The Mortgage Crisis - 10 years on

Aug. 9, 2007: The Day the Mortgage Crisis Went Global

Excerpt:

Ten years ago this Wednesday, the first glimpses of the global financial crisis came into view.

The French bank BNP Paribas froze three investment funds, saying a lack of trading in subprime securities made valuing them impossible. The bond market seized up, rattling investors and central bankers who previously soft-pedaled the notion that the U.S. housing bust would hit the economy.

Aug. 9, 2007, marked the beginning of the most far-reaching economic disruption since World War II. The events that Thursday made clear that subprime-lending excesses wouldn’t be “contained,” as Ben Bernanke, then Federal Reserve chairman, had predicted just months earlier. Yet few people appreciated the scope of the disaster that would unfold over the next 18 months.

By now it is widely understood that the global financial industry was overleveraged, that the U.S. mortgage market was rife with loans that wouldn’t be repaid, that investors and financial institutions everywhere were paying high prices for highly rated securities that were actually extremely risky....

Investors knew before that day that souring subprime loans would cause losses. But few realized they would show up with such disruptive effects in Europe, thousands of miles from the epicenter of the subprime crisis in southern California.

Investors understood the housing bust would hit the finances of major lenders such as Countrywide Financial Corp. But even after the firm warned that afternoon of “unprecedented disruptions” in markets, few appreciated how gravely impaired the entire U.S. mortgage sector would become as borrowing costs rose, housing prices fell and losses started to mount.

The depth of the existing losses and the efforts to keep the system running would ultimately combine to turn the August liquidity scare into a full-fledged run on markets.

That day didn’t expose just the disarray of the global financial industry. It also illuminated behavioral patterns that helped accentuate the crisis, notably investors’ expectation that central bankers and other policy makers would intervene when markets started to shake. ...

From the vantage point of August 2017, it is clear there have been changes. Subprime has been banished from the lexicon. Banks are better capitalized and more liquid. Investors are constantly on the lookout for imbalances that might signal a coming market catastrophe.

Comment: How it impacted us: We actually came out OK.

• Our house valuation dropped fairly dramatically but: Stayed well above what we paid for it in 1996 AND we never went underwater.
• The housing crisis caused the collapse of Wachovia and its acquisition by Wells Fargo. My job was in limbo but I came out ok. Click Wachovia for my blog coverage of this. I went from top dog in my position to 2nd or 3rd fiddle in the new larger organization but I still received raises and bonuses (but no more promotions)
• We paid off our house (Fall of 2007) and we were able to begin equity acquisitions big time at cheap prices - eg 1000 shares of FITB for about $ 1 a share.
• Today our house value surpasses what it was pre-crisis. 

Wells Fargo's John Stumpf: How to fix the mortgage mess

Wells Fargo's John Stumpf: How to fix the mortgage mess

Excerpt:

First, all parties involved in making and investing in mortgage loans need to share a financial interest in the quality of those loans. That includes the customer taking out the loan, the financial institution or broker originating the loan, and the investor who ultimately owns the loan. All parties need to have skin in the game. If originators don't have a financial interest in the loan, they will have less concern for its quality, and poor lending decisions will happen and be passed along to investors. That creates a house of cards.

A healthy debate is already taking place about how much a homeowner should put down and how much a bank should keep on its balance sheet when it bundles and sells mortgage loans. There is no magic number out there, but I can tell you one thing: The more the risks and rewards of a mortgage loan are shared by all parties -- and the better those risks and rewards are understood -- the better the quality of the loan will be.

Will this mean higher down payments for homeowners and more financial skin in the game for banks? Probably so, but the long-term costs for homeowners, bankers, and the economy will be dramatically lower. Just look at what past mortgage lending practices have cost all of us.

Comment: Good article from Fortune Magazine

A "safe" mortgage - 20% down

Regulators define "safe" home loan

Excerpt:

U.S. lenders would have to offer mortgages with at least a 20 percent down payment if they want to repackage the loan to sell to other investors without keeping some of the risk on their books, according to a proposal U.S. bank regulators endorsed on Tuesday.

The Federal Deposit Insurance Corp board agreed to seek public comment on the proposal that is intended to restore lending discipline and define the safest form of mortgages that can be sold to investors.

Last year's Dodd-Frank financial law requires firms that package loans into securities -- a practice known as securitization -- to keep at least 5 percent of the credit risk on their books.

The provision is meant to force securitizers to have "skin in the game," so they don't churn out poorly underwritten loans and then pass along the risk to investors, as happened during the 2007-2009 financial crisis.

Comment: A sound idea

People who walk away mortgages are "jerks"

Walking Away From Your Mortgage Is Morally Wrong And Financially Stupid

Excerpt:

As millions of Americans begin to realize that it will be years if not decades before their houses are worth what they owe on them, there has been lots of talk about whether it's okay to just voluntarily walk away from your mortgage.

I argued last week that, in some circumstances, it is okay -- because your mortgage is a business contract between you and a bank. As the contract makes clear, if you stop paying, the bank gets the house, and you lose your equity and credit rating. That seems like a fair trade, especially if you have tried to renegotiate the mortgage first.

Our guest Megan McArdle, economics editor for The Atlantic, thinks this argument is wrong. First, Megan says, walking away from your mortgage voluntarily is often financially stupid: There are plenty of fees and costs associated with defaulting, and your credit rating will be destroyed for years.

Second, Megan says, it is morally wrong to walk away, because your mortgage represented "a promise to pay." If everyone entered into a mortgage with a secret plan to walk away if the house value falls, Congress would write new laws allowing mortgage-lenders to go after borrowers' other assets (which already exist in some states). This would make borrowing money harder and more expensive for everyone.

Megan concludes that people who walk away are "jerks". In the accompanying video, she makes her case.

Comment: Earlier post If it is amoral for businesses to walk away from debt ... why is it immoral for individuals?

Counterproductive accounting rules

Comment: good read by the CEO of INGDirect!


Why Mortgage Modification Isn't Working - The loan adjustment success rate is just 1%

Excerpt:

That's a success rate of just 1%. This means that up to 99% of eligible homeowners struggling with their mortgage payments have been unable thus far to modify their loans.

A big reason for HAMP's limited success is that the government is suffocating banks with counterproductive accounting rules. Under current law, if a bank modifies a mortgage it must record the write-down as an expense on its books. For example, if a homeowner's monthly mortgage payment is reduced by $400 per month for 24 months, the bank has to report that it "lost" $9,600 ($400 times 24 months).

The bank, though, didn't lose any money—it's still scheduled to receive the totality of the loan principal, just less interest.

This rule, for obvious reasons, makes banks reluctant to modify. They don't want to take the "loss," which can get very big for larger mortgages with long modified periods. So there's a huge financial disincentive to offer modification.

Comment: By the way, INGdirect has a great banking product. We use them for savings and for CD's.

If it is amoral for businesses to walk away from debt ... why is it immoral for individuals?

Walk Away From Your Mortgage!

Interesting statistics:

1. The housing collapse left 10.7 million families owing more than their homes are worth.
   
2. A family who bought a three-bedroom home in Salinas, Calif., at the market top in 2006, with no down payment (then a common-enough occurrence), could theoretically have to wait 60 years to recover their equity. On the other hand, if they walked, they could rent a similar house for a pittance of their monthly mortgage.
   
3. A quarter of mortgages are underwater
   
4. 10 percent of mortgages are delinquent

Comment: Interesting read ... I just culled out the statistics. More below:

Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)

Interest-only owners: "heading straight for a big wall"

As an Exotic Mortgage Resets, Payments Skyrocket

Excerpts:

Edward and Maria Moller are worried about losing their house — not now, but in 2013.

That is when the suburban San Diego schoolteachers will see their mortgage payments jump, most likely beyond their ability to pay.

Like millions of buyers during the boom, the Mollers leveraged their way into a house they could not otherwise afford by taking out a loan that required them to make only interest payments at first, putting off payments on the principal for several years.

It was a “buy now, pay later” strategy on a grand scale, meant for a market where home prices went only up, and now the bill is starting to come due.

With many of these homes under water — worth less than the loans against them — many interest-only mortgages will soon become unaffordable, as the homeowners have to actually start paying principal. Monthly payments can jump by as much as 75 percent.

The Mollers owe so much more than their house is worth, and have so few options, that they are already anticipating doom.

“I’m praying for another boom,” said Mr. Moller, 34. “Otherwise, we’ll have to walk.”

...

John Karevoll, a longtime senior analyst for MDA DataQuick, sees the plight of interest-only owners this way: “You’re heading straight for a big wall and you can’t put the brakes on.”

The greater the length of the interest-only period, the more years the owners have to hope for a recovery, government help, or a miracle. But a long interest-only period works against them, too. A loan that is interest-only for its first 10 years means the entire house has to be paid off in the next 20 rather than the more typical 30 years.

One possible solution: start paying extra each month now to pay down the principal before the loans reset. But many homeowners took out the maximum they qualified for, and don’t have the means to pay more, or at least not enough to make a sizeable dent in the principal.

A decade ago, interest-only loans were rare. But as the boom heated up and desperate buyers sought any leverage they could, these loans became ubiquitous. They were especially popular in Florida, Nevada and above all California. In 2004, nearly half of all buyers in the state got one.

The Mollers bought in 2005, paying $460,000 for their three-bedroom, thousand-square-foot house. A quick refinance a few months later supplied cash to pay debts. Now the house is worth perhaps $310,000. After their interest-only period is up, they expect their monthly payments to increase 20 percent if not more.

Comment: What were these people thinking?

No skin in the game

New Evidence on the Foreclosure Crisis: Zero money down, not subprime loans, led to the mortgage meltdown.

Excerpts:

any policy makers and ordinary people blame the rise of foreclosures squarely on subprime mortgage lenders who presumably misled borrowers into taking out complex loans at low initial interest rates. Those hapless individuals were then supposedly unable to make the higher monthly payments when their mortgage rates reset upwards.

But the focus on subprimes ignores the widely available industry facts (reported by the Mortgage Bankers Association) that 51% of all foreclosed homes had prime loans, not subprime, and that the foreclosure rate for prime loans grew by 488% compared to a growth rate of 200% for subprime foreclosures. (These percentages are based on the period since the steep ascent in foreclosures began -- the third quarter of 2006 -- during which more than 4.3 million homes went into foreclosure.)

...

The analysis indicates that, by far, the most important factor related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home. The accompanying figure shows how important negative equity or a low Loan-To-Value ratio is in explaining foreclosures (homes in foreclosure during December of 2008 generally entered foreclosure in the second half of 2008). A simple statistic can help make the point: although only 12% of homes had negative equity, they comprised 47% of all foreclosures.

Comment: Years ago - like when I was buying my first house (1974), one had to pony up 20% down.

An “Alt-A” story - "I am still waiting for the ax to fall"

My Personal Credit Crisis

Excerpt:

The only problem was money. Having separated from my wife of 21 years, who had physical custody of our sons, I was handing over $4,000 a month in alimony and child-support payments. That left me with take-home pay of $2,777, barely enough to make ends meet in a one-bedroom rental apartment. Patty had yet to even look for a job. At any other time in history, the idea of someone like me borrowing more than $400,000 would have seemed insane.

But this was unlike any other time in history. My real estate agent gave me the number of Bob Andrews, a loan officer at American Home Mortgage Corporation. Bob wasn’t related to me, and I had never heard of his company. “Bob can be very helpful,” my agent explained. “He specializes in unusual situations.”

Bob returned my call right away. “How big a mortgage do you think you’ll need?” he asked.

“My situation is a little complicated,” I warned. I told him about my child support and alimony payments and said I was banking on Patty to earn enough money to keep us afloat. Bob cut me off. “I specialize in challenges,” he said confidently.

As I quickly found out, American Home Mortgage had become one of the fastest-growing mortgage lenders in the country. One of its specialties was serving people just like me: borrowers with good credit scores who wanted to stretch their finances far beyond what our incomes could justify. In industry jargon, we were “Alt-A” customers, and we usually paid slightly higher rates for the privilege of concealing our financial weaknesses.

I thought I knew a lot about go-go mortgages. I had already written several articles about the explosive growth of liar’s loans, no-money-down loans, interest-only loans and other even more exotic mortgages. I had interviewed people with very modest incomes who had taken out big loans. Yet for all that, I was stunned at how much money people were willing to throw at me.

Bob called back the next morning. “Your credit scores are almost perfect,” he said happily. “Based on your income, you can qualify for a mortgage of about $500,000.”

Comment: Good read!

Lending money to nearly anyone who asked for it

WaMu Built Empire on Shaky Loans

Excerpt:

... one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer.

Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.

...
On one loan application in 2005, a borrower identified himself as a gardener and listed his monthly income at $12,000, Ms. Zaback recalled. She could not verify his business license, so she took the file to her boss, Mr. Parsons.

He used the mariachi singer as inspiration: a photo of the borrower’s truck emblazoned with the name of his landscaping business went into the file. Approved.

....

For WaMu, variable-rate loans — option ARMs, in particular — were especially attractive because they carried higher fees than other loans, and allowed WaMu to book profits on interest payments that borrowers deferred. Because WaMu was selling many of its loans to investors, it did not worry about defaults: by the time loans went bad, they were often in other hands.

...

By 2005, the word was out that WaMu would accept applications with a mere statement of the borrower’s income and assets — often with no documentation required — so long as credit scores were adequate, according to Ms. Zaback and other underwriters.

“We had a flier that said, ‘A thin file is a good file,’ ” recalled Michele Culbertson, a wholesale sales agent with WaMu.

Martine Lado, an agent in the Irvine, Calif., office, said she coached brokers to leave parts of applications blank to avoid prompting verification if the borrower’s job or income was sketchy.

Comment: WaMu is now owned by JPMorgan Chase.

Inside WaMu's "boiler room"

Was There a Loan It Didn’t Like?

Excerpt:

MS. COOPER started at WaMu in 2003 and lasted three and a half years. At first, she was allowed to do her job, she says. In February 2007, though, the pressure became intense. WaMu executives told employees they were not making enough loans and had to get their numbers up, she says.

“They started giving loan officers free trips if they closed so many loans, fly them to Hawaii for a month,” Ms. Cooper recalls. “One of my account reps went to Jamaica for a month because he closed $3.5 million in loans that month.”

Although Ms. Cooper couldn’t see it, the wheels were already coming off the subprime bus.

“If a loan came from a top loan officer, they didn’t care what the situation was, you had to make that loan work,” she says. “You were like a bad person if you declined a loan.”

One loan file was filled with so many discrepancies that she felt certain it involved mortgage fraud. She turned the loan down, she says, only to be scolded by her supervisor.

“She told me, ‘This broker has closed over $1 million with us and there is no reason you cannot make this loan work,’ ” Ms. Cooper says. “I explained to her the loan was not good at all, but she said I had to sign it.”

The argument did not end there, however. Ms. Cooper says her immediate boss complained to the team manager about the loan rejection and asked that Ms. Cooper be “written up,” with a formal letter of complaint placed in her personnel file.

Ms. Cooper said the team manager told her to “restructure” the loan to make it work. “I said, how can you restructure fraud? This is a fraudulent loan,” she recalls.

Ms. Cooper says that her bosses placed her on probation for 30 days for refusing to approve the loan and that her team manager signed off on the loan.

Four months later, the loan was in default, she says. The borrower had not made a single payment. “They tried to hang it on me,” Ms. Cooper said, “but I said, ‘No, I put in the system that I am not approving this loan.’ ”

Brokers often tried to bribe Ms. Cooper to approve loans, she says. One offered to pay $900 to send her son to football summer boot camp if she would approve a loan that had been declined by a host of other lenders. “I told him no and not to disrespect me like that again,” Ms. Cooper says.

Hidden fees meant brokers could easily make between $20,000 and $40,000 on a $500,000 loan, Ms. Cooper says.

...

Ms. Cooper says that loans she turned down were often approved by her superiors. One in particular came back to haunt WaMu.

Vetting a loan one day, Ms. Cooper says she became suspicious when a photograph of the house being bought showed one street address while documents deeper in the file showed a different address. She contacted the appraiser, and recalls that he said that he must have erred and that he would send her the correct documents.

“So then he sent me an appraisal with a picture of the same house but this time with the right number on it,” Ms. Cooper recalls. “I looked the address up in our system and could not find it. I called the appraiser and said, ‘Please investigate.’ ”

The appraiser came back, reporting that a visit to the California property had found everything in order and in agreement with the original appraisal. “I was so for sure that it was fraud I wanted to get on an airplane,” Ms. Cooper says.

The $800,000 loan was approved, but not by Ms. Cooper. Six months later, it defaulted, she says. “When they went to foreclose on the house, they found it was an empty lot,” she recalls. “I remember clear as day this manager comes over to me and asks, ‘Do you remember this loan?’ I knew just what she was talking about.”

Comment: Decisions in rooms like these greased the Mortgage crisis

Joey the upside down homeowner

Comment: More from the Star Tribune article cited in the previous post.

Millions owe more on their homes than homes are worth

Excerpt:

Joey Goldner always approached real estate with a gardener’s zeal. He’d plant his money in a building, patiently care for it and watch its worth grow. For 30 years, it was a brilliant avocation — right up until the heavy thud of the housing market helped flip Goldner’s mortgage upside down.

Facing debilitating health problems, Goldner refinanced his Chicago-area home repeatedly, only to wind up with a $729,000 mortgage on a house that eventually sold for $450,000.

In real estate circles that’s called being underwater — owing more than the value of a home. Goldner is just now coming up for air.

“I kept refinancing it to pay the mortgage,” he said. “I kept hoping the market would level off. I never imagined this would happen.”

Comment: From the comments - "I think most people agree that this nation is financially illiterate". That's it!

Housing Crisis: Not out of the woods yet

The Next Housing Catastrophe Waiting to Strike

Excerpt:

It seems that the majority of investors, economists, and governmental leaders are overlooking a very important right hand side of this mortgage rate reset graph. The subprime loan reset period (represented by the green bars) may be nearing the end, but the lightly-shaded yellow bars represent $500 billion worth of option-ARM loans expected to reset from mid 2009 through 2012.

In other words, the subprime mess was the earthquake and the next wave of option-ARM resets will be the aftershock no one saw coming.

So what's an option-ARM?
Everyone was entitled a home during the housing boom, right? No one could be turned away if they wanted to become a "homeowner." Alas, shady lending practices of our savvy mortgage brokers didn't stop at subprime lending. Borrowers who wanted to purchase a home but couldn't even afford the already low teaser rates of conventional ARM loans needed a way to finance their dream piece of real estate. The option-ARM fulfilled that need perfectly. It offered borrowers the chance to pay a minimum payment on the balance, which in many cases didn't add up to the full amount of the interest owed, let alone any portion of the mortgage balance.

When borrowers pay the minimum payment on their mortgage balance, the difference between the minimum payment and the full obligation is tacked on to the total mortgage balance. And while option-ARM loans aren't actually set to reset for five years following the origination of the loan, the structure of the loan only allows borrowers to drown in a specified amount of negative equity – to the tune of 110% to 125% of the original balance – until a surprise reset rate is triggered. To make a long story short, option-ARM borrowers will face significantly higher monthly payment increases in comparison to their conventional counterparts because the mortgage balance is now greater than the initial loan.

Comment: Article has full sized graph. Worth pondering. The economy will not recover until this housing crisis passes - and it looks to be several years out!

Burning Down The House: What Caused Our Economic Crisis?

Another view of the Bailout

Issue Is Payback, Not Bailout

Excerpts:

Yet in just a few days’ time, members of Congress have to figure out how to improve the bare-bones $700 billion plan submitted by Henry Paulson, the Treasury secretary, and ultimately whether to vote for it.

Their best shot at success depends on keeping the debate tightly focused on the questions that matter most. There are really only two: What steps are most likely to solve the immediate crisis? And how can the long-term cost to taxpayers be minimized?

...
The first thing to understand is that a bailout plan doesn’t have to cost anywhere close to $700 billion, so long as it’s designed well. The $700 billion number that you see everywhere is an estimate of how much the government would spend to buy deteriorating assets now held by banks. Eventually, the government will turn around and sell these assets, for a price almost certain to be greater than zero. So this $700 billion is very different from $700 billion spent on a war or on Medicare.

“Much of the discussion of the cost of the bailouts is getting it wrong,” David Colander, an economist at Middlebury College, says. “What matters is what price they buy the assets for and the price they sell them for. That’s where the real action is.”

Figuring out how much to pay for the assets is the first problem. The drop in house prices and rise in foreclosures have made it clear that these securities are worth considerably less than banks expected. But there is enormous uncertainty about how much less.

Comment: Much I do not understand!

Government: punishing prudence and rewarding irresponsibility

Uncle Subprime

Excerpts:

Mr. Frank's idea is that, for mortgages originated between the start of 2005 and mid-2007, a lender and borrower would be able to agree on a federal refinancing plan. Lenders would have to write down their loan to no more than 85% of the current appraised value of the property – which means the banks will use this opportunity to unload the biggest stinkers in their loan portfolios.

For the borrower, the deal is even sweeter: a low fixed monthly payment and a reduction in the principal to market value. The Federal Housing Administration would then guarantee the loan, up to a total of $300 billion in total Frank Refis. The deal is so sweet that even Mr. Frank is concerned that otherwise reliable borrowers may "purposely default" to be eligible for assistance. His solution is to require borrowers to "certify" that they really, truly aren't doing this simply to get on the taxpayer gravy train.

...
In sum, Mr. Frank is volunteering U.S. taxpayers to insure $300 billion in mortgages with underwriting standards to be named later. Connecticut Senator Chris Dodd thinks $400 billion is more like it. Quavering Republicans should do the political math. The Mortgage Bankers Association tracks 46 million mortgage borrowers, and 42 million are paying on time. More than 20 million households own their homes outright and, having worked for years to pay for them, probably don't want to pay for someone else's. Neither do 35 million renters who didn't take a flyer on nicer digs.



Robert J. Samuelson: How Not to Save Housing

Excerpts:

No reasonable person takes pleasure from seeing people lose their homes, and Congress is understandably upset. Estimates of defaults in 2008 run up to 2 million. If realized, that would be roughly twice the 2006 level and about 2.7 percent of the nation's 75 million owner-occupied homes. It would be the highest rate since World War II but well below much higher rates during the Great Depression, says economist Kenneth Snowden of the University of North Carolina at Greensboro.

The best-known congressional proposal comes from Massachusetts Rep. Barney Frank, chairman of the House Financial Services Committee. (The Bush administration is reportedly considering a similar plan.) Frank's plan would authorize the Federal Housing Administration to guarantee $300 billion of new home loans to strapped homeowners, allowing them to refinance their mortgages at lower rates and reduce outstanding amounts. Under the plan homeowners who borrowed between Jan. 1, 2005, and July 1, 2007, would be eligible for new loans if their monthly payments of interest and principal exceeded 40 percent of their income—well above a more prudent level of 30 percent.

...
Everyone wins from this arrangement, say its supporters. Homeowners—some of the victims of deceptive lending—stay in their houses. Neighborhoods don't suffer the potential blight of numerous foreclosures. Housing prices don't go into a free fall, depressed by an avalanche of foreclosures. Although lenders take a loss, the losses are lower than they would be if homes went into foreclosure. That's a costly and lengthy process that can involve losses of 50 percent or more.

The Frank proposal and others like it put politicians on the barricades, trying to protect needy homeowners. The imagery is flattering. But there are two glaring problems, one moral, the other economic.

About 50 million homeowners have mortgages. Who wouldn't like the government to cut their monthly payments by 20 or 30 percent? But Frank's plan reserves that privilege for an estimated 1 million to 2 million homeowners who are the weakest and most careless borrowers. With the FHA now authorized to lend up to $729,750 in high-cost areas, some beneficiaries could be fairly wealthy. By contrast, people who made larger down payments or kept their monthly payments at manageable levels would be made relatively worse off. Government punishes prudence and rewards irresponsibility. Inevitably, there would be resentment and pressures to extend relief to other "needy" homeowners.



Comment: Every parent knows that sometimes one can be "too good" to children. Examples would be shielding them from financial realities to the point that they do not learn to be fiscally responsible adults. It's also possible for government to be "too good" to the point that it "punishes prudence and rewards irresponsibility". These 2 articles highlight that danger.

Greed!

My Take on Greed

Excerpt:

Lately, I've been thinking about greed. In our capitalist system, it does a lot of good by prodding us to become successful financially. But it can also do a lot of harm. People break laws under the influence of greed -- or they do only what's best for themselves, at the expense of everyone else.

Want some examples? Out of greed, mortgage bankers made home loans to people with poor credit histories, then immediately sold the loans. Now when borrowers default, it's somebody else's problem.

Out of greed, Wall Street's investment bankers packaged the same loans in ways that earned the securities undeserved investment-grade ratings, then sold them to eager clients. As those securities are now downgraded to junk, they become pretty close to worthless.

Four of the five biggest firms on the Street -- Bear Stearns, Lehman Brothers, Merrill Lynch and Morgan Stanley -- recently took losses in the tens of billions of dollars for subprime skeletons in their own closets.

Comment: Another example of greed: embezzlement to murder to suicide

Relying more on plastic for necessities

More Americans using credit cards to stay afloat

Excerpt:

Across the nation, credit counselors are reporting the same trend. Credit bureau analyses of consumer payment data show that financially squeezed borrowers have begun paying their credit card and car bills before their mortgages. That's a striking reversal from the norm, one that reflects rising desperation. It suggests that some people essentially have given up trying to stay current with their mortgages and instead are focused on using credit cards to squeak by.

If the trend persists, many economists say, it could accelerate mortgage losses and further drag down the economy.

Comment: Not good news for housing!

"cramming down" regulations

A Mortgage 'Tweak' We Don't Need

Excerpt:

One of the most dangerous proposals is now moving through the House of Representatives. The Emergency Home Ownership and Mortgage Equity Protection Act was voted out of the Judiciary Committee recently. It takes aim at Chapter 13 bankruptcy proceedings to make it easier for buyers to rewrite the terms of their mortgage contracts in court. It would do this by changing how a debtor's principal residence is treated in bankruptcy, allowing mortgage contracts to be modified by the courts.

In short, if this bill becomes law a mortgage would no longer be a matter between a borrower and a lender, but instead, between a borrower, a lender and a judge. Rather than interpreting private contracts, judges would suddenly be able to rewrite them.

Current bankruptcy law has existed for more than 100 years, and was designed to promote homeownership by making mortgages secure from outside meddling. Strong contracts make for a vibrant mortgage industry. Weakening mortgage contracts would endanger the future of American homeownership by making it harder for homebuyers to obtain a loan.

Comment: Bad for business, bad for prospective homeowners, bad for investors!

Banking results ... how bad will it be?

Banks' Dim 4Q Results Roll in Next Week

Excerpts:

When banks and brokerages roll out their fourth-quarter and full-year results over the next couple weeks, investors will try to figure out which are showing resilience, which are scrambling for lifelines, and when they can start buying again.

...
Robert W. Baird & Co. analysts said San Francisco-based Wells Fargo has extra cash to work with and is thus better positioned than many of its peers, but that it still faces problems in its consumer businesses. Its home equity portfolio is particularly worrisome.


Comment: Wells announces earnings on Tuesday. Next week should be interesting for investors.