Mortgage "Crisis"

There are things now accepted in residential real estate which were unheard of in the past. Here are a few:


1. Transactions with 100% financing, with little or minimal downpayment. Not only that, the banks know about it!! I say this because, let's say, in the past, I had "heard about" transactions where the banks did not know what was going on. These transactions later became known as the "savings and loan crisis". OK, back in the 80's the banks shouldn't have let themselves be hoodwinked. Nowadays, the lenders are in on their own hoodwinking....or perhaps they have hoodwinked the investors in their "product". Here's the way 100% financing happens....at the closing the buyer gets a regular mortgage for 80% of the purchase price. He also gets an equity line for the equivalent of the balance of the purchase price, which he accesses in full at the closing, and there you have 100% financing. On top of this, the contract often provides for a "sellers concession", which is a price reduction for the equivalent of the buyer's closing costs. When I represented sellers who gave this "concession" of approx $16,000, they never complained. They were thrilled to be selling their crappy house for $500K, and couldn't wait for the closing to happen. I'm not sure, but I think I saw some sellers RUN to their cars after the closing, lest someone realize what had happened.


2. Along those lines, sometimes the prices just seemed ridiculous. I know the lenders still do appraisals, but a night at Yonkers Raceway seems like a more legit proposition than some of these appraisals. I have no problem with prices rising, and neighborhoods becoming "hot". However, in the sub-prime mortgage market, it should be obvious there is a limit on the upside, and a lot of room on the downside. When you lend at "100% of appraised value", you are living on the edge.


3. People buying with no spare cash to do ANYTHING with the house. Not only was there no downpayment, the buyer had no money to fix, or re-do, or re-model, or upgrade....all the things that buyers usually do. I have seen this quite a few times, and knew it did not bode well. OK, it boded well for the sellers running to the car, and the real estate brokers, and the mortgage brokers.


It did not bode well for the mortgages.


It seems like a lot of smart people have lost a lot of money on these mortgages.


May I use a few cliches from the archives to sum up how I see the investors losses?.......


"Looks like dog s***, smells like dog S***, sure glad I didn't step in it"

"You pays your money and you takes your chances"

"What goes up must come down"

"Eyes Wide Shut"


One last thing......the housing market is not going to collapse from this, nor is the economy going to be wrecked. Those houses are still worth some good money, just not as much as the banks put in. There will be opportunities aplenty from this mess. It's already happening.

Mortgage Crisis From the Trenches

Is anybody surprised there is a mortgage "crisis"?

As I understand it, a high percentage of mortgages in the "sub-prime" market are in default. This would be bad enough, but the problem is compounded by these mortgages having been grouped together into some kind of investment instrument, which a lot of banks, brokerage houses and financial institutions have invested in. I guess they did this because the securities offered a "good return" at a "low risk". After all, they were secured by real estate. When a much higher than expected percentage of these loans went into default, the value of the investment instruments backed by these mortgages went down, and a lot of big players lost their money. THAT is the crisis we keep reading about. I realize the way I just explained it is an over-simplification, but when we talk about the government coming in and helping with this crisis, let's be honest about what really happened.

Here are a few facts from the trenches, from personal observation:

1. If someone puts virtually no money into a real estate purchase, and two banks financed the 100% of the purchase, and the purchaser either lived there without paying for a year, OR walked away from the property when the value went down, is that person a "victim"? Are the banks who put up the money, made their fees, and then sold the loan into the market...."victims"? Are the investors who bought these mortgages, foolishly relying on the real estate market to continue soaring...."victims"?

What I have seen are insane prices, with 100% financing obtained by mortgage brokers who would do ANYTHING to get the loans approved. If you took this transaction to 1000 intelligent financial people and said "give me odds on the ultimate success of this transaction", with success being defined as the borrower does not end up in default, 90% of objective observers would say the odds of success are 10% or less. Yet I saw many transactions like this sail through, as if this were normal business, and I know, there were THOUSANDS of transactions just like this. And yet, big players invested in this.

If you are not familiar with some of the fine points of a "sub-prime" transaction, fasten your seatbelts, you are not gonna believe this....