WSJ: MAJORITY (up to 61%) of $2.5 Trillion of inflationary Subprime loans went to CREDIT WORTHY. . .

[Faryn Balyncd]

A Wall Street Journal commissioned analysis has confirmed that the epidemic of irresponsible & predatory subprime loans that has fueled astronomical real estate inflation, and threatens to bring down our financial system went, NOT to those who could not merit better financing, but to credit-worthy purchasers with high credit ratings.

Subprime Debacle Traps Even Very Credit-Worthy


As Housing Boomed,
Industry Pushed Loans
To a Broader Market


By RICK BROOKS and RUTH SIMON, Wall Street Journal


One common assumption about the subprime mortgage crisis is that it revolves around borrowers with sketchy credit who couldn't have bought a home without paying punitively high interest rates. But it turns out that plenty of people with seemingly good credit are also caught in the subprime trap.

An analysis for The Wall Street Journal of more than $2.5 trillion in subprime loans made since 2000 shows that as the number of subprime loans mushroomed, an increasing proportion of them went to people with credit scores high enough to often qualify for conventional loans with far better terms.

In 2005, the peak year of the subprime boom, the study says that borrowers with such credit scores got more than half -- 55% -- of all subprime mortgages that were ultimately packaged into securities for sale to investors, as most subprime loans are. The study by First American Loan Performance, a San Francisco research firm, says the proportion rose even higher by the end of 2006, to 61%. The figure was just 41% in 2000, according to the study. Even a significant number of borrowers with top-notch credit signed up for expensive subprime loans, the firm's analysis found.

The numbers could have dramatic implications for how banks and U.S. regulators address the meltdown in subprime loans. Major banks, mortgage companies and investment firms have been rocked by billions of dollars in losses as shaky subprime loans -- which typically carry much higher, or rising, rates and other potentially onerous costs -- have increasingly gone into default. Many analysts expect hundreds of thousands more loans could go bad over the next several years. The Bush administration and major financial institutions are working on a plan to freeze interest rates of certain subprime loans in hopes of avoiding an even bigger meltdown.

The surprisingly high number of subprime loans among more credit-worthy borrowers shows how far such mortgages have spread into the economy -- including middle-class and wealthy communities where they once were scarce. They also affirm that thousands of borrowers took out loans -- perhaps foolishly -- with little or no documentation, or no down payment, or without the income to qualify for a conventional loan of the size they wanted.

The analysis also raises pointed questions about the practices of major mortgage lenders. Many borrowers whose credit scores might have qualified them for more conventional loans say they were pushed into risky subprime loans. They say lenders or brokers aggressively marketed the loans, offering easier and faster approvals -- and playing down or hiding the onerous price paid over the long haul in higher interest rates or stricter repayment terms. . . . . . . . . .

. . . . . . . . .



complete article at http://online.wsj.com/article/SB119662974358911035.html?mod=hps_us_whats_news

Major banking institutions have not been content to transform the industry into predatory, loan sharking parasites whose unconscionable fees and rates have been facilitated by "bankruptcy reform".

We now see that the real estate bubble which has made housing un-affordable has been built upon an epidemic of irresponsible predatory loans, not to the non-credit worthy, but to anyone who could be enticed to buy property at an unsustainable price.





Who will benefit, and who will lose, as the feds sustain astronomical real estate prices with a bailout?








_____________________________________________


Addendum:

A related, & not inconsequential, issue is the massive fiction of the current official U. S. government "inflation rate" figures, which DO NOT INCLUDE real estate sales prices.

Paul Craig Roberts, who began his Washington career in Ronald Reagan's Treasury Department (Roberts wrote the initial Reagan tax cut bill), but whose writings now have been banished from the right wing websites who formerly published his work (due to Roberts' outspoken opposition to the war in Iraq & the assault on civil liberties) discussed this in his "Return of the Robber Barrons" essay at Counterpunch.

Roberts not only discussed the current fraudulent & fictional "inflation rate" statistics (created to drive down social security payments and negotiated inflation adjustments in labor contracts), but presciently discussed the subprime debacle before it unfolded (His essay appeared in August):

In Richistan: Fantastic Wealth for a Few; Steady Decline for Many

The Return of the Robber Barons


By PAUL CRAIG ROBERTS


. . . . .


. . . . With the real wages and salaries of American civilian workers lower than 5 years ago, with their debts at all time highs, with the prices of their main asset--their homes--under pressure from overbuilding and fraudulent finance, and with scant opportunities to rise for the children they struggled to educate, Americans face a dim future.

Indeed, their plight is worse than the official statistics indicate. During the Clinton administration, the Boskin Commission rigged the inflation measures in order to hold down indexed Social Security payments to retirees.

Another deceit is the measure called “core inflation.” This measure of inflation excludes food and energy, two large components of the average family’s budget. Wall Street and corporations and, therefore, the media emphasize core inflation, because it holds down cost of living increases and interest rates. In the second quarter of this year, the Consumer Price Index (CPI), a more complete measure of inflation, increased at an annual rate of 5.2 per cent compared to 2.3 per cent for core inflation.

An examination of how inflation is measured quickly reveals the games played to deceive the American people. Housing prices are not in the index. Instead, the rental rate of housing is used as a proxy for housing prices.

More games are played with the goods and services whose prices comprise the weighted market basket used to estimate inflation. If beef prices rise, for example, the index shifts toward lower priced chicken. Inflation is thus held down by substituting lower priced products for those whose prices are rising faster. As the weights of the goods in the basket change, the inflation measure does not reflect a constant pattern of expenditures. Some economists compare the substitution used to minimize the measured rate of inflation to substituting sweaters for fuel oil.

Other deceptions, not all intentional, abound in official US statistics. Business Week’s June 18 cover story used the recent important work by Susan N. Houseman to explain that much of the hyped gains in US productivity and GDP are “phantom gains” that are not really there.

Other phantom productivity gains are produced by corporations that shift business costs to consumers by, for example, having callers listen to advertisements while they wait for a customer service representative, and by pricing items in the inflation basket according to the low prices of stores that offer customers no service. The longer callers can be made to wait, the fewer the customer representatives the company needs to employ. The loss of service is not considered in the inflation measure. It shows up instead as a gain in productivity.

In American today the greatest rewards go to investment bankers, who collect fees for creating financing packages for debt. These packages include the tottering subprime mortgage derivatives. Recently, a top official of the Bank of France acknowledged that the real values of repackaged debt instruments are unknown to both buyers and sellers. Many of the derivatives have never been priced by the market.

Think of derivatives as a mutual fund of debt, a combination of good mortgages, subprime mortgages, credit card debt, auto loans, and who knows what. Not even institutional buyers know what they are buying or how to evaluate it. Arcane pricing models are used to produce values, and pay incentives bias the assigned values upward. . . . .


. . . . .



http://www.counterpunch.org/roberts08022007.html

[magellan]

1. How many were tempted by the opportunity to "flip" their house and cash in?

Only their timing sucked? :shrug:

[DangerDave921]

Please

We must lay a big chunk of the blame on the BUYERS. Those people who decided to buy homes they either couldn't afford, or who wanted to flip them, or who didn't take the time to learn what an adjustable rate really meant because they were so excited at the low teaser rate and didn't think about the long-term consequences.

I'm sorry for the end result at people losing homes, but I can't feel sorry for people who voluntarily put themselves in this spot. I cannot condone irresponsible financial planning, whether it's on the government level or the individual level. If you're making $50k a year and you're buying a $500k house -- with an adjustable rate no less -- then you've taken one heck of a gamble. And when you gamble, the first rule is be prepared to lose.

[Cassandra]

9. You are missing the point.

Perhaps deliberately. These were buyers who qualified for better loans but were not offered them. They were deliberately offered lousy loans because the lenders made more fees from them. Many of these borrowers would have been fine if not scammed into predatory terms. Are you so sure that if you had bought at the same time from the same lender, that you would have done better?

[DangerDave921]

11. Yes

I would have done better because I knew ahead of time -- from doing my homework -- what kind of loan I wanted. A 30-year fixed. No adjustable rate, no teaser-rate, etc. I was offered ARM's by my mortgage guy, with the sales pitch that I would save X amount on my monthly payments. But I knew that an ARM would self-adjust in a few years and that I had no idea of knowing what that higher rate might be. So yes, I do lay blame on the buyer if they didn't know what they were getting into.

Also, my wife and I bought a house that was well within our budget, and were not gambling that the market would go up, or that I'd get a great bonus next year, etc.

That being said, if the lender is engaging in dishonest, fraudulent conduct, then of course the fault lies with the lender. The lender must give all pertinent information to the buyer. But if the lender does that and the buyer wants to take that risk, the fault lies with the buyer.

[Lucinda]

26. There is also another issue...I designed, and my fella built our home. We are bombarded

with offers to refinance, beyond our means even, because we have equity from building it ourselves. People are getting hit on several fronts.

I can understand how people could fall prey to the process.

[LynneSin]

12. Seriously - why can't the buyers take some responsiblities?

I was given approval for way above what I purchased (and even sometimes I think what I purchased was still about $20k higher than what I should have bought).

And then you get realtors that try to push you to that limit. Why shouldn't they - they're getting 3% of whatever the selling price is so why push $150k when $250k could net them an extra $2-3k in realtor commissions.

I went with a realtor who understood my limits. Sure, she pushed a little but the extra $20k I spent still left me well below what I was approved for with my credit ratings. But so many realtors push for "what about family", "what if you get married", "what about children". I'm a 39 year old woman who got tired real quick of realtors selling to imaginary people in my life.


BTW the extra $20k was worth it - it got me into a neighborhood with higher property values where homes sell much quicker and the house I bought was all updated within the last 5 years so there was little I needed to do to get the house in shape.

[1932]

18. Interestingly I remember a DU'er who wrote about how their mortgage broker

inadvertently put an adjustable rate mortgage agreement under a cover sheet showing a fixed rate mortgage and the DU'er got lucky and caught the mistake. Although the broker made the "kind" offer of letting the borrower sign the adjustable rate mortgage and replacing it the next day at the office with the correct mortgage so the sale wouldn't be delayed, the borrower said no and signed the next day with the correct form. So kind of the borrower by the way to not go with a new broker (much less not call the cops!).

I think I asked in the post, "does anyone believe this was an accident?" and not getting any reply.

So, the reluctance at DU to blame anyone else but the buyer is interesting...

[magellan]

13. Please what?

Certainly some did get caught with their pants down, knowing exactly what type of loan they'd gotten and believing they'd move the property before the rate adjusted, or they just didn't do their homework before signing.

But the article makes it clear that some unknown percentage were outright scammed: there's evidence amassing that borrowers were told they were getting fixed rate loans but received ARMs. Add to that the fact that many of these loans were sold on to buyers in the money world, who btw also got caught with their pants down, and your assertion that home buyers bear a big chunk of the blame is like saying all victims of date-rape are "asking for it".

I hope you aren't that deplorably narrow-minded.

[DangerDave921]

14. Whoa Whoa Whoa

You absolutely cannot equate my position on the sub-prime market with blaming the victim in a date-rape situation. That is totally out of bounds. I have made it quite clear that if the lender was engaging in fraudulent conduct, or didn't explain all the terms, or withheld critical information, then that lender is at fault. Like your example of a lender selling a fixed rate loan that turned out to be an ARM? If that really happened, that is criminal. I would like to see lenders punished severely if they were engaging in such conduct, including having their licenses stripped. Honesty is required in any financial transaction.

I am talking about the folks who decided to get an ARM, or an interest-only loan, because the teaser-rates were cheaper and they gambled that the rates wouldn't go up. I'm talking about the people who bought houses bigger than they could afford just because they wanted it. I'm talking about the people who simply didn't do their homework in learning what the heck a mortgage is, how it works, etc. And I will not lay the blame on the mortgage guy who approved the buyer for a higher loan, or the realtor who steered the buyer toward granite counter-tops and the 5-bedroom house. Of course they play a part, but it is the buyer who ultimately makes the decision.

If I go to a car dealership and the salesman talks me into buying a $60k car when I can only afford a $25k car, whose fault is it?

[magellan]

16. So you don't care for my analogy

I feel the same way about your assertion that the BUYERS own a "big chunk" of the blame. Some undeniably do. But let's not forget the gatekeeper. Why were people who wanted more house than they could afford given a loan? Are you suggesting the lenders weren't aware of the risk in doing that? Who was really being greedy here, the buyers with bad credit or insufficient income who simply wanted in on "the American Dream", or the lenders who smiled and handed the money over?

Come on.

[DangerDave921]

17. Gatekeeper

I respectfully disagree with your definition of gatekeeper. The gatekeeper is the person doing the borrowing because only they know how much they can really afford, and how much risk they are willing to take. Of course a lender is going to approve you for more than you should spend. That's the nature of the beast. But a wise borrower knows there is a big difference between what you are approved for, and what you can actually afford.

[magellan]

19. Only I know how much I can really afford?

My credit history and income aren't important to lenders anymore? Wow, that's good to hear, because lenders used those pesky things to keep me from getting all sorts of things in the past.

[DangerDave921]

20. You misunderstand

You're making a fundamental mistake by confusing two separate things: a) what you can afford; and b) what amount you can be approved for. They are not the same thing. Just because a lender says it will approve you for a $200,000 loan based on your income and credit history does not mean you can afford that. It only means the lender is willing to risk giving you that much. Each person has to analyze his/her own spending, income, needs, investing, etc. to determine how much he/she can actually afford in his/her overall budget.

So yes, it is up to each person to be the gatekeeper in deciding how much and on what terms to borrow money.

[magellan]

21. The mistake isn't mine

Lenders were giving high interest loans to all subprime comers with little to no regard for solvency. And they did this because they had no intention of hanging onto the bad debt; they sold the exposure on to mortgage buyers and investment banks that were equally blind to the risk, for the all the dollar signs floating before their eyes.

Meanwhile no one was talking to Americans about the risk to the economy, and ultimately to them, presented by this ponzi scheme. No one was telling them that once rates started adjusting and borrowers started defaulting, the lenders would revert to their very strict rules about who qualified and who didn't for a new loan...leaving them high and dry, stuck with their expensive ARMS and homes that were no longer worth what they'd borrowed for them.

I'll say it again: buyers do own some of the responsibility for their predicament. But it never would have happened in the first place if lenders hadn't devised this greedy scheme to rip off the poor.

[DangerDave921]

22. Two things

One, it's not the poor that was the focus of all these loans. Of course some were poor, but many were middle-class to upper middle-class who borrowed more than they could afford.

Two, if you take the gamble on an ARM, you have to be prepared for the adjustment to a higher rate. Simple as that.

And a third thing: If the lenders were being deceptive at all, or dishonest, then they should be punished. But they can't be held accountable just because a borrower didn't understand what an ARM was, or borrowed more than they should have, or who just happened to buy when the market was really high.

[magellan]

23. We aren't going to agree

I say this was a ponzi scheme, you say it's business as usual. One thing's for certain: it's not over.

[DangerDave921]

24. depends

Depends on how you define Ponzi scheme. Some would say that Social Security is a giant Ponzi scheme because the government has to keep taking more money from future payors in order to be able to pay all the recipients. Are you against S.S.?

I think you're a little confused on what a ponzi scheme is.

[magellan]

25. I'm not confused. n/t

[zabet]

2. Well that just helps prove

the 'robust economy' touted
by bushco is another lie.
Inflation, job losses, medical
expense -- everything has gone
up.
I have the same income now that
I had 6 years ago. I have far less
extra money now than I did then.

[Cassandra]

3. This is what happens in the dog-eat-dog world...

repukes so believe in. There are no fellow citizens, only marks to be exploited for every dollar.

[Gman]

4. And they followed it up with "bankruptcy reform"

Just how much more corrupt, if that's even possible, can things be?

[Faryn Balyncd]

15. Records seem to be broken almost daily.

[sam sarrha]

5. in 2005 at the 'Peak' was when the ReThugs eliminated Bankruptcy.. this is a RICO

[Cassandra]

10. Actually, the bankruptcy bill cracks down on credit card debt...

so more people who are sqeezed have no choice but to walk away from their mortgages. Instant karma for banks.

[sendero]

6. I don't fnd this at all surprising..

.... the mortgage companies were in it for the cash. You can't make much cash originating a $100K loan to some poor schmuck. Much more money in talking someone who could afford a $200K loan into taking on a $300K.

I have always believe it was the over-reaching middle class that was going to get hurt the most by this. Folks who make decent money, but think they should be living like they make way way more. This relaxed style of lending was MADE to exploit these folks, and it has.

Problem is, I have a hard time coming up with much sympathy for them. They went to Las Vegas, came home with empty pockets. Who's fault is that?

[Kelvin Mace]

7. There is one big differeance between the two

groups of borrowers. The "revised" bankruptcy law makes it harder for poor folk to get out from under the debt. Mutli-billion dollar corporations will have no problem.

[annabanana]

8. Madison Avenue has a big hand in this.

Remember, advertising works. The lifestyles that are always available if only you buy this or that..Just one more purchase and all the women are beautiful all the men playing golf all day and partying all night.

And if you think YOU are not affected by advertising, I suggest you think again.