First off, thanks to those people that keep commenting and e-mailing me their support even in periods of less than frequent postings.
I know it seems like a lot is happening, and it is, but now that everybody (including people hand-writing fortune cookies in China...which just happen to be holding a couple hundred billion of our mortgage debt) now knows that there were some 'risk assessment' issues the past few years in the mortgage market, I didn't feel like I was adding as much value as when I was one of a few people warning about what was coming.
I was gearing up to get a new post done anyway...then I woke up to my TV the other morning a few minutes before CNBC's Dylan Ratigan was going to interview Hillary Clinton.
Ohhh...where to start. I guess I will start with the mortgage 'solution' as proposed by Hillary. First off she wants increased standards for mortgage brokers. OK, I will go along with that. Since there are NO standards for mortgage brokers right now, some standards might be a start.
"SoCal, what do you mean there are 'NO' standards for mortgage brokers?? ...they have to be licensed...right??" Well, not exactly. A real estate license covers a person to be able to do real estate and mortgage transactions. That license focuses more on real estate than mortgages and finance. BUT the REAL PROBLEM is that anybody can be a loan officer!!! I had broker shops where 1-2 people had their 'broker license (RE license)' and there were 10-100 people selling loans 'under' that license. All of the paperwork would have the 'licensed brokers' name on the 1003 (the mortgage application form), but it was 'Joe-the-loan-officer-that-cold-called-all-day-long-that-dealt-with-the-actual-borrower' who did all the work. It was all of THESE people that were selling loans with no verifiable training or license and met NO standard to become a 'loan officer'. The only standard they met was that the 'licensed broker' wanted another 100% commission person working for them. No skin off their back. If they sold loans...cool. If not, no worries. Didn't cost the 'broker' anything more than maybe some time and phone bills.
Let me make it simple. I have a Series 7 or 'stockbroker' license. I cannot open up a shop and have 20 people calling clients selling them investments under my license, BUT that is what happened in every city in California as you could have people sell loans under your 'California Real Estate License' as long as the licensed person's name was on the paperwork.
Now here is where Hillary starts veering off course. This statement shows she does not totally understand the mortgage industry:
“A lot of buyers think the brokers are actually representing them, when we know the brokers get paid depending upon the size of the mortgage they are able to sell,” - Hillary Clinton on CNBC
That is NOT really true. Mortgage brokers do not really control the size of the mortgage. If you and your Real Estate agent find a property, and negotiate a price of $450,000, that is the size of the mortgage you will get (assuming you don't put any money down, or get a 103% mortgage, etc.). Your mortgage broker can't 'sell you' a $550,000 mortgage for your $450,000 home. Mortgage brokers can commit fraud on refinance deals by working with an appraiser to inflate the value of the property so they can 'help' the borrower take out more money. The funny thing is, the borrowers were usually happy about this. Very few times did I ever hear of a borrower that wanted a specific amount of 'cash-out' on a refi. Usually I heard "as much as I can get", or 'max cash out'. They probably wouldn't be complaining about the extra cash-out if property went up every year like the 'experts' said it would.
That said, don't think the borrowers didn't know what was going on. MANY of the borrowers out there knew, or learned how to take advantage of the 'easy money' available. They knew how to get inflated appraisals and work the brokers. They would call brokers until they found one that would help them. So don't think that every borrower was 'unsuspecting' and just wanted a 'home to LIVE in'.
Let's move on...
Then things get really hairy as she proposes that the TAXPAYERS fund a ONE BILLION DOLLAR federal program that is supposed to help state and local governments help at-risk homeowners avoid foreclosure. She says these programs will go to help 'unsuspecting families' linked to unfair mortgages. I don't want to know the 'standard' for handing out this money...as I'm sure there isn't one, just like handing out credit cards after Katrina. Another 'feel good' program that isn't thought out and becomes nothing more than another billion dollar boondoggle. If you really keep looking, there is another BILLION dollar fund she wants to create as well. As much as I hate to send traffic to her site, you can read her mortgage proposal for yourself.
IF the government IS going to help people, here is THE STANDARD that needs to be used: Only people that put 10% or more down, got a full-doc loan, with a 15,20 or 30 year fixed-rate mortgage should be eligible for any sort of help...and that is IF the taxpayers should help at all. I know that 'sh!t happens', but government shouldn't be in the charity business with taxpayer dollars, and certainly not to help people that made poor real estate decisions.
While we are at it, I should just address a few things she has in her 'plan' to address the mortgage industry. Of course, it is always good to find a 'victim' that needs to be 'saved' by government and politicians. I just scanned the US Constitution again...in case I missed something the first 100+ times, but it says nothing about government helping to make sure you can afford your home. Here you go...from Hillary's site:
New Hampshire resident Kristi Schofield joined Senator Clinton in Derry today. On July 31st, Kristi and her husband Paul lost their home of eight years in East Hamstead, NH because it had been purchased by the bank at a foreclosure auction. Yesterday, their mortgage company asked them to be out of the house in 17 days. They had planned to raise their three children and spend the rest of their lives in their home, but their adjustable rate mortgage payments continued to climb from $2,400 to its current level of $6,000 a month.
"We tried to do the right thing and continued to make the payments as long as we could with our savings and what earnings we had from unemployment, temporary and part time work. My husband had a good job, we had a great home. We were living our dream. Hillary Clinton is standing up today because she wants to help protect the American dream," said Schofield.
I don't get it, how are they losing the home NOW, after EIGHT years?? The ONLY way they could have a mortgage adjust from $2400 a month to $6000 a month is if it was a 'neg-am' or option-arm loan. There is NO way a basic ARM loan would have the payments go up that much. I am willing to bet they didn't get an option-arm loan 8 years ago, so that means they refinanced and pulled some money out along the way. I don't know the RE market in New Hampshire, but I would bet that property appreciated over the past 8 years...call me crazy. Either way, a $6000 a month payment would put their mortgage balance somewhere between $800,000 and $900,000 dollars (depends on too many unknown variables). What I want to know is what these 'victims' did the past 8 years. How many times did they refinance? How much cash did they pull out? Besides, since when was being able to live in an 800k house guaranteed as part of the 'American Dream'? The complete and total lack of personal responsibility in this country makes me sick. But what do you expect? The politicians are all too eager to 'help out'...but with OPM (other people's money). Sad...
In response to another question regarding lenders 'exploiting' borrowers, here was her reply (sorry for the all caps...that is how it was on the CNBC site):
SENATOR CLINTON: I WILL GIVE YOU ONE EXAMPLE. THIS WHOLE IDEA OF PREPAYMENT PENALTIES WHICH ARE OFTEN BURIED ON PAGE 700 OF FINE PRINT. PUT HOMEOWNERS IN IMPOSSIBLE POSITION. LOT OF THEM WHO HAVE TRIED TO PAY OFF THEIR MORTGAGE, MORE MANY FIRST-TIME HOME OWNERS SEEMS LIKE THING TO DO HAVE BEEN HIT WITH THE PREPAYMENT PENALTIES YOU KNOW THE PAPER HAS BEEN SOLD AND PEOPLE ARE, BASICALLY, BANKING LITERALLY ON WHAT THE PROJECTED INCOME WOULD BE. I THINK WE'VE GOT TO, REALLY, REQUIRE THAT LENDERS TAKE, A DIFFERENT APPROACH IN DEALING WITH PEOPLE WHO MAY NOT HAVE THE CREDITWORTHINESS IN ORDER TO, HANDLE THE KINDS OF MORTGAGES THAT ARE BEING SOLD TO THEM.
First off, I have seen some big mortgages, but NEVER one with 700 pages, and certainly not that much fine print. There is a lot of paperwork, but there are some 'key' documents that are pretty much STAND OUT that you need to pay attention to. But even if there were 700 pages of fine print, TAKE SOME F%@#ING PERSONAL RESPONSIBILITY and don't sign until you, or somebody you trust, or other hired expert tells you it is OK to sign. The 'I didn't know what I was signing defense' is complete BS. If you didn't know what you were signing...DON'T SIGN!! Funny how there were NO problems with these mortgages when everybody was 'getting rich'.
Most prepayment penalties are only 1-3 years, usually the length of the 'fixed rate' part of the ARM loan. If you are buying the house to live in, you need to be there for at least 3+ years for it to make sense financially in a 'normal' RE market. So don't buy property with short term mortgages if you don't have a long-term plan and you can't afford them once they adjust! I know, I know...the plan was to 'flip' the property and make 6-figures. I just don't see how a 2 year pre-pay penalty puts a borrower in an 'impossible position'. The borrowers KNOW this going in, and they know they will have to refi, sell, or deal with fluctuating payments in 2 years. Besides, nobody said the borrower HAD to take a 2-year loan, or a loan with a pre-payment penalty!! Guess what, the rate was LOWER with the prepayment penalty. You don't know how many times I would hear the borrower tell the broker they didn't want a pre-payment penalty...and then when they heard the new, higher rate, they would take the prepayment penalty. They didn't have to have the penalty, they could have had a higher rate instead, it is just numbers. You either pay with a higher rate, or you pay with the prepayment penalty. If they 'ban' pre-payment penalties, then the investors won't buy the loans. If they won't buy them, the lenders won't make them. If the lender doesn't make the loan, then guess what, Joe-wanna-be-homeowner...won't be.
We do NOT need government telling the lenders what they can and can't do...the FREE MARKET is already doing that!!! The lenders are not making those loans anymore because there is NO MONEY IN IT!!! Just ask Bear Stearns! I spoke with some people in Capital Markets this week, they told me that NOBODY is buying MBS (mortgage backed securities). This was further confirmed by Cramer ranting tonight on his show (I usually don't watch his entire show, but the first 10 minutes were all mortgage talk, so I had to watch). The lenders NEVER would have made those loans if there weren't people buying the paper. Now, there are NO people buying the paper, and guess what, NO loans are being made! Funny how that works. The free market has it's issues, but none of them are as bad as guvment 'solutions'.
A few more points. There is NOTHING guvment, or the financial industry can do right now to 'fix' this. It just has to run it's course. People need to go BK. Hedge funds that got too aggressive with mortgages need to reap the consequences. People need to be fiscally smarter, think for themselves, and not run with the herd. There is nothing that can be done to support property values where they are in many areas, and borrowers do NOT need to be rewarded with taxpayer money for over-extending themselves.
I hate to say it, but this thing is going to be ugly, and we are a good 2-3 years from even thinking about the bottom. We finally started reaching critical mass with 'subprime' foreclosures, but we haven't even begun to hit the alt-a and a-paper sham loans. They are starting to pop up, but they will take longer. Most alt-a and a-paper borrowers were doing 5, 7, and even 10 year ARM loans. 5 years seemed like an eternity when things were good. Appreciation was guaranteed! Well, I know several people with 5 year ARMs and all of a sudden 2-3 years doesn't seem so far away...especially the way things are headed. Sadly, I think many people are going to be in for a nasty surprise when their 5 year interest-only ARM starts to adjust, and they realize that their property is worth the same or less than it was 5 years ago, and their mortgage balance hasn't changed one bit! Tell me how it felt to RENT from the bank and the guvment (you do have to pay property taxes when you own)...instead of a landlord.
On a quick side note, it looks like Europe now has a pretty good idea how bad our debt is. I will try and post more frequently now that major companies are going under, hedge funds are going under, markets are halting trading, and things ARE finally starting to happen.
Here are my 'solutions' to stem this from happening again. Have a private company establish a set of standards to become a Licensed Mortgage Specialist. This person needs to meet certain educational requirements and take an extensive test that covers math, mortgages, and situational based integrity questions. The license would have some sort of continuing education and a certain number of mortgage complaints would impact maintaining the license. It would be like a Series 7, in that you must have one to call, pitch, market, sell, talk mortgage products with potential clients. This license would be completely separate from a RE license, and the RE license would not allow people to do mortgages. Secondly, in addition to all the other pages that are already there, I would make a simple ONE-PAGE disclosure statement with all the pertinent loan information. It would be spelled out in simple ENGLISH (not spanish) and cover things like rate, payment, high adjusting rate and payment, broker commission, prepayment penalty, and other important terms. Of all the other pieces of paperwork, this piece would have the 'main' parts of the mortgage all spelled out so 'anybody' could understand it.
In closing, as bad as it was waking up to Hillary Clinton on my tv...I would rather be forced to see pictures of her cleavage (don't ask me why that was nationwide 'news') than have to see the results of her proposed guvment programs.