 1:12 AM  

Madman, your "handle" is apparently well earned. This looks like a response from a twenty to thirty something individual that feels that they are owed the same standard of living that their parents had/have. What you apparently didn't see is the the slow, careful saving and budgeting that can create this type of lifestyle if managed properly and within a BUDGET. I know that word is not terribly popular with the "entitled" younger generation (I'm 44 by the way) but good Lord man, listen to the wise words of long ago... "Whatever you have, spend less"... Oh, and a newer phrase, "Take responsibility for YOUR own actions, don't immediately look for the nearest scapegoat when YOUR decisions land you in trouble." Good Luck.
Posted By Tim, Atlanta, GA : 1:54 AM  

How come the sub-prime lending practice was rarely discussed in the media until now when its too late?

This is similar to the 2000-2001 Dotcom bust. Until it was too late, most analysts would continue to blow their individual company horns - to up the ante, and then dump the stock that that individual analyst had purchased on behalf of the company.

Short term gain or greed. I think the US will always have some vehicle for short term greed. It so happens that its the turn of sub-prime loans right now.
Posted By Sriniva,Fremont,CA : 2:27 AM  

I am an underwriter for an "A Paper" lender in Southern California. Anyone who thinks the problem is limited to the subprime market is in for a big surprise. I can't tell you how many times I've impugned the judgment of whoever is establishing the lending standards. A lot of the loans are 1st time home-buyers with good, but extremely limited credit histories. In most cases no income verification occurs, rarely are significant assets verified, and almost without exception, a risky loan product(interest only or negatively amortizing loan)is utilized. In other words, these borrowers have to overstate(i.e. lie) about how much money they make in order to qualify for a loan that doesn't even require principal(and in some cases even the entire interest)payments. To boot, they've put no money down. This is a recipe for disaster. Many of these buyers have survived by living off of the equity in their homes--a process known as "debt pyramiding"--run up credit card debt, refinance house every 6 months, repeat. Guess what happens when their home ceases to appreciate? Yep, they're in big trouble, & soon to join the ranks of the "subprime consumer".
Posted By Josh San Diego, CA : 3:17 AM  

I think its funny that you sit here and say that someone who is using solid data and facts about the housing market is overconfident, yet for the last 5 years, anyone with an ounce of sense could tell you this was coming and that the market was being inflated by realtors, investors and flippers along with millions of people with bad credit getting loans...BUT it was ok then to listen to realtors and people INVESTED in the market and you all backed them up and called them experts and nothing but happy articles. Its just like the internet craze.

I'll take someone not invested in the market anyday over anyone with a tie to real estate. Any of them are going to paint a rosy picture. They are idiots. They are the ones saying we hit bottom already. You hit bottom after the fact.

Greenspan allowed this type of lending to go on. So did the banks. So did the FBI and so on. With no penalities or jail time for these shady dealings. it was an elaborate pyramid scam. They let it happen to let the economy survive. But in the process its going to really put us in a recession. Just look at any boom and its followed by a recession. This one will be so far reaching, from construction, to realtors, to lowes and Home Depot, to all the people with negative equity now. But hey, I said all this 4 years ago and no one listened.

Your house is worth whatever it was in 2001 plus a little bit of inflation. If you believe its worth more, you aren't ready for the hard times coming.

Lastly, you should KNOW if you are ready for owning a home. If you were unwise enough to get involved in one of these scams and so on, it's your own fault. I make a nice salary and I didn't buy into the hype. I knew it was a fake market. My friends told me I was stupid for not buying and yet my friends in no way should have bought. Now they are the ones in trouble.

Be prepared for a recession and crash. And no market is safe. If you live in NOVA/DC don't be delusional about this area either. It's one of the most overpriced areas and is going to fall bad. Condos even worse.
Posted By Recession : 3:20 AM  

I invest heavily on stocks for my retirement and gotten a little worried about what people say on the economy in the US with all this big headlines woeing about the subprime mortgage bust. A lot of statistics was quoted but I can't find the one I need - the subprime market as a percentage of the overall property market in US. Anyone got any idea?
Posted By Lawerence Ho, Hong Kong : 3:32 AM  

Any of you get the feeling that a lot of these "doomsday" prognosticators are people who have lived in apartments for the past 6 years praying for a crash so they can get into the market? They are trying to create the self fulfilling prophecy - slash - housing vortex via hype and bluster but unfortunately will only have limited success. Prices are overheated in many markets but market equilibrium is not more than 5% away. So keep dreaming all you market Nostradamuses.
Posted By D. Latimer, Pasadena CA : 3:34 AM  

Ever read a Tom Clancy novel? A minor event inevitably leads to the brink of world catastrophe. There was no way out. Except for the small band of intrepid heroes that do save the planet. So it is with subprime mortgages. The underlying assets are still real and most are at or above the loan value. Financial institutions would be wise to help out subprime folks. I suspect a big part of the problem could be dealt with by giving people a 1 year period with a 2% lower interest rate ... which is probably still above prime. Yes, it may mean a couple cents less profit this year. But it is hardly a collapse. As long as people have jobs, they will want to keep their homes. If lenders can wise up, everyone will be OK.
Posted By AL, San Jose CA : 4:43 AM  

Hi Steve, Baton Rouge.
I agree with you. If the lender change the loans from arms to fix, then we dont have a lots of problem in what is called Subpime Mortgage. But they all so Greedy they want to take your money ( the poor and middle class ) more and more then they take your houses. They think that they can resell and put more money in their big Bag. I bet you this time they have screwed up because It is a fault in housing market over the last few years. since 1999 - 2006 the prize of a house raise almost triple, but your wages not even double, most of the people who bought the houses ( median houses ) were the people with low income..HOw will they put up with the inflated payment ??? 2009 the valua of a house will go down atleast 15% from now.
Posted By Davy tran , Richfield, MN : 5:17 AM  

Thanks a lot brother. I was in a panic after yesterday's fall and was about to dump stocks in my own country. The Dow's fall has affected Asian stocks all across the board today.
Posted By Saurabh, Bangalore, India : 5:29 AM  

i'm a 29 year old married male who currently rents in the suburbs of NYC. to say that the new york area will be immune to this is insane; almost all my peers that "own" a home has a suprime mortgage. my wife and i have a combined NET income of over $100,000 and have more that that in savings. we are still not happy with the houses we see that are affordable. half a million for a 1100 sq. foot fixer-up? i am sorry, but we will wait.
Posted By dave, new hyde park, ny : 6:51 AM  

What is crazy about the housing market is that people are not waking up to the fact that this is not 1 year ago! I live in Norfolk/VA Beach and I am a 1st time home buyer with outstanding credit, with a well paid job and can afford a decent price. BUT...people here are wanting absurd amounts for their houses! For instance, a 1 1/2 story home with 2 bedrooms and 1 bath IS NOT worth $200,000! The place needed work too and was not in the best neighbourhood! Seeing this sort of thing everywhere! People are now scratching their heads wondering why their homes have been on the market for over year now! When is it going to give? If someone like me who has all these good credentials cannot afford a home...what does that say for the rest of the population. THAT is scary!
Posted By Jonathan, Norfolk, VA : 7:02 AM  

Pat; I think you're right and I think you're wrong. I am a RE Broker in South Florida, also licensed in Ohio, in this business for 30+ years. Now, that doesn't make me an expert but does however, give me some qualified perspective on these matters. Most importantly, I agree with the Realtor just before me, that sellers have NOT adjusted their sales prices downward nearly enough. They are in extreme denial and are still believing they are going to pick up the $100,000+ profit they would have claimed just a few months ago, even when they might have only just recently purchased their property. However, my overall views are rather simplistic: 1) Sales prices must drop way more than the low percentages you and the so-called experts predict if our over-inflated housing market availability is to show any real appreciable activitiy. They will. Believe me, they'll have no choice if they wish to stay afloat. 2) Yes, there will be a
vast number of foreclosures, probably way more than the million predicted in time to come. Has to happen, because sellers just don't get the picture and many of them, even many desperate to sell, just refuse to see the light. They honestly believe they are going to pick up that $100,000+ any day now, if they just hold on. 3) While the lending institutions may initially tighten lending practices, they will be forced to make it easier for the less than fortunate 100% qualified borrower to obtain mortgage loans, otherwise they will all be sitting there holding real estate they never wanted on the books while they lose many fists full of dollars by the minute. Go figure. 1) Yes, market sales prices will decline, and rightly so. 2) Yes, less than perfect credit worthy borrowers will be able to obtain satisfactory mortgage loan financing. 3) Finally, FHA, VA and other special financing terms, including seller assistance, and including the out-dated land contract, will once again be a constant. You'll see......
Posted By Anne Braun, Boca Raton, Fl : 7:47 AM  

We saw this with gold and silver; we saw this much more recently with dot-conomy; and now we have seen this with real estate.

Congratulations! We have all now passed Ponzai 101. Your certificates are in the mail...
Posted By Joel F., Portsmouth VA : 8:37 AM  

Very, very interesting. I work for one of those subprime lenders that remain. Let me discuss something for a short period - at some point along the way the MORTGAGE industry found (or thought they found the cure all to making loans) - it was called a credit score........ Funny thing is, daily I look at 30-40 credit reports of individuals across this wonderful nation. For the most part, I can't make heads or tales of why a subprime borrower has the scores that he or she does. When you see a person who has three scores, one of 715, one of 635 and the final one being 497 - you realize there has to be some fault placed on this credit bureaus. Apparently there is absolutely NO consistency amongst the bureaus (all claiming proprietary reporting views). Proprietary or NOT, it is having an impact on this Subprime Fallout. If credit reporting agencies had done a more consistent job here (I smell a class action lawsuit for all you attorney's out there), perhaps better credit decisions could have been made, but Wall Street Firms were having subprime lenders (probably ALL lenders) using credit scores. A borrower with a 580, no rent, no tradelines that were paid good and no housing history with 1 day out of a chapter 7 was still eligible for 100% financing AND the seller could pay ALL closing costs (that borrower just bought into a house with nothing out of pocket)..........a borrower 1 day out of a BK, do they really deserve a credit score that high, what about 100% financing, did they earn that??? Perhaps credit reporting agencies will be forced to step up to the plate and share some of the blame, however, certainly only a portion........and maybe this will force some revision and starardization of credit reporting.
Posted By Jenna, Mississippi : 9:09 AM  

well said, time is near
Posted By Dan Portland Or. : 9:25 AM  

Do you think it would be in the best interest of each lender/bank/mortgage company to sit with each family about to default on their loan and maybe lower their rate back to the affordable level they once had? Banks could and should be flexible in this sense or they risk the chance to recoup most, if not all of the money originally agreed upon in the loan. If you recall, the John Deere tractor company did something similar but different during the depression when they decided to literally carry the loan burden until each farmer was able to make payments again for the loans on their tractors.
Maybe this means going from a 30-year mortgage to a 40-year. I don't know. But I think it would be in everyone's interests, especially the banks/lenders, to be a part of a solution. Otherwise, the lenders/banks will create their own domino effect, if it hasn't already started.
Posted By Anthony, Smithfield, RI : 9:47 AM  

Homes have more of what people want than they had in the past, so there is a greater value. Do most homes have dishwashers, air, ect?
Have buyers made prices rise higher than they should? Some markets 30, 40, 50% in a year. Any one can reason this is excessive and they will come down. While some have made money in the stock market or real estate, some have lost.
Have you ever seen an investment built on the fact that the people from whom you are buying the investment made money? Surprise it was your money, it was not because of other value reasons.
I have been in the real estate business for years and I remember selling house to people that could not come up with $500 cash that made $2,000 a month or a person that bought a toaster on credit and was delingent on the payment, but still go a no down, no closing cost VA loan. While this dates me, the basics do not change.
Yes there will be a shake out, but we will be OK.
Posted By Charles, Belle Haven, VA : 10:15 AM  

Good ol Greenspan caused this entire slump. Why doesn't anyone realize that it is Alan Greenspan that screwed 25% of American mortgage and credit card holders....This increased my own mortgage payment from 740.00 to 1600.00 in a year and a half. Now I am nearing bankruptcy...not fair! Waah!

Posted By Dominic M. Mac, Waterford, Michigan : 12:21 PM


Let me get this straight, you took out an adjustable rate loan knowing full well that you wouldn't be able to afford the payments if they rose. You took a chance, gambled, and lost. And now you want to blame everybody but yourself?

You are the one who did the moral equivalent of charging your house on a credit card with a temporary teaser rate. You are the one who did the moral equivalent of putting your property deed on a Vegas roulette table. You are the one who took an unreasonable risk on your housing. And now you are the one who needs to pay. Consider it an expensive lessson in personal finance education.

What's that, you say?

Senate wieghs aid to 2.2 million subprime borrowers

Now you expect those of us who took out responsible 30 year fixed mortgages, those of us who rent during this insane housing bubble, those of us who paid off their mortgages in full, you expect all of us to pay off your lousy and inappropriate mortgage too?

I am officially going to stop making my 30yr fixed mortgage payments today so I can qualify too. If the honest taxpayers are going to be forced to bail out irresponsible mortgages, I don't see reason why I should have to pay mine anymore. Let me in at the head of this feeding trough!
Posted By Mike, Belgrade MT : 10:28 AM  

Here is a HUGE part of the sub-prime story that nobody has discussed here yet. A high percentage of sub-prime loans also have aggressive "pre-payment" penalties attached to the loans. This was a relatively new phenomenon in the past 5 years, but this feature will add fuel to the bonfire of foreclosures coming up.

Here is a typical scenario: A subprime borrower rate adjusts up, and can't afford the payments. Their current home is also declining in value, worth less than they originally paid. They have decent credit and try to refinance their loan. But hidden deep in the fine print is typically a stiff $20,000 pre-payment penalty if the loan is paid off before 3 years (or some even go up to 5 years). What the hell were the lenders thinking?

Nobody is talking about these horrible pre-payment penalties that sub-prime lenders tacked on to these loans in the past few years. Getting out of these loans is a zero-sum game for many homeowners, who I expect will walk away from their homes and tell the lenders to shove it.
Posted By Brett B, Phoenix AZ : 11:13 AM  

Lot of generalizations flying around here. I am a loan officer and have been originating mortgage loans for 11 years. I have tried to advise my customers correctly and turned down plenty of business because of it. For instance from the first time World Savings tried to train me into pedaling their Option Arm product, I could see that these were BAD NEWS! Well, you say, for some people, investors, etc., they are good? BULL. In 11 years I have NEVER sold an option arm. Zero!! Interest only, especially at 100% are also a very bad idea, and I have consistantly tried to talk my customers out of doing that, admittedly not always successfully. We are not all bad people in the mortgage business. I could see the current situation coming a long time ago. The only thing that surprises me is that it took this long to get here. The real problem is people buying things they can't afford with the idea of paying later, not just huge houses, but expensive cars and SUVs, plasma TV's, etc. With the way our government has been operating for the past several years, it is no surprise that people would have this attitude. There is plenty of blame to go around.
Posted By Rob Adelman, Eden Prairie, MN : 12:01 PM  

As long as house prices continued to rise, the "sins" of the loose lendings standards stayed hidden.

AS house prices rose, folks who got fast talked into getting a mortgage they could ONLY qualify for at the "teaser" or pre adjusted rate WERE able to sell the house once they could not afford the adjusted payment.

However, as soon as housing markets stopped rising enough (or even dropped!) to let these folks sell their houses to avoid foreclosure/loss, the "sins" of the loose lending became hugely exposed.
One of the reasons why the Denver / Colorado market is LEADING in foreclosures is that we have had a FLAT appreciation curve YEARS before the coasts etc. Been pretty flat since 2001. While other areas have been increasing in price up until 2005, we have not, as the increases in the Denver area market happened mid to late 90's into 2000, then went flat. So, where we go now, the rest of the 'bubble' /nation will be soon.

So, if you rob a bank, and it isn't discovered for 2 years, is it still robbery? All those folks who got fast talked into trading their almost paid off mortgage for an ARM with LOWER payments (at least for awhile) NOW are hosed. Senior citizens who thought it was 'free money' are on the street. So, next time you get a "flyer" from a mortgage company saying they can get you a 200K loan for 300$/month, CALL them and rip them a new one for pulling this shit! Fun for you and a cheap good time!
THEN mail that flyer, or ad, or whatever, to your state attorney for fraud review. Why? Upon review, it has been determined MUCH of the advertising violates state law! But they didn't follow up until people started crying. Stupid State. Make them do the right thing, and prosecute the Mortage Brokers who Implemented this loose money, nation destroying process! THEY have BMW's, and seniors are on the streets. Yes, the folks who gave them the money to loan should have been more critical.. but it is the guy on the street selling the loans inappropriately, taking their commissions, and hitting the road that should be burning in hell.

And a whole pack of new grifters is being created, folks claiming they will "help" you with your foreclosure if you just sign a "few papers". Papers that unknown to YOU transfer the house to THEM!

I saw this coming, killed me to see folks who SHOULD NOT BUY HOUSES buy houses! I do kick myself for not shorting all the idiot mortgage companies stock!

And folks buy HOUSE PAYMENTS, NOT HOUSES! So, if money is CHEAP, you run up the price of the market as you are buying the monthly, not the house.. until it readjusts that is! So most of the price rise in real estate is smoke, mirrors, and a lot of fart gas, and not only will most markets be flat, but a lot of that fart gas is going to come out.. and stink!

The emperor is naked! The houses are NOT worth that much. They are only worth what they SHOULD be worth.. remove the cheap money, the "qualify anyone" attitude, and the air etc. comes out.

Also, many claims are made the we have all time high HOME OWNERSHIP! Bullcrap.

In the 50's, many fewer folks owned houses, but the amount they owned OF the house was huge compared to now! Many folks have cashed out some or all or their equity for vacations and cars. So if you look at HOW MUCH of the houses are really owned in equity terms, we are WAY less than the 50's.

You own something when you don't owe something! Until then, you only own part of it!
Posted By Tony the Rocket Scientist, Erie, CO : 12:55 PM  

I have originated loans in New England for almost 7 years. This situation is NOT caused by {THE LENDERS}. It is caused by loan officers greed and ignorance of available loan products. Currently only a handful of states require a loan officer to be licensed. These So Called Licenses only check to see if the loan officer has acriminal record. No Tests/ You need 5 real/testing licenses nowadays to sell insurance. But NONE to offer financing to a person's home?{makes NO sense}
When i said Greed. this is in reference that Loan Officers make more money by charging higher rates. For instance, if a borrower qualifies for a 6% rate and I charge him 7% I make what is called yield spread premimum. On a 200,000 loan this can mean $6,000 dollars in my pocket and much higher payments for the borrower. This ability to make money off of borrowers backs needs to stop. Thankfully as the market slows these so called loan officers will be squeezed out....
Posted By jason gruner north hampton new hampshire : 1:08 PM  

Mike from Belgrade is right on point.

Those jerks who got rich giving out subprime mortgages should be on the hook for this mess.

Spend-happy Americans just don't get it: If your credit is bad, then you don't manage money well. And you don't deserve to qualify for a house until you clean up your act.

Look at other countries, such as Italy. Many folks there live with their parents until they can afford to pay for a place of their own -- in full. Lots of folks there don't like to take on mortgages.

I hope the government doesn't go through with this bailout. Irresponsible people need to be taught a lesson.
Posted By Jan, Berkeley, CA : 1:25 PM  

I have been preaching all along that salaries have to keep pace with home purchase prices and they are not. Banks have come up with ways to keep the wheel churning by offering teaser rate ARM's and 100% financing. But what good is a bank if people aren't saving money? Are there any true homeowners or are we technically just renting from the banks? It seems that perception is driving the market, but what happens when reality kicks in?
Posted By Rod, Chicago, IL : 2:03 PM  

The housing market is just moments away from sending the entire country into default. Prices are out of hand, and those you try to refi will get stuck because a decrease in property values shuts them down. I originate loans all day as a bank loan officer, and here is the real problem in an example: a cashier at Traget earns $1500 per month. she bought a house for $60,000 10 years ago. The value has increased to $250,000 since that time. Now she sells, takes the profit, rolls most of it into a new home (20% down on a $500,000 home, buys a new car, buys new furniture etc..., and gets the loan through some kind of low doc mortgage. she could never afford it in the first place. The only solution to the problem is to masturbate with both hands on a regular basis. No one can stop her from the rigorous lifestyle of dildo jamming and anal cramming. She is now doomed to failure. Alan Greenspan should shut his mouth and allow things to play out. We may survive this housing hit, but it'll be tough times for a while.
Posted By Harry Johnson, Ocala, FL : 2:42 PM  

I read the news article regarding Senate Banking Committee Chairman Christopher Dodd plan to give financial aid to subprime borrowers. What's next, give financial assistance to those who went to Vegas and lost? Is he insane? The budget deficit is at record high and he wants to give away our hard earned tax dollars! I am losing faith with our elected officials.
Posted By jos diz, chicago : 3:13 PM  

My house has crickets that keep me awake all night long. I've tried sprays, bait, fumigators, etc. but to no avail. Do you guys think that this incessant chirping will affect my re-sale value? I haven't appoached my realtor about this problem.

Any Comments?
Posted By drew, chandler, arizona : 3:38 PM  

Mike from Belgrade and Jan from Berkeley, CA are mind readers.

I'm one of those professionals living with his parents until he can afford prices. This isn't 10 years ago, you can't just launch out on your own.

Who's the only winner? The banks. Why? You give them a 'promissory note' and they give you a piece of paper with a number on it. They sell your note for many times its worth, and what do they give you? Nothing - you didn't get bank funds, they made an entry in a book and created money. (= inflation) They give you nothing and get thousands. Great trade.
Posted By Rodger, San Diego, CA : 3:59 PM  

Harry from FL is close -

This country is already in default. The dollar is less than 1% of its value 100 years ago, and the only thing keeping it afloat right now is foreign countries, mostly China. The collapse of the dollar is imminent, the only question is when. Its not doom-and-gloom to predict a collapse when your currency is backed by NOTHING and you devalue it every day.
Posted By Rodger, San Diego, CA : 4:03 PM  

Greetings-Thanks to everyone who has commented, for your information and insights are very helpful to this first-time home buyer. I am currently in the process of buying a home and this is all very scary to hear. Should I not buy right now with all the pending doom? Not quite sure what the smartest move is...
Posted By Michael, West Chester, Pa : 4:13 PM  

Crickets? Weird.

This would be an example of an off-topic post that I would usually not let through. But, I don't know, I kind of got a kick out of it... Although I bet its not funny for Drew. Here in New York, people are having trouble with bedbugs in their co-ops, which only sounds funny to people who don't live here.

If I was buying a house in Chandler or thereabouts, I would definitely make sure to view it at night.
Posted By Pat Regnier, New York, NY : 4:39 PM  

What do you expect , with nothing down and the speculative nature. Take the Speculators out of the market, burn them good, so they don't drive the prices up for ordinary Joes that are trying for a first home. Still everyone should put down 10-20% minimum. So they have something they can lose if they really can't afford it.
Posted By jack, Phoenix, AZ : 4:56 PM  

There is no crisis if wall street could change its short term profit ideology. More often than not, the short sighted mind set of wall street says cut subprimes out because they can't meet the high/excess profit margins seen in the last 5 years(literally, cutting off their ARMs; i couldn't resist). However, the real market solution shifts focus to retaining subprime revenue and market value, not how to avoid lending to them as wall street sees.
Why? Because subprime buyers have such an impact on market price and sales in addition to the costs of foreclosure, bankruptcy and other such proceedings.

If mortgage companies turn their focus to market value retention, two solutions emerge:

1) Create transfer contracts that allow subprimes to live in the homes until new buyers at good market rates can be found at a decrease monthly payment. The decreased rates would involve waiving the 20% surcharge on subprime buyers for mortgage insurance. Think about, if buyers could cut 20% off their monthly payment, many could make payments. Plus, since the property would transfer back to the mortgage company, they retain the asset that they could have managed by a property management company. Moreover, the company could include buyback options for the subprime buyer if the buyer returns to financial solvancy.

2) repealing the new bankruptcy act that forces those who go into bankruptcy to pay back unsecured creditors, like credit card companies, etc. Mortgage companies have secured credit but the new law forces subprimers (let's be honest; they are ones carrying high credit card debt) payment rather than forgiveness. While this is great for American Express, the law's effects are now being seen in mortage defaults.

The key here is to retain home values and profitability off the subprime market while avoiding expensive foreclosure and bankruptcy proceedings.
Posted By William Marx, Seattle, WA : 6:15 PM  

Some of you folks are hilarious in your thinking. Its nobody's fault and its everybody's fault. The whole system turns on commission which turns on volume. Thats all you need to know. The crisis is a liquidity crisis. Adjustable loans are funded with adjustable money. When the funding is gone, you can't make more loans. The funding is gone, because the loans have proved to be unprofitable. Therefore, no more loans.

As a result, homes cannot be bought or sold at current prices. Increased rates hurt values because they become harder to buy. The increased rates by the fed have no direct bearing on mortgage rates per se. Prime is 8.25 and mortgage rates are 6.25. Explain that one? They aren't tied together. The difference is, subprime is not a true mortgage loan in the traditional sense. It is a two year loan funded with short term money. This short term money has gotten more expensive, and lately unavailable due to the issues with subprime and the risk involved. Risk is the price you never think you will have to pay.

Real estate and mortgage lending is cyclical. I should know because I did it for 20 years, until two years ago, when I said ENUFF!!

This isn't that hard to see coming folks. Real estate will go down in the short term. It has to. Will it be a catastrophe? Put it like this. If you are unemployed, it is a depression. If your neighbor is unemployed, it is a recession. Get it?

If you have bad credit and no money, no house for you.

If you have good credit and money, house.

If you had bad credit, took a bad loan and can't pay, no house for you.

If you made stupid loan, and don't get paid back, bad move, and you deserve it.

If you lied to get the house, and you can't get another one, you deserve that too.

If you don't plan to move for a while, so what.

If you plan to move, prices are going down for you.

Those that will be hurt, are those needing to sell now. Ouch.

All of this is why I don't own real estate. No liquidity, difficult to sell, high transaction costs, and with the standard deduction rising every year, less and less tax break. Who says rent is throwing your money away? Still think so?
Posted By Frank , Fairfield Ohio : 7:13 PM  

Folks,
You have to understand how the banking system works. It is a Fractional system. This means the banks lend and borrow on fractions of dollars. If you borrow $100,000 from a bank, the bank can look at that as (in the bank) and by law, can loan out many times that amount to others (for interest).
This may be 30 times or God Knows how many times through dirivatives. The subprime loans were NOT stupid mistakes! They were keeping the system
alive.Why do you think you are still getting the credit card apps. in the mail everyday? They (the banks) have to keep the credit bubble going,or imploade.
What is the answer to an orderly easing of the situation. I don't have a clue. Do you?
Posted By Dave Thompson Toronto Canada : 1:45 AM  

If I hand out $10 bills to ev everyone on the street with their hands out, soon everyone will have their hands out. Anyone who has a financial interest in spinning the facts will. If Moody's has a revenue stream related to subprime's, I would be more surprised to find out they told the story straight than they withheld downgrading sub's.

If anyone thinks they can believe gsax or bstrn, they obviously were born after 2000...
Posted By Alan Durhan NC : 12:53 PM  

to jason gruner & jan from berkeley:

a very small majority of the subprime loans originated created the distressed circumstances that should never have been approved in first place. most of these people in trouble are stated wage-earners with poor credit and getting themselves approved for loans that increased their monthly debt. these buyers bought in hopes of an increasing market and their gamble proved wrong. the refinancers took large amounts of cash out and didn't manage it well.

still these circumstances represent very few. the vast majority of these people were given LOWER monthly expenses and, therefore, a very lucrative opportunity to turn their financial circumstances around. whether they did or didn't is not the lender's responsibility. we're not children here. we don't need to hold our parents hands when we cross the street. i lost a great amount of $$ during the tech bust. know who's fault that was? mine. i learned my lesson and moved on.
new century is getting the heat because of bad bookkeeping. in actuality, they were one of the few large subprime lenders that DID require strong financial benefit before approving a loan. most subprimers followed this example. AND, most of these subprime borrowers are in a better position because they listened to the advice the loan officer gave them and are now refinancing into much lower 30-year fixed rates.

course there are still some very bad apples. Ameriquest's near half billion $$ settlement and (just announced today) 5,000+ employee layoff is just screaming poetic justice. these guys actually had software programs designed to CREATE fake W2s! another extremely shady boiler room outfit is quickloan funding. they funded anyone and everyone. last thing i heard, their owner is now a hollywood producer. he made so much money that his first movie to be premiered is being financed by him personally and will involve the crashing/totaling of his porsche GT-1 just for kicks. his other 10 exotic cars will be in the movie too. why is New Century taking all this heat???

oh, and higher rates through yield spread premiums aren't what killed the homeowner. the borrower may have saved only $600/month instead of $700 but they still saved $$$ and blew it in the end.

i know it's trendy nowadays to blame The MAN but a much more lucrative and longer-standing trend is called responsibility.
Posted By Tony, Corona CA : 6:08 PM  

As a responsible mortgage broker, I have to say...I have done many subprime loans over the last several years. When do we begin to look to the borrower to be responsible for the choice they made to purchase a home and be responsible for the payment?

If you had subprime credit, and we helped you get into a home, at what point is it your responsibility to become more credit worthy so that you could be refinanced at the 2-3 year point. Continuing your previous history of late payments and disregard for credit has to end somewhere... Is that my fault or yours?

Credit scoring is a reflection of your priorities and meeting your obligations in a responsible manner. Blaming the consequences of your choices on someone else is irresponsible and continues the pattern that created the selection of a subprime product to meet your goal in the first place.

It is unfortunate that we are facing limited choices to help borrowers that had to go with subprime loans. It is sadder for borrowers that thought they could continue their disregard for their responsibilities without consequence.

A solution...take your responsibilities seriously and you will prove to yourself and to future creditors that you have earned the privilege of a great rate on your borrowed funds..
Posted By Marie, Denver, CO : 1:51 AM  

It sounds like there are alot of under-informed or mis-informed people making random comments about the sub=prime industry. If having 2 years to clean up your credit and improve your score so you can qualify for a conventional mortgage is too short of a timeframe, I don't think thats the industry's fault. There are all sorts of disclosures signed at closing letting the borrower know that they have an adjustable rate and it even spells it our for them how much the rate can increase each year. If the borrower doesnt understand any of this, they have lawyers present at closings to explain this. To blame the sub-prime industry for a melt down of the financial world that will not happen is ignorant.
Posted By Matt Chicago, IL : 2:15 AM  

When I underwrite a loan file, my decision to approve a loan is based on the borrowers ability to pay back the loan. Collateral is important, however the ability to pay is more important. Interst only and pay option ARMS are for the more savy financial borrower. Your average borrower does not understand the ramifications of these loans. Borrowers beware!
Posted By Maureen Bruneau, Bel Air, Md : 10:24 AM  

If we dont't act on the information available, then all is left to use is gut intuition. Probably acting on information is a safer bet, at least in my case. I just sold my interest in mortgage lenders, not because i dont think their stock price will improve, but I can make just as much in T-bills without all of the risk, based on the past 3 years of dividend returns and price appreciation.
Posted By Jim B., Amherst, MA : 10:36 AM  

When I first became a Realtor in 2001,The local market was on the uptick.During those years the simple fact was that there was more buyers than inventory.Period.Now all I get is phonecalls from buyers I serviced during those times telling me they are in way over there heads,which results in another "for sale sign",witch in turn floods the market with more inventory,which in turn devalues the market demand for them all-each day a few more. This is a nightmarish game of dominoes to us all.You cannot blame one single factor.It is quite indeed the perfect storm.
Go one scenario furthur-pepole will always need homes-true,and we certainly are more pepole everyday-but land never grows any larger.But here is the thing,If you will not buy a house then I will not sell a house.If I don't sell a house,I can't pay my bills either.The folks at the home improvement stores aren't doing the business that they once were.Those stores will now begin to cut their losses by "laying off" more workers,and how will they pay their bills?
Can you see where this is going folks?Our crappy leadership needs to step up to the plate and figure it out!
Posted By sasha suffolk countyNew york : 5:26 PM  

I have an interesting fact. I bought a rental property 5 years ago in Kansas City. It has appreciated in price 33% but I have had to lower the rent over that time frame about 5%; in the meantime my taxes have almost double. My insurance also increased. I went from a positive cash flow to break even with a house that has been appreciating in a growing economy. Someone explain bow that happens. If my taxes continue to go up, I will need to sell to advoid a negative cash flow. I am sure I am not the only real estate investor feeling this pain. Rental vacancy rates are at 15%, 7% above normal and there is an increasing number of unsold homes.
Posted By anon in kc : 2:04 AM  

We need help. The market is going to get worse. Will our elected officials come to our aide? I doubt it. I feel a global catastrophe is in the works. Many don't realize that if the US market hits bottom, the world will suffer. We may be weaker financially than in the past, but we are not out yet. We must push on.
Posted By Jonathon Wreal, Denver, Co : 11:05 AM  

Is this the apocolypse? Some say yes, but I say no. I think it will be difficult in the near future, but like the earth's weather cycles, this will eventually correct itself. This could in reality be a good thing for many homeowners. If defaults rise, and late payments continue to climb along side foreclosures, the government may NEED to send rates lower to combat the problem. If not lower, they will remain as they are for some time. The strong borrowers will be able to take advantage of this situation. Sure, the weak get squeezed out, but that is the way of the world. The strong survive.
Long term rates are dictated by the 10 year bond. It is important to remenber that. They do not move with Prime. Therefore, having Bernake lower Prime won't help a lot of borrowers, only those with large HELOC balances. What will help is if Realtors start doing their jobs and sell the inventory they currently have.
Much of this can be blamed on realtors. I will speak only of Florida realtors, but I'm sure they are the same everywhere. They know very little, and are not at all concerned with the customers long term well-being. They get 6% potentially on each sale. All they had to do when the market was hot was put it on MLS... it then sold itself. They make a sale for $400,000 as a pocket listing (6% commission), and gross $24,000. They sell 20 homes a year and they made almost a five million, and they really did nothing. Now they struggle. Surprised? Shouldn't be. Those people gave bad advice to good people, encouraging the sale of a nice home to upgrade into a bigger, pricier pad. They increased their income dramatically, while the homeowner suffered with the new high mortgage. The dumb borrower got fooled by the dumb realtor.
What offsets all the personal grief the homeowner suffers from... the fact that a VERY high percentage of realtors spent like drunken sailors when the market was hot, getting themselves caught in their own greed. They bought properties for a quick profit on the next sale. Now the market is soft, like grandpa's pecker, and they can't cover their obligations. Thats what I call a reversal of fortunes.
Never trust a realtor. They are greedy crooks, usually highschool or college drop outs, who can't even balance their own checkbook. Remember: never take advice from someone who can make 6% on your sale. They are in it for themselves... not you! Trust a true financial adviser. Use a bank, they usually want a relationship from you. A mortgage broker or a realtor is a single transaction based business. They may tell you that my statement is not true, and that they are a "reputation" based business, but that just how they cover up their intial lie. They do not typically care if you default, and even if you blame them, they can turn it around and say that they gave you only what you wanted. It is your best interest to research on your own time, and not trust in another person's plan when you know they get paid to convince you.
FOR SALE BY OWNER... they ONLY way to go.
Posted By Ant I. Envester, Miami, FL : 12:12 PM  

Ant Envester has some good points.

Realtors are NOT financial advisors. I know because I was a realtor for many years. I never cared about anyone but myself. I would lie to a potential customer because I knew that my money was in their hands, so to speak. If they don't buy, then close, I won't get paid. In fact, many realtors will try to steer you to a specific broker. Why, because they work together so both are paid. That is what commission does for you. It is dog-eat-dog out there. Nobody can be trusted.
I used my status as a "Real estate Professional" to secure people trust, and then I'd give them bad advice so that my pockets would get bigger. real Estate Professional... what a joke that is. Our creed is to rip off the stupid, and live like the rich. we care about ourselves.
I got out of that business because I want to avoid eternal damnation. Jesus spoke of the tax-collector, but if he were to return today, he's speak against the realtor. Realtors are the devil's henchmen. They spread out across the world trying to force innocent young families into spending all their money on the American Dream. They never tell them that the American Dream they are pushing is their own... dreams of grandure.
Do business on your own. That way no one can corrupt you. Down side, blame no one but yourself.
Posted By Speaking Truth, Atlanta : 12:47 PM  

Giving out financial advice by generalizing all Realtors and mortgage brokers doesn't make a whole lot of sense- especially when the commission breakdown and banker/broker relationship examples used are extremely inaccurate. Nearly, all service-based businesses are commission driven. Consumers should take appropriate steps in assuring that they are working with the correct individual/company with ANY transaction. There's nothing wrong with seeking additional input from 3rd parties such as attorneys or other financial advisors. What you don't want to do is conclude that everyone's out to get you and then base your purchasing power on spiteful paranoia.

Homes are extremely difficult to sell right now. There is a lack of buyers. For Sale By Owner right now is equivalent to replacing your own transmission by hand without automotive repair experience. Very different from changing your oil.

People need to use logic, not emotion, when making financial decisions. You either grow your money or grow your pride. It's a battle of wisdom vs. arrogance. Ball's in your court...
Posted By Tony, Corona CA : 5:57 PM  

Tony from Corona must be a realtor. He uses an example of changing your transmission without experience is like For Sale By Owner. Except he neglects to remind you of his 6% comissions. Ant Envester is right. All a realtor does is throw your property on MLS and waits for another overpaid, uneducated realtor to bring them the customer. Real hard work. I would use a realtor to BUY a property because then it is no cost to me. But to SELL one, no chance. They take your 6%, and then on top of that they lock you into a contract so that even if you were to sell the home on your own (through a personal contact)they still take their cut of it. And its very difficult to fire them as well. Stay away from realtors, especially ones who deceive like Tony from Corona. We are on to your games, fella. Take note, the end is nigh!
Posted By Pat Miass, Ellija, GA : 9:03 AM  

Tony from Corona wisely leaves out his last name. I doubt he's even from Corona. He plays this secretive game where he fires off a bunch of intellectual jargin hoping to turn the blame around on the consumer, with no fault to the lender. Surely he is in on the foul play. Show yourself Tony... give us your REAL name, and let us decide who speaks the truth!
Posted By Hank Santos, Ft Myers FL : 9:13 AM  

I have enjoyed reading the comments, but please keep this in mind. The American people have been on the road to self destruction for many years. It started with the creation of the federal reserve to reduce risk to banks. FDR pushed us much further down the road with the creation of uncontrolled beauracracy to reduce risk to individuals.
This country was started by some of the biggest risk takers of all times. Now it is being destroyed by those who want assurances about everything.
Manias are a natural human condition. Government interference in their deflation always makes the results of manias worse and brings us closer everyday to a socialist society.
Posted By Bruce, Baton Rouge, Louisiana : 10:34 AM  

Does anyone have current statistics as to how many properties are in foreclosure?
Posted By m memoli, bridgeport, ct : 12:09 PM  

Forclosures are a huge problem Memoli from CT. However, they are not as big a problem today as they will be in 6 months. The real estate market is only beginning to feel the damage that is mounting, and mounting rapidly. Almost daily are large investors altering their existing loan products to protect themselves from future losses. It is my view that they are preparing for the worst, and can already anticipate the crunch forthcoming. Sadly, this will eliminate opportunity to purchase a home for the regular, working class. Products that allowed for 100% financing are vanishing, and I have heard of more than one horror story where the investor pulled the program while the borrower was at the closing table. While this type of practice may reflect poorly on a companies integrity & service, it can potentially save them million in the long run. As a real estate investor, I have learned the value of good advice, market research, and a bit of luck when looking for the next big score. It is imperative that we as consumers evaluate all of the options on the table.
Some lenders have told me that they have a problem with appraised values not meeting the loan minimum. Inother words, people who want to refi canb't get the home value to appraise at what they need to complete the transaction.
In reality, this real estate bubble burts effect so many more than just the realtors & lenders. Think about the appraisers who have also slowed dramatically. What about the inspectors that suffer. So many people are being squeezed by this burst that it really will drag down the whole economy. Think about all the people used in a single real estate purchase: realtor (sometimes 2), lender, title agency, appraiser, inspector, and pest control agencies. Not tom metion all the people behind them: secretaries, underwriters, processors, closing agents, and many more. These working folks must also suffer because as business slows their employer may need to cut expenses, and then cut them. Then trickle down effect will cost many more jobs than can been seen only by examining the surface. And when those poeple get laid off, how will they pay their bills. The situation actually CREATES subprime borrowers. these people had steady jobs, and as things worsen they are left out in the cold to fend for themselves. Will they find the time to fondle their gonads as much as they could in the past? Unlikely. They will be trying to find new work. If they have the opportunity they will sell and move to a cheaper part of the country. I love large breasts. The rich, who demand service, will be left washing their own dishes at restaurants when the poor folk move to higher ground desperately trying to avoid the flood of loan default. Many men will be forced to put their penises between their legs, bury their heads in the sand, and wait out this crisis. The danger still lurks, and as stated before, this is only the beginning of the end.
If it is a forclosure you want, check your local newspaper. but, if you are patient, many more will appear in the next year. If you are looking to buy and flip for investment, then you should know that you may end up in the same boat as those that forclosed. Proceed with caution, for it is a smart man who can talk his way out of the trouble that a wise man would have never gotten himself into.
Posted By Justin Crettible, Norfolk VA : 2:32 PM  

"I am a loan officer and have been originating mortgage loans for 11 years. I have tried to advise my customers correctly and turned down plenty of business because of it. For instance from the first time World Savings tried to train me into pedaling their Option Arm product, I could see that these were BAD NEWS! Well, you say, for some people, investors, etc., they are good? BULL. In 11 years I have NEVER sold an option arm. Zero!! Interest only, especially at 100% are also a very bad idea" Posted By Rob Adelman, Eden Prairie, MN

Rob- I have one of those "horrible" World Savings loans on my house. So does Alan Greenspan on his house in CT and Donald Trump has a few. I have had mine for 6 years, and I am on target to be mortgage payment free in about 5 more. I will NEVER use any other mortgage product. I've been in the mortgage business and a registered investment advisor for 25 years. Here's some good reading for you: "Missed Fortune" by Douglas Andrew. "Rich Dad, Poor Dad" by Robert Kiyosaki. The primary theme? KEEP YOUR LIQUIDITY OUTSIDE THE PROPERTY WITH GREATER SAFETY, DIVERSIFICATION, AND RETURNS. EQUITY COMES FROM MARKET APPRECIATION, NOT PRINICIPAL REDUCTION. Here's one thought- the average American family has 75% of their net worth in the equity of their primary residence. With the impending real estate correction, would you feel comfortable having NO CONTROL over that much of your net worth? I'd rather have a majority outside the property in a diverse portfolio of mutual funds that I can control.
Posted By Howard Taylor, Boston, MA : 10:17 PM  

Don't blame the lenders. Don't blame the realtors. Don't blame the consumer either. You want to know where to direct your anger for this real estate debacle? The Bush Administration. When he had rates drop to historic lows following 9/11 they never prepared for this event to occur. Similar to post-Saddam. George Bush has sent this country into new, unheard of levels of debt. We owe so many countries billions of dollars that there is no safe way to keep this economy from total collapse. Alan Greenspan only speaks the truth, and he called this months ago. We are headed into recession.
If you purchased your home in the last 2 years with 100% financing, or a negative amm Option ARM, you might as well staple your balls to a rocket and shoot it off to Mars because your situation here on Earth will only worsen. I was only kidding about the Bush administration being to blame. It is really the fault of that lesbian Hillary Clinton. She will take credit for all of Bill's successes, but won't shoulder any of the blame for not putting out and keeping him satisfied. She is a hideous creature from the deep and she must not get elected. It'll be a tough fight though. Many militant dikes around the country support her simply because she is a woman. But is she? I have noticed a rather large bulge in her crotch when she wears her pant suits. She either has a 6 inch cock or a bush that was cultivated in the rain forest.
Whatever the case, be ready for more trouble with housing. Refinance if you can to take advantage of these low rates, but be careful not to fall into the brokers trap of Option ARM products that will force you out of your home and into bankruptcy.
Posted By Lawrence of Arabia, SanDiego CA : 9:19 AM  

I think the subprime market could eventually fuel the rebound of real estate. Unfortunately, the failure of many will result in lower housing costs and allow more first-time home buyers the opportunity to fulfill the American Dream.

Unfortunately, we still have 2 years left of the Bush Administration. Hopefully the country will elect a good Democrat to allow, and support, the future rebound of our housing market. Bill Clinton loves to massage his balls with the tongues of dead camels. The subprime market lenders have been too aggressive in the economy and they will now pay the piper. It is a buyer's market now. People looking to purchase homes should move now. Don't wait for your panties to dry out or for the duck butter in your crotch to go away... you should purchase now! Take advantage of the Republican's mistakes of the past! VIVA HILLARY CLINTON!!!!
Posted By Carefor Bangingme, St Paul MN : 1:31 PM  

I hope a Republican official gets elected in 2008. It is for economic reasons like this our country needs to stay steadfast with the stronger party. Sure, the Bush administration has made mistakes, but the Republicans can help fix this crisis.
Posted By Tyler Harmish, Birmingham AL : 2:52 PM  

Democrats have ruined our economy... again! They represent the poor, uneducated, and unemployed. Or in other words, they represent the subprime borrower. Conforming & conventional borrowers who have jobs and good credit are conservatives, not liberals. Stop blaming the current Republican administration! This is not their fault. Anyone who has any brains knows that this problem started with Jimmy Carter and extended through Bill Clinton. Democratic leadership in this country is destroying all that we stand for. DO NOT ELECT A DEMOCRAT IN 2008!!!!!!
PLEASE NOTE: THIS REAL ESTATE CRISIS ONLY REALLY CAME INTO LIGHT AFTER THE NOVEMBER ELECTIONS! Democrats will raise our taxes only making problems worse! Vote Republican all the way! God bless the Bush Administration!
Posted By Phil, Dallas TX : 3:10 PM  

Blame REPUBLICANS! They, and our foolish leader Mr Bush, are the cause of this mess. Bring on 2008 and lets get the Democrats in there to fix this huge problem!
Posted By Julie Scanata, Fort Worth, TX : 3:40 PM  

I believe we should start with where did all these godd & bad easy loan's money came from? It came from our national debts which is financed from the foreign central banks and domestic/foreign investing funds. The more we American spent, the more the dollars flow back as debts and investments. Now that our national and individual spendings are slowing down so does the backflow of dollars. When an economy slowing down the first ones to get hurt are those who owes more than they can pay. Sub-prime is just the tip of a huge iceburg, the liar loans, Alt-A, No-Doc, Negative Amortization, ARM w/o down, etc. are on their ways to get into trouble. The big finance institutions and the big investors are quitely reducing their risks (i.e. margin calls). The bottom line is the long decline of housing prices has just begun, for the next 5 years, even a great numbers of prime loans will default. Those who bought in the red hot markets before 2005, still have time to sell it and get the equity out, even it's 20% less than the peak (2006) price. It will be more difficult to sell in 2008 thru 2011. There will not be any shock wave, it just slowly erode away the equity.
Posted By Jose, L.A., CA : 10:35 PM  

Lets just hope the economy can handle this shake up.
Posted By James T Kirk, Final Frontier : 6:20 AM  

"Democrats have ruined our economy... again! They represent the poor, uneducated, and unemployed. Or in other words, they represent the subprime borrower. Conforming & conventional borrowers who have jobs and good credit are conservatives, not liberals. Stop blaming the current Republican administration! This is not their fault. Anyone who has any brains knows that this problem started with Jimmy Carter and extended through Bill Clinton. Democratic leadership in this country is destroying all that we stand for. DO NOT ELECT A DEMOCRAT IN 2008!!!!!!
PLEASE NOTE: THIS REAL ESTATE CRISIS ONLY REALLY CAME INTO LIGHT AFTER THE NOVEMBER ELECTIONS! Democrats will raise our taxes only making problems worse! Vote Republican all the way! God bless the Bush Administration!

Posted By Phil, Dallas TX : 3:10 PM"

You, sir, are a complete moron!
Posted By Rob M, Mpls., MN : 12:05 PM  

I'm loving my 5.125% 15 year fixed mortgage, taken out in 2003. Why anyone went with an ARM when fixed rates were at 40 year lows was alternately amazing and amusing to me. I just hope the ARM foreclosures don't depress home values too much in the long term.
Posted By JP, Seattle WA : 5:31 PM  

Phil from Dallas wrote: "Conforming & conventional borrowers who have jobs and good credit are conservatives, not liberals."

What an idiotic thing to say. Here's one 868 FICO, 15 year fixed pinko liberal saying Phil is a moron.
Posted By JP, Seattle, WA : 5:34 PM  

Dear JP from Seattle, WA:

You are showing the world what a fool you really are. I don't believe a word you say, except for the fact that you are a liberal. It is clear that you lean to the left, because just like CBS and NBC, you make ficticous statemets as if they were fact to push your own agenda. How do I know? An 868 FICO score??? Hey stupid, max score you can get is 850! Check with Equifax, Transunion, & Experian. Do research before you lie so you can make it more believable.
Don't question someone who has decades of experience in the business. You are a dumb fool... and now everyone knows it! Keep hugging those trees JP, because you can't offer any legitimate business advice! At least its probably safe to assume your carbon footprint isn't too big... being that you live in a trailer and ride a rusty, old bike around town.
Posted By Phil, Dallas TX : 10:48 AM  

To JP from Seattle: the highest credit score you can have is 850. It is impossible to have an 868 FICO. Learn the game before you try to teach the rules.
Posted By Mr Greenspan, DC : 12:02 PM  

I live in So. Cal and don't know anyone who has bought recently that can afford their home. I think that the middle 90s is coming back,, when we saw record forclosures and reduction in value. Stay put if you can. We have seen the highwater mark in real estate value for the next 10 plus years.
Posted By turbo los angeles : 4:06 PM  

To all the "experts" posting on this blog... if you want any kind of credibility at all learn to spell... a good start would be to learn the difference between there, their and they're. You know who you are!
Posted By Maybe You Should, Go Back to Grade School English : 4:30 PM  

To D. Latimer:

You said: "Any of you get the feeling that a lot of these "doomsday" prognosticators are people who have lived in apartments for the past 6 years praying for a crash so they can get into the market?"

Wow, you hit the nail right on the head... there is a huge conspiracy of apartment dwellers trying to knock the bottom out of the housing market, and they all park their black helicopters on the roof overlooking the grassy knoll. I always knew that people who live in apartments and pay rent were all soooo much smarter than the investors who collect the rent. It was only a matter of time before they would collectively hatch a great scheme to influence the US housing market with skill and precision only dreamt about by the professional economists with MBAs and PhDs working in the financial sector (who, I am willing to bet do not live in apartments).
Posted By to take me They're coming away, haha : 5:27 PM  

The economy will suffer in the short, but not too far off in the future it'll bounce back. Think positive! Don't get freaked out everytime Greenspan speaks. Make sound, researched investments and work hard at retirement. Those who don't will wish the did.

"I am a loser. I have no friends. I'll never get laid."
Sound like you? Call Tony from Corona and you can talk about all the things you have in common!

But don't take his financial advice. He is a dangerous adviser with absolutely no qualifications or credentials.
Posted By Chavo Guerrero Jr, New Mexico : 12:02 AM  

To all: has anyone given credence to the fact that the Greenspan Fed created this financial mess we are in today, with the same institution under Bernanke�s leadership continuing to do the same? Don�t forget that the Greenspan era span several administrations: both democratic and republican. I agree with an earlier comment that this is a �huge conspiracy�. But come on, created by the apartment dwellers? What makes you think that bunch smart enough to �engineer� something like this?
This mess was created by the brokers, appraisers, lenders, Wall Street firms, and lastly the Fed. They all looked the other way to �suck into the game� as many gullible people as they can with their low doc, teaser loans, and resell the loans as securities (MBAs). Well, we all know that all good things will end some time. The question is: how bad is it going to be this time? It is not looking good for now, but I believe time will tell.
Posted By Mike Blum, DC : 10:43 AM  

Glad that you apparently are "aboard," relative to the impending housing price crash. As always, better late than never. Personally, I think that the (great) rate at which the housing market tanks, from this date onward, will astonish most people.
Posted By Chip, Orlando, Florida : 10:44 PM  

Why post a comment if you do not understand the industry - NEVER would I comment about a heart surgeon�s work! As a loan officer and a veteran of the real estate industry for 30 years I would like to set some false comments straight:

1. Mortgage interest rates are NOT controlled or set by the Feds. They are traded as private mortgage backed securities (the bond market) which fluctuate daily just like the stock market. Generally, stocks go up, mortgage interest rates go up (NOT always, but that is the general trend) - stocks go down, interest rates go down.

2. Indices - these are starting to settle down a bit - especially the MTA index which most Negative Amortization Option Arms are linked to. You must remember that if you wanted to purchase a home in say, California you HAD to and still must get an interest only loan or you could never afford the payment - this is what happens as prices increase with any commodity - look at cars and boats - they finance them for 10 years now I believe? In addition to the subprime transactions, you must remember the mortgage industry sold "Interest Rate" and the consumer bit hard. Then, instead of looking at say a 5 year ARM, most people wanted the "Lowest Rate" and opted for the 3 year arm! The banks now have 10 year arms - not a bad loan really - 10 years is a loooong time! But shame on the Loan Officer who wrote an A paper buyer with a short term loan less than 5 years - they either were not experienced in life, the industry and/or failed to explain the benefits of the longer term loans.

3. I think many people in the buying process need to be responsible for the subprime fallout! The realtor who jumped into the business 4 years or less wants a sale - if the realtor found a person on the street that could fog up a mirror they truly believed they were more than able to buy a home. Then the loan officer is pressured into doing the loan, the banks are making great margins (profits) on their loans in the secondary market and everyone is a happy, fat cat! But there are/were the loan officers like myself that would say NO - I will not do your loan, even with risk of losing the business of the realtor and the buyer! They went to someone else who would "cook the books" - the LO would make a good $15K gross or more for a $450K purchase KNOWING that the bank would underwrite the loan and fund it. There was no consideration of the buyer and what their future held! It reminds me of this buyer who was referred to me 4 times by 4 different realtors. His debt to income ratio was 76% - the last loan officer he talked to said he could buy the house, refinance in a few months and then pay all his debt off - we were already in a declining market at that time. Bottom line, you have no idea of the FRAUD on behalf of the Mortgage brokers. Creating false W-2's, check stubs, bank statements, having a phone line listed that was a bogus business (many times the subprime reps camped out in a few offices and had everything set up to falsify the documents)- I even had a buyer that bought only because the LO he hired actually altered his credit report (some banks did not repull credit or use an automated system years ago) and he paid this gentleman $24,000 IN CASH for him to get the loan - that $24K did not include the loan origination fee he received. He went to refi and oops - there's that Federal Tax Lien again! He was screwed!

4. People are reacting to the decline in prices and taking on the "sheep mentality". I get calls all week long from realtors asking - "She doesn't like the house anymore because it is not worth what she paid - do you think the bank will do a short sale?" HARDLEY!!!! I ask, is she able to make the payment? Well, of course she can � my answer is still NO. Love this one - they want to buy another house, finance it first and then let the old house go into foreclosure. ARE THESE REALTORS AND CONSUMERS NUTS!?!?!? All these "Slick Dick's" in the industry only hurt us all, because believe me; they are still doing all kinds of nutty things!

5. You all must remember that things are very different this time around. Jobs are good, interest rates are still at historically low levels and people are STILL buying homes. If you were not in the business or trying to sell a home in the 1980's you have NO idea what bad is. The S & L crash shook things up, you couldn't give a home away and I still remember "crying foreclosures" on the steps of our title company steps with the wife present, crying because she was losing her home - NOT BECAUSE HER VALUE WAS DROPPING AND SHE DIDN'T WANT THE HOME ANY LONGER - but because the family was experiencing a hardship. We still saw families lose their homes due to poor money management � but that will never change.

6. All I know is I own 21 doors of real estate � only 3 in California - I easily saw the writing on the wall 2 years ago with the market starting to change (there are some of the same signs every down turn by the way - have you ever noticed gas prices are always spiked?) I bought 1 house for speculation and yes, that was a less than desirable outcome for an investment (even I got caught up in the game) - but my intention for all the homes was to hold for 10 years. So the problem is???????????

7. The banks will loosen up a bit - once Freddie Mac announced on that fatal Wednesday 4 weeks ago, I started getting emails and phone calls that the loan I had submitted, well, the program just might not be available tomorrow. It was a knee-jerk reaction - and almost every bank jumped on the band wagon - even WAMU cut out their 100% financing last Friday! Bottom line, you must change what you can't sell on Wall Street.

8. Hang in there - it will one day get better - it always does - the media just loves doom and gloom. I am just grateful I have lots of rentals - now those who could have bought a month ago must rent a house now - I am sure a few of those would be buyers will now be my tenant! And believe me, there will be a solution to the problem - there always is. The 80's brought all inclusive deeds of trusts - we just might see LOT'S of lease with the option to buy here in California. Many with bad credit are dreamers and not good money managers and will again lose their money - but that is just part of the game - rich mentality vs. the poor mentality - the rich always end up with the poor mans money - and it is not out of greed, but out of being just a little smarter! Bottom line - GET EDUCATED about this stuff before spouting your opinion off or someone like me might have their hand in YOUR pocket!!
Posted By MW Bay Area, CA : 2:48 AM  

For thos of you who don't think the real state market is going to crash---take a load of this: I live in San Jose, CA the heart of sillicon valley where the top high tech companies in the world have headquartered for a couple of decades. Here in Sillicon Valley the median price for a house (a shack with 1/8 of an acre) is $760,000. That price is completely out of reach, even for an electrical engineer like myself who holds a masters and who makes close to six figures a year. I obviously have not been stupid enough to follow the crowds and hang myself by gettting a subprime loan to by a house here in the area. I, however, know of multiple people who have. Several examples: Some of the janitors who clean my office after hours, the lady who cleans my appartment, the handyman who fixed my toilet, the guy who makes burritos at the taco shop on Santa Clara street, my cousin who is a landscaper and who makes $13.00/hour, the groom at a wedding I just attended last saturday and who by the way is a construction worker. I know that all of these people got subprime loans/interest only ARM's. And all of them purchased their homes not more than three years ago. What surprised me the most was the fact that one of the janitor ladies who cleans the company offices, whose husband is a cook at Chillis, got a loan for $850,000 just eight months ago. I almost pooped in my pants to even think that lenders would be this STUPID/or this greedy to make quick commisions. All of these seems to obvious to me and it should be clear to all of you. The associations of realtors, who by the way are a bunch of greedy leaches, want you to think that everything is honkey-dorey. This is obviously to stop the onslaught and to keep this from going out of hand. Those of you who don't open your eyes are gonna be exposed to a rude awakening. The explosion and collapse of the real state market will be many times the Magnitude of Chenobyl.
Posted By Roberto, San Jose CA : 3:05 AM  

So now cities are coming up with plans to bail out people that are losing their houses? What? People that bought houses they can't afford should be bailed out by the rest of us who are also struggling to make ends meet?

There is something really wrong with this picture!
Posted By Rob M, Mpls, MN : 11:32 AM  

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.