To be, or not to be: that is the question:: Whether 't is nobler in the mind to suffer: The slings and arrows of outrageous fortune,: Or to take arms against a sea of troubles,: And by opposing end them? To die: to sleep:: No more; and by a sleep to say we end: The heartache and the thousand natural shocks: That flesh is heir to,-'t is a consummation: Devoutly to be wish'd. To die, to sleep;: To sleep: perchance to dream: ay, there 's the rub:
The rub is a phrase made famous to me by the movie Swingers. It means the catch or even maybe a double edged sword. I believe it also has some meaning in the evolving mortgage crisis and I intend to show how.
First, here is a quick introduction. What I am about to say comes from the perspective of a mortgage professional however it is only one mortgage professional. There is in no way a consensus toward my perspective. Much of my evidence is merely anecdotal and not scientific and I personally dislike anecdotal evidence. That said, my anecdotal evidence can be combined with a certain logic as well other compelling facts to make for a very strong arguement.
In the simplest way, the mortgage mess occurred because banks opened up programs so aggressively that irresponsible people qualified for and bought homes they simply couldn't afford. I know this because I saw how aggressive the programs became. The poster child is the so called 620 stated/stated to 100% program which became the industry standard for about a year. This means that a borrower with a 620 score (marginal at best) could buy a property without proving their income or liquid assets and do it with no money down. Furthermore, the real estate boom lasted for a good four years or more depending on your definition of a boom.
Now, somewhere in the middle of the boom banks went from offering aggressive programs to offering irresponsible programs. It is hard to pin point when, however this was not short, a minimum of two years in my estimation. These irresponsible programs were masked by a hot market which allowed folks to refinance or sell before anything really bad happened.
Here is what I believe happened and happened a lot. An irresponsible borrower bought a property that they couldn't afford. They bought it because neither their income or their liquid assets were ever verified. They bought a property they couldn't afford because they are irresponsible. These irresponsible borrowers would be able to manage their payments for a while: six months, nine months, a year. By manage, I mean they would begin to borrow in order to make payments on a property they couldn't afford to begin with. In other words, they would take out credit cards, personal loans, etc in order to pay their home loan.
Once they were tapped out they went back for a new loan. They would get it because in the meantime their property had increased in value by ten, fifteen and twenty percent. Their mortgage broker would wrap up all of their payments into one new loan. Now, while the new payment was lower than all of their current payments combined, it was still more than they started with. Keep in mind, folks that couldn't really afford their home to begin with were now tapping some serious equity. I believe firmly that for a large majority of folks this cycle happened more than once and several times for several folks.
I believe this firmly because I caught a lot of these folks on the back end of several such transactions. The most extreme case involved a couple that had a debt to income ratio (in reality that is as opposed no doubt to what was presented to the bank) of 100%. That means before any taxes were taken out monthly, they had as many debts, just on their credit report (this doesn't count other such things as food, gas, etc) as their entire income. This couple had tapped into their equity multiple times to wrap up credit only to continue the same cycle after each refinance. Once they found me, their situation had gotten so extreme that even the lax bank rules for stated loans weren't going to accept the ridiculous income I would have needed to claim in order to get the loan done. Furthermore, even if I could do a loan, it wasn't going to solve anything for them. I suggested the only proper course: sell and buy a cheaper property. At the time, summer of 2006, the property still had about 15k in equity even despite the endless refinances. They refused. They had put too much into the property and they weren't going to walk away. I don't know what happened to these folks but I can guess.
This is not my only example, just the most extreme, however all my evidence is anecdotal. I believe that what I am hypothesizing makes sense. We know that banks opened up their programs to irresponsible folks. This is exactly the sort of behavior that irresponsible people exhibit. We also know that real estate went up with no stopping for years. We also know that much of that push came from a lot of new folks getting involved in real estate.
What does all of this mean? If I am right then all the proposed legislation, rate freeze and bailouts are totally inconsequential. Therein lies the rub. There is no getting out of this mortgage mess. Keep in mind that most of these inflated prices have long come down and continue to drop. All of these folks used every opportunity to tap into their equity so most of them owe at or near the top of the market. First, it means there is no new loan for them. Unless Congress opens up 150% Loan to value loans none of these folks will qualify for anything no matter what they propose. Second, it means these folks aren't going to be saved with a simple rate freeze or opening up FHA like some have suggested. They owe 20,20,50% and more than they can afford. That is not a scenario that can be resolved with any legislation.
It also means that all of these folks that every politician is jumping over each other to save, bear as much responsibility as anyone else for the crisis. These folks that many claimed were duped would have then turned around and perpetuated the problem. Furthermore, for several years these folks had a simple out, selling, that they could have taken but didn't.
It means that every piece of legislation is not only useless but ultimately counter productive. By trying to save those that are in an impossible situation, the government only throws the perverbial good money after bad. These folks will be foreclosed on rate freeze or not, however rate freezes, bailouts, foreclosure moratoriums, will only cost their creditors even more money than they already will lose. If I am right, then the market needs to take its course and we need to move on as quickly as we can. By delaying the inevitable the government only prolongs what is already painful and makes it more painful.
If I am right, then the proper course of action is cold hard capitalism. These folks need to be foreclosed on and innovative entrepeneurs need to come in and buy all of these properties in bulk and find income and investment opportunities in millions of new undervalued properties. I believe this will happen one way or another since there is really no saving most of these folks. Unfortunately, well meaning, though obscenely naive, politicians want to propose a series of bailouts and other measures designed to help folks that are in my estimation stuck in an impossible situation.
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