Let’s Talk About Subprime Loans (And Stop Yawning)

If you want to have an intelligent discussion about subprime loans, then …don’t look at me.  I have tried to understand the whole issue.  I’ve listened to countless NPR segments about it (which, granted, is not the same as doing in-depth reading, but frankly, there is only so much yawning I can stand myself), and I vaguely get the part about the mortgage meltdown and the collapse of Wall Street, all of which seem to be entertwined.  There were credit default swaps and securitizations and all that kind of stuff, but there is an extent to which understanding it is like learning to speak Urdu.  I would have needed to start way earlier, like when I was five. 

Here is what I do know:  I have a subprime loan, my very own personal self.  And the question is…who owns it?  And the answer is:  No one knows.  And there, you see, is Fakename’s definition of “securitization”.  Little pieces of my house belong to entities all over the globe, and if they own a little piece, they don’t even know it. 

Here’s my story.  I bought my house in 2002, and the loan was granted by I Don’t Remember, because the loan was sold already by the time I got to closing to Ocwen Federal Bank.  Doing business only in Florida and California.  Then…Ocwen Federal Bank ceased to exist.  Now I pay my money to Ocwen Loan Servicing, which, as the following article explains, is an “enforcer”.  They collect the money for the Owners…um, the Investors…and that is an entirely amorphous group.  I presume that if anyone ever decided to foreclose on my house, it would be Ocwen, and that I can rest assured that two guys from Nigeria and one from Saudi Arabia will not be knocking on my door.  But who knows?  In Florida, the courts are hammering out foreclosures as fast as they can, and if I’m not mistaken, it’s here that someone finally said…wait, who owns this property?  Who has the actual right to foreclose? 

While perusing Ocwen’s website today, I saw a link to this article from Time Magazine, which profiles Ocwen and its policies.  The article is entitled Forestalling Foreclosure (clever title, huh?)  I was pretty much impressed, because it seems that Ocwen agrees with the question I’ve been posing all along.  Wouldn’t it be better to have SOME money coming in (by modifying a loan), than by foreclosing?  Because by foreclosing, then you own a house (okay, Ocwen doesn’t, but someone does) that you then can’t sell to anyone else in the current economic environment? 

In the interest of full disclosure, no one, either Ocwen or the two guys from Nigeria,  has ever tried to foreclose on my house.  But I have, for the last two years, hung on by the skin of my teeth, and I’ve had to have help to keep it going.  My problem is that my income has been static but my expenses have all gone up.  It’s that simple.  And it’s the same for everyone I know. 

So I really get the anger of people who are outraged by “bailouts”.  It isn’t just Wall Street…it’s that you have to have defaulted on your mortgage to get help.  We fall somewhere in the losing middle.  We aren’t either rich enough to get tax breaks, nor poor enough to qualify for aid.  That, I think, is the true meaning of “middle class”. 

But what can you do?  As Donald Rumsfeld famously said (which was his undoing, even though it was true), You go to war with the army you have, not the army you wish you had.  And we live in a real world.  Sad, but true. 

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23 responses to “Let’s Talk About Subprime Loans (And Stop Yawning)

  1. Thank the Democratic sponsored “Community Reinvestment Act” for creating this falling domino act.

  2. If your house isn’t too underwater, you might try a re-fi with a 30 year conventional. I believe the rates are around 4.35% right now.

  3. Jeff’s assertion that this is all the fault of the government forcing mortgage brokers to make loans to “those” people is a convenient lie that doesn’t stand scrutiny.

    Mortgage brokers got paid if they approved and sold loans. No loan, no commission. So they made lots of loans and cut lots of corners. The brokers didn’t care if the loan had little chance of being paid back – they were going to flip the loan immediately anyway, as they did with yours. The next owner didn’t care about collectiblity either. They were going to put your mortgage in a pool and “securitize” it – and pocket still another commission in doing so. Eventually “liar” loans became the latest, hottest thing – no income verification! (Jeff, what did liar loans have to do with the Community Reinvestment Act? Huh?)

    “Sub-prime” only means loans to people with less than excellent credit. They were a bit riskier to the lender (if he cared about such things), but the interest rate was higher – a GOOD thing if you were into securitizing loans. Properly priced, sub-prime loans are even more profitable to lenders than loans to people with AAA credit. Do you see any shortage today of people offering to lend money to people without much means to pay it back? Do ya, Jeff? Do ya? How does the CRA come into play here, I wonder?

    Jeff’s answer to your mortgage situation is to just get another loan, but it’s not very realistic today. (Reminds me of that old commercial for an oil well service company: “If you don’t have an oil well – get one!)

    Lenders have really tightened up. But since you are already on the edge, and with the mortgage industry’s new-found interest in borrowers’ repayment ability, that may be difficult for you.

    The problem about getting your “investor” to modify your loan is that no one has the authority to make that happen. Ocwen is supposed to collect payments and foreclose when someone’s loan gets behind. Their terms don’t include the ability to apply any judgment or good sense.

    It’s a mess. I wish I had an answer for you. It just proves the old saying: If you owe the bank $50,000, the bank owns you. If you owe the bank $50,000,000, you own the bank.

  4. Thanks Jeff. My house is not underwater; it would be a good time to consider what you say. Especially before our new governor lays waste to Tallahassee. I don’t think it’s going to be a fun place to live for the next four years. Unless he goes to jail before he can do much damage. You think I’m kidding…I’m scared and depressed about this….person. Like they say, there is nothing like putting someone who hates government in charge of government.

  5. Perfectly right, GC (I hope you don’t mind my abbreviating your name). My original loan was accomplished through a broker, and I’m happy for it. But they were by no means affiliated with the government nor were they under some sort of coercive incentive to loan to me. The CRA played no role in this whatsoever. What the lenders were after was loaning me the money at the highest rate they could, and what I was after was…owning a house. It’s like, we both get the picture. I’ll play if you’ll play.
    Lucky for them…I’m a responsible, employed person, who had the income to do it, and I really, really want a house. I get the part where people who can’t afford to own a house were suckered into it…but that isn’t the fault of the goverment.
    And I’m not “those people”. There is a lot of that categorization going around…like subprime equals subhuman.

  6. It has always confused me that the people who are least able to pay are charged the highest interest rates. I’ve always wanted someone to explain that to me. It seems to me like a prescription for failure. I mean, wouldn’t it work better if you charged low interest rates to poorer people, thereby guaranteeing that they could pay you? On an ongoing basis? Or is it just more profitable to repo the couch/TV/car/house multiple times and resell it to someone else?

  7. That CRA crap is a typical right wing lie. How many loans did those investment banks which had to be bailed out make? Not one. There was only one reason for CDO’s – profit. And those CDO’s were based on a flawed belief that there was a way to calculate the risk, something which I previous posted about.

    Certain portions of the private sector that contribute to politicians got bailed out. GM got bailed out. But “the people” can go to hell. Maybe that attitude is why “the people” are mad as hell. And I like an angry mob….

    The idea that the market is rational is ludicrous. The market is irrational. The market is largely a bunch of financial lemmings.

    Next time, and there will be a next time, I have no problem with the market committing seppuku. Maybe next time the politicians will be too afraid of what the public will do if government lifts a finger to help the private sector.

    When Republican candidates campaign against the Republican-initiated bailout what does that say? They were (a la Kerry) for the bailout before they opposed it?

    The Retardicans shellacked the Demagogues for the same reason the latter shellacked the former in 2008. The public is fed up with government, no matter who is in power. We anarchists like that attitude and hope for two years of gridlock. Then, watch the Retardicans get whacked.

    Three years to Costa Rica….which does not extradite it’s citizens. To bad Julian Assange did not become a Costa Rican.

    http://www.usexpatcostarica.com/2010/10/citizenship-us-law/

  8. The reason that people with bad credit get charged higher interest rates is actually very sensible. Everyone wants to lend money to people with good credit, so the borrower’s interest rate can actually be set by him searching for the low bidder. With not-so-good credit, or income that makes the loan a bit risky for the lender, lenders aren’t so willing to take the risk. But if you sweeten their deal with a higher interest rate, taking that risk starts to look attractive.

    People with overextended credit and a bad credit history don’t have any trouble getting credit cards. How come? Because with interest rates at 24% and beyond and the prospect of charging $30 late fees and God-only-knows what other add-ons, risky lending to people who are bad credit risks is the most highly profitable sector of the lending industry. Hard to believe? How can payday loan offices and credit card companies rake in so much dough while still spending so much money on marketing.

    Did you know that big banks are so stupid that they will sell their bad credit card debt for pennies on the dollar, then buy it back for a higher price after it has been “securitized”? See my recent blog post about “the billionaire you’ve never heard of.”

  9. GC, I did read that blog and it was excellent. It just makes you want to shake your head in disbelief. But back to your comment about no one having the authority to modify loans except the investors…Ocwen does have that authority. Two very interesting things about the article (to me)…Ocwen has in some cases reduced the principal. I’ve never heard of such a thing. Extending the loan is one thing, but….reducing the principal? Second, it said that Ocwen routinely gets calls from its investors screaming about lower returns. Apparently Ocwen takes the view that if you don’t like it, you can find another loan servicer…and the reason they don’t, is that Ocwen seems to be the most successful at what it’s doing, i.e., you still get more money going with them than you would anywhere else. Nice position to be in, from Ocwen’s standpoint.

  10. “Thank the Democratic sponsored “Community Reinvestment Act” for creating this falling domino act.”

    “That CRA crap is a typical right wing lie. ”

    No it’s not, it is the truth. I watched it evolve from government pressure to government sanctions to those lenders that did not meet quotas to lend to minorities. The government (democrats) pressure on the lenders was significant so the sub prime mess evolved because it provided a false sense of security that they were eager to embrace based on the age old premise that real estate would always appreciate so the whole house of cards would survive. Just look at the demographics of the foreclosures and the diversity of those populations. Those states that aren’t very diverse have the lowest foreclosure rates.

    It is certainly true however that a standard republican position is that you can’t give things to people who don’t earn them. Whether or not thats true obviously varies from those who believe in legislating social justice to those who believe in earning it.

  11. I think that it’s unusual for a loan servicer like Ocwen to have the authority to modify the terms of a mortgage. But it’s a good thing for you that they have it. If Ocwen didn’t have that authority, it wouldn’t matter what they knew to be in everyone’s best interests – they still couldn’t do anything.

    If someone’s house is upside down (more owed than it’s worth), then it makes sense for the investors’ agent to negotiate the principal down to keep the loan performing and avoid the foreclosure mess. In the case of someone who is just overstretched, it still makes sense to consider a reduction in the interest rate. How high is your rate? If it’s way above the current market, a negotiation like that may be feasible.

  12. “It is certainly true however that a standard republican position is that you can’t give things to people who don’t earn them. Whether or not thats true obviously varies from those who believe in legislating social justice to those who believe in earning it.”

    Here in the real world that is:)

  13. The CRA has been on the books since 1977. It applies only to depository banks. It never did apply to the likes of Countrywide and the other bad actors.

    Banks covered by the CRA are supervised by the FDIC. The failure rate for mortgages made there are significantly lower, and less likely to be bundled and securitized by Wall Street into what became toxic assets. And the CRA only applied to loans in low-income neighborhoods. How did it cause all those problems in overbuilt subdivisions in Florida and Las Vegas?

    http://www.nw.org/Network/policy/CRA.asp

    Blaming “minorities” for all our problems? That’s really rotten.

  14. Graychin said, “Jeff’s answer to your mortgage situation is to just get another loan, but it’s not very realistic today. (Reminds me of that old commercial for an oil well service company: “If you don’t have an oil well – get one!) ” In my case, and that of my neighbors, I get unsolicited offers to finance my property. In fact, I probably get two or three of them a week. My main bank has been begging me to finance my property for years. However, I believe that it is very important to own one’s house free and clear. Besides, the taxes on my property are greater than the mortgages y’all pay being well over $40K per year and that’s not including insurance. Anyways, there are plenty of mortgages available, but I strongly suspect that Mr Graychin has not done his research and is not up to date on current conditions.

  15. “The Community Reinvestment Act of 1977 directed federal regulatory agencies to “encourage” banks and other lending institutions “to help meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions.”
    That sounds pretty innocent and, in fact, it had little effect for more than a decade. However, its premise was that bureaucrats and politicians know where loans should go, better than people who are in the business of making loans.” Thomas Sowell

    The CRA was the camels nose under the tent.

    http://www.capitalismmagazine.com/economics/5429-Upside-Down-Economics.html

  16. Well. I have several comments. First, thank you all for commenting. Now then. Let’s start with the CRA. That red herring just makes me crazy.
    My understanding is that it was promoted as a way to get a path to home ownership for those who might not otherwise have a path. And regardless of the benefits of renting, home ownership is much better for the people involved and for the community involved. To simplify it…there is an issue of pride and freedom that comes with owning a house. Just ask me. I rented my house for a year before I bought it, and my next door neighbor is a renter. You should see that. I have been a renter most of my life, although I owned one other house before.
    But more importantly, show me one example of someone who opposed the CRA until it went south. I am not an expert on the issue, but show me one example where the CRA said, you have to grant loans to people who can’t afford them. I doubt you can, because in fact, CRA was a windfall. Mortgage brokers and lenders said, Whoopee. They interpreted it as a green light. They did it out of greed, not out of coercion.
    So that brings us back to my personal situation. I did not get a mortgage loan at a high interest rate because the government told them they had to do it. They did it out of greed, and it so happened that their greed coincided with my desire to own a house. Like I said. Eyes wide open. The mortgage meltdown did not happen because of the CRA. It happened because mortgage lenders viewed it as free access to money. Now the bastards want to disclaim responsibility. Stupid.
    In closing, let me say that if I wanted to refi, I’m pretty sure Ocwen would do it. But I’m waiting until a more advantageous time for me, and trying to build up my record after the last year of being somewhat unreliable. But make no mistake: I am completely unmoved by the concept that you should live up to your obligations, no matter what they are. It might seem noble, but you don’t always have that choice. That’s why so many people are just walking away from their mortgages. In my personal case, my obligation to Ocwen coincides with something I want. I want to keep my house. It is that simple.

  17. Here in the real world 🙂 Nice of you to notice, pt 🙂

  18. “But more importantly, show me one example of someone who opposed the CRA until it went south. I am not an expert on the issue, but show me one example where the CRA said, you have to grant loans to people who can’t afford them”

    My profession required me to work with bankers in the late 80’s and early 90’s while government auditors audited banks to determine that their loan portfolios matched the census demographics of the community they served. They all hated it vehemently, but were forced to comply or risk loss of FDIC status.

    I can’t share names and you wouldn’t know them anyway, but its my life experience not a theory. Barnett, Sun, and Southeast were some of the bankers I worked with.

    I can’t really comment on your personal situation except to say we all live by our choices. And that I wish you well here in the real world.

  19. This might be off topic, but if one borrows money and signs a note, they are morally responsible for paying back the note, no matter what. I’ve heard all kinds of excuses of people not repaying because they don’t know who owns the note etc. It doesn’t matter who holds the paper, you still write the check to the servicer. It really bothers me when people try to weasel out of their obligations, saying that they were the victims of predatory lending etc. Nobody held a gun to their head making them buy a house. Greed played a large part on the buyer, thinking he would be bailed out by a real estate bubble that would go on forever. Face it, not everyone is ready or mature enough to assume the responsibility of owning a house. And as I reiterate, a person buying a house (Probably the largest purchase in their life) not running the deal by a real estate attorney is very irresponsible. I understand that people want to save money, but by not spending the $2K for an attorney will eventually bite you in the ass and end up costing you 100 times as much in the long run. People forget that the real estate market is the same as the money market, soybeans, corn, pork bellies, and stocks……it’s purchasing something with the hope that there will be a greater fool down the road who will pay you more and take you out of your investment.

  20. So pt, you ARE saying that these bankers were forced to loan to people who couldn’t afford them? What you said was, they were forced, more or less, to show that their loans reflected the demograpics of their communities, which is not necessarily the same thing. And was it the CRA that was responsible for this, or some other law or regulation?
    Jeff, I should have been clearer. While I said I was completely unmoved by the idea of fulfilling your obligations (e.g., walking away from your mortgage), that isn’t entirely true. I should have emphasized the part that sometimes people have no choice. I would never do it unless I had no choice. But there again, I did not buy my house as an investment, I bought it as a place to live…hopefully forever. So I’m not looking for the next fool. Speculators are an entirely different breed.

  21. What’s wrong with speculators? I would be very curious as to your take.

  22. The CRA officials forced banks to lend to minority borrowers, to find them and solicit their business in order to meet the demographics of their communities. It didn’t make big headlines because bankers are by nature the most conservative folks around and they feared further government intervention and sanctions. This is not fiction it is what I lived. I was very involved being the key source for the demographic data that the banks used. It is not a twice told tale it is what happened. One of my oldest friends and favorite guys was HR VP for Barnet, I heard all about the corporate loathing for CRA and the helplessness that they felt as Government encroached on their lending standards. It was about that time that I began to change form a “progressive” philosophy to a “hell no you can’t” conservative mind set.

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