Bad_credit_home

via Misstrade

Category: Credit, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

20 Responses to “Who Knew?”

  1. michael schumacher says:

    who knew??

    Big Ben and Hammerin’ Hank that’s who.

    Today’s drop amount = $12.5 billion

    Brought to you by the Fed and the Treasurey…

    excess tax receipts are getting out of hand…..may be we should start paying down that debt, that we are currently over……

    But that matters not as the DOW just went green…

    Gotta love it

    Ciao
    MS

  2. KP says:

    This toon suggests that Wall Street had lost sight of that fact.

    We know it never did…there was just too much money on the table to resist.

    It’s only funny because of the irony!

  3. I agree with KP’s assessment of greed leading the decisions. I’ll also add that they knew all along. It was financial musical chairs and none of the participants felt they would lose…

  4. a guy called john says:

    the only thing missing in the cartoon is briefcases overstuffed w/ dollar bills…

  5. super-anon says:

    Wall Street knew, but they didn’t care. The genius of the scheme is that they engineered it so they took all the reward and passed on all the risk.

  6. Um, I think thats Sarcasm.

    I think the point of the cartoon is that they did know, and they did it anyway . . .

  7. KP says:

    Sarcasm? What’s that?

  8. UrbanDigs says:

    Sarcasm? Isn’t that an old wooden ship that was sailed to the lower America’s back in the 1600′s?

    I love scotch! And of course, baxter!

  9. GerryL says:

    That’s really funny.

    I think there are many talking heads on CNBC that didn’t know. Actually, many of them still don’t seem to know.

  10. KP says:

    Some judge is about to get whacked.

    http://www.bloomberg.com/apps/news?pid=20601087
    &sid=aNeo.o6TEuzo&refer=home

  11. metaphorical_mixer says:

    If by ‘poor people,’ they mean persons who didn’t get 15-25% YOY raises commensurate with rising house costs, then yes.

    MM,
    dilligently saved for that 20% down, and risks losing it to (further) inflation

  12. VJ says:

    Latest ABC News poll shows the sharpest one-week drop in Consumer Confidence in more than 20 years, with 57% of Americans now saying the economy is getting worse.
    .

  13. Mr. Beach says:

    While the focus has been on subprime borrowers, it is important to remember that there are other groups that are also screwed.

    1: Home ATM zealots: As Barry has discussed before, with a negative savings rate, Americans cashed out equity to maintain spending over the years. Now with flatlining and/or falling home prices, cash-out refis are closed. Consumer spending has to take a hit.

    2: Speculators with multiple homes: many, many folks have bought 2nd, 3rd, Nth homes as leverage and loose lending standards formed a virtuous circle. These people used their pristine Prime credit ratings to borrow far more than their incomes could support — using cash-out refis to pay interest on earlier loans. Sort of a single-man Ponzi scheme. These people are genuinely screwed.

    In summary, I think two things are coming next:

    1. Consumer spending slowdown. Look for lower retail sales, rising credit card delinquicies, and a slow Christmas.

    2. The subprime problem morphing into a prime problem. Look for rising Prime defaults.

  14. Shock: Poor people can’t afford homes

    The Big Picture | Who Knew?.

  15. whipsaw says:

    Mr. Beach-

    Since you brought up the topic of the Home ATM, I think it’s worth mentioning a few reasons why borrowing against equity is not as irresponsible as is frequently depicted here:

    First, the tax laws have prevented deducting most consumer interest for about 20 years, so unless you are paying cash for vehicles and have no other debt, it is rather foolish not to use equity to pay off those obligations. The interest rate is lower and you get a tax break for a few years.

    Second, from Day One many people plan to pay for their kids’ college education by dipping into equity. The other alternative for most is to borrow against their 401k, but that loses the tax break.

    In both cases, hitting equity is entirely reasonable assuming that you have built up a real stake over the years and don’t go crazy about it. In my own case, I bought my house in 1985 and paid off an absurdly high mortgage in 2001. Around 2003, I observed that I had $50k in auto loans, some creeping credit card debt, kids starting college, and no tax break, so I borrowed half of the value back out on a 10 year note. The car and credit card balances went away, the financial part of college was mostly resolved (don’t ask about the other aspects), and I am still writing off some pretty good interest.

    I realize that you qualified your comments about Home ATM with “zealots” and assume that you probably agree with most of what I have suggested, so I am not picking on you. I just saw an opportunity to bring another aspect of the issue up that many people here seem to overlook for whatever reason.

    ==whipsaw==

  16. Mr. Beach says:

    Whipsaw:

    You make a good point. For many folks, home equity has been a default tax-free savings and investment plan. You’ve clearly used equity to responsibly retire debt and switch into deductible interest payments.

    Unfortunately, at least in my anecdotal observation, many folks saw the past five years of 10% to 30% yearly gains in home price as the new normal. These folks used their equity for immediate consumption (cars, vacations, electronic toys, dining out, etc.) instead of retiring debt. The more aggressive used their equity to buy more property.

    The first question now is how much spending was fueled by MEWs and when it will lead to a measurable consumer slowdown. The second question is how many prime borrowers out there bought multiple investment properties that they cannot support with their incomes.

    We’ll know more in the next 6 months.

  17. Winston Munn says:

    I’m not sure about the sarcarsm – sometimes it seems these guys are so insulated from reality that if their computer models failed it really would be a shock – I mean, how many “poor people with bad credit” do you think they have ever met in their lives?

  18. Eclectic says:

    The Mauldin stand-in for his “John Mauldin’s Outside the Box”:

    “First Consumers, now Structured Financing:
    The Ongoing Impact of the Housing Sector
    by Barry Ritholtz”

    …is possibly the best analysis you’ve ever done.

    I’d hope you and Mauldin would agree to re-feature it here for discussion. Maybe Mauldin’d bring you back some snuff:

    http://en.wikipedia.org/wiki/Copenhagen_tobacco

  19. SPECTRE of Deflation says:

    Barry, I thought this was an interesting montage of the current credit crisis and solvency issues , and the author also shows the parallels between today and the panic of 1907:

    1. In one way, I’m sympathetic to the institutional reluctance to face the music. I’d give a lot to mark my weight to ‘model’ rather than to ‘market.’ – Warren Buffett, Fortune, 8/16/07 (On the financial institution practice of valuing subprime assets on the basis of a computer model rather than the free market price.)

    2. The Federal Reserve was not founded to bail out Bear Stearns or a few hedge funds. It was founded to keep a stable currency and maintain its value. – Jim Rogers, Rogers Commodity Fund

    3. For the second time in seven years, the bursting of a major-asset bubble has inflicted great damage on world financial markets. In both cases–the equity bubble in 2000 and the credit bubble in 2007–central banks were asleep at the switch. The lack of monetary discipline has become a hallmark of unfettered globalization. Central banks have failed to provide a stable underpinning to world financial markets and to an increasingly asset-dependent global economy. – Stephen Roach, Morgan Stanley

    4. There is a lot of pain still to be had in the equity markets, particularly aimed at the risky end of the spectrum. We think the fair value on the market is about a third lower in the U.S. . . – Jeremy Grantham, Grantham, Mayo and Van Otterloo

    5. Suddenly, the world is realizing that gold is still a safe haven asset. We’ve seen pretty substantial losses in equity markets. I think this is genuine safe-haven buying. – James Moore, theBullionDesk

    6. I think Greenspan would have cut rates already. So I do think things are beginning to look different at the Fed. – Paul Kasriel, Northern Trust

    7. At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. – Fed chairman, Ben Bernanke, Congressional testimony, March, 2007

    8. “If prices go down, we will have problems — problems in the sense of spillover to other areas,” Greenspan said. While he hasn’t seen such spreading yet, “I expect to.” – Former Fed chairman, Alan Greenspan, speech, March, 2007 as reported by Bloomberg.com

    9. This is not a rescue. – Goldman Sachs Chief Financial Officer David Viniar after Goldman poured $3 billion into one of its hedge funds

    10. This is a sort of preemptive rescue. – Eric Kuby, chief investment officer for the Goldman fund mentioned

    11. When you’re in a pit, the first thing to do is to stop digging. – James Ellman, Seacliffe Capital

    12. The US financial system is teetering. Its USDollar currency is losing global support, with some outright revolts in crucial territories. The chief private sector export from the US financial sector has been fraud-ridden asset-backed bonds and their toxic credit derivatives. What should anyone expect? For years an institutional dishonesty within all things financial in the United States has been engrained, spreading, and become integrated with high levels of the USGovt. The Wall Street hucksters exported fraud. The backlash might be more severe than the soft soap gurus anticipate. Look for an international boycott. The shock waves in the US financial markets are preliminary symptoms of bigger events soon to come. Stability identified is nothing but quiet between tremors. – Jim Willie, Hat Trick Letter

    13. The German banks’ situation is not uncritical. – Alexander Stuhlmann, Germany’s Landesbank

    14. After all, in a credit crunch, cash is deemed to be king. In which case, gold owned outright has just been crowned emperor. – Adrian Ash, BullionVault

    15. [C]apitalism without financial failure is not capitalism at all, but a kind of socialism for the rich. – James Grant, Grant’s Interest Rate Observer

    16. US sub-prime is just the leading edge of a financial hurricane. – Bernard Connolly, AIG

    17. When the music stops in terms of liquidity, things will get complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing. – Chuck Prince, Citigroup

    18. Why is it possible to rescue S&L buccaneers in the early ’90s and provide guidance to levered Wall Street investment bankers during the 1998 long-term capital management crisis, yet throw 2 million homeowners to the wolves in 2007? – Bill Gross, Pimco

    19. So perhaps the most worrying single remark made by a responsible banking official during the current crisis came from Jochen Sanio, the head of Germany’s banking regulator BaFin. He warned on Aug. 1 that his country could be facing the worst banking crisis since 1931 — a reference to the collapse of Austria’s Kredit Anstalt, which provoked a wave of bank failures across Europe. – Martin Walker, United Press International

    20. Angelo Mozilo, chief executive of Countrywide Financial Corp, which is one of the chief victims of the sub-prime home loan debacle, said the housing crisis was the result of “one of the greatest panics I have ever seen”. When asked if housing would lead the US into a recession, he said: “I can’t believe … that this doesn’t have a material effect … on the psyches of the American people and eventually on their wallet.” – Phillip Inman, The Guardian

    21. As calamitous as the sub-prime blowup seems, it is only the beginning. The credit bubble spawned abuses throughout the system. Sub-prime lending just happened to be the most egregious of the lot, and thus the first to have the cockroaches scurrying out in plain view. The housing market will collapse. New-home construction will collapse. Consumer pocketbooks will be pinched. The consumer spending binge will be over. The U.S. economy will enter a recession.” – Eric Sprott, Sprott Asset Management

    22. The U.S. economy, once the envy of the world, is now viewed across the globe with suspicion. America has become shackled by an immovable mountain of debt that endangers its prosperity and threatens to bring the rest of the world economy crashing down with it. The ongoing sub-prime mortgage crisis, a result of irresponsible lending policies designed to generate commissions for unscrupulous brokers, presages far deeper problems in a U.S. economy that is beginning to resemble a giant smoke-and-mirrors Ponzi scheme. And this has not been lost on the rest of the world. – Hamid Varzi, International Tribune

    23. It’s a crisis if everybody calls it a crisis. – Morgan Downey, Lasalle Global

    24. It’s inappropriate [for money market funds to invest in credit derivatives]. It doesn’t have a place in money market funds. When I created the first money market fund, I said you have to have immediate liquidity, safety and a reasonable rate of return. You also have to have a situation where you’re not giving people headline risk. – David Evans

    25. The crisis in the US sub-prime mortgage market could bolster the gold price not only because gold provides a safe investment haven. The crisis is expected to slow GDP growth, spurring lower real interest rates and a weaker US dollar that will boost gold investment demand. Gold’s traditional role as a safe haven asset in times of financial turbulence and instability is enforced in the current market as the metal recouped the majority of losses which occurred in a flight to cash in the beginning of August. Supporting this view is the fact that gold recovered despite a rise in the US dollar caused by a European Central bank intervention that boosted liquidity in Europe. – Dr. Peter Richardson, Craton Capital

    Final Word

    While compiling the quotes for this article, I could not help but note an irony: The most severe test of the Federal Reserve in the modern era dates almost 100 years to the day from the Panic of 1907 – the credit crisis that instigated the Fed’s founding. The Panic of 1907 was characterized by bank runs and a stock market crash as investors fled the financial system. The current crisis, though it has produced similar results, is a much more complex and wilder breed of cat. Market commentator Henry K. Liu, offers a keen insight: “With the daily volume of transactions in the hundreds of trillions of dollars in notional value of over-the-counter derivatives, the Fed would have to inject funds at a much more massive scale to affect the market. Such massive injection would mean immediate and sharp inflation. Worse yet, it would cause a collapse of the dollar.” Unpredictable circumstances such as these speak compellingly for gold ownership which, by the way, proved to be just as effective a safe haven in the Panic of 1907 as it is likely to be now.

  20. melissa m says:

    Well, the problem is – its not just poor people. It is financially irresponsible people, its people who had 750 credit scores with 40k incomes who purchased 300k homes that they could not afford. In the lives of many decent, middle class, hard working people, one job loss in the family is all it takes to lose everything. Someone in the auto industry, lets say Detroit, with a lovely 750 fico, making 25 an hour, maybe with a spouse who brings in 15 an hour. They are living the American dream… right? Wrong. That auto job goes to another community, overseas or is just eleminated. Unless you have MD behind your name or you are a reality tv star, 25 bucks an hour is hard to come by when you have industry specific skills. Then in an effort to keep their lifestyles they take their home which is already paid for and get an equity loan and live off of it. Suddenly, reality hits, foreclosure looms, and unless you live in one of those rarified communities where everyone seems to buy homes before the ink is wet on the real estate agent agreement – you are in deep trouble. It is not because you were poor, not because you were greedy,but it all falls into the old “s*&^ happens” category of life. Unfortunately for America, its happening to too many of us. The problem isnt so much as poor folks with bad credit getting loans they can not afford – the problem is working class jo’s with regular, normal, or below average credit getting too much home, inflated home prices ( 600k for 1bd apts… thats just silly for most) that are starting to drop hard. You buy a home for 300k in a working class community, you cannot afford 2500 a month mortgage or 30k down. You get a 80/20 or grants or whatever and a 5/1 ARM. You pay 1200 a month. Now 4 1/2 years later your home is worth 287k but work is slow and no one is selling at that high a price. Your mortgage will go up to 3k a month,Your earn 3.5k, you have no equity to borrow on, and you are upside down on your loan – owe 310k on a 287k home which you cannot sell and satisfy the bank. So the bank forces a foreclosure, your credit is shot to heck, the bank sell the home for 250, getting really all of their money back but with little interest, no one wins but the original loan officer and RE agents. Now you have a poor credit history so you can not even apply for 70% of the good jobs out there because they do credit checks. Americans are often caught up in these vicious cycles. I have friends who bought over their head assuming they would have equity and could sell in a pinch. Even DR.’s and high end income professionals are getting in trouble. You buy your million dollar dream house while making 200k a year in IT sales. The economy takes a hit, your company is sold, you loose your job and now you are unemployed with 1 mil in debt. Sure, in 6 months you find a new gig. However, in 6 months you could max out credit cards, borrow from Peter to save Paul, all while being told your dream house is worth 1.2 mil but no one will buy it until you put 100k in improvements in it.
    This happens to the best of us. It is not a poor mans problem it is everyones. When people get desperate, bad things happen. Unemployment = foreclosesures, increased crime, slowed sales and more unemployment.
    I became ill and was out of work for 2 years. I had to liveoff of 60% of my base salary as disability insurance which was about 25% of my reguar income. The first year I had savings,The second we started cashing in 401k and investment money. Luckily I am a renter and live below my means. I want to purchase a home now that I am working again but a great income still needs alot of money down. I have to start saving all over again. I shudder to think what would happened if I was a home owner living from check to check. – I wouldnt have gotten my current gig with a bankruptcy or foreclosure or low FICO.

    It is really a bad situation for the whole country.