Pop goes the mortgage

Nearly 61% of option ARMs originated in 2007 will eventually default, according to a recent analysis by Goldman Sachs ...

-- from Calculated Risk

61% failure rate. And this for loans originated after the bubble started popping. What the hell were all these people -- the applicants, the brokers, the underwriters, the banks, the realty agents -- smoking?

A friend suggested that my view that the housing bubble resulted in an overabundance of homeownership, with the "American dream" expanded to envelop hundreds of thousands of mortgages issued to people who, in a less insane environment, wouldn't have received mortgages in the first place, was condescending.

I don't think it's condescending to assert that the orgy of available mortgage cash between 2002 and 2006 resulted in loans being given to people who had no business getting them. In this period it was possible to apply for a mortgage, say "I have a job as a blablabla-ist and I make $100,000 a year and I have $50k in the bank but I don't want to prove it".. and get approved for a NINJA loan (no income verification, no job verification, no asset verification). Apparently, the mortgage officer would just get an opinion from someone stating that it was possible for a blablabla-ist to make $100k a year and save $50k over n years. Voila, you're approved, and here's your 105%-to-value Option ARM. Don't worry about that balloon in two years, we'll just refinance you, you'll probably be able to pull out some of the equity you're bound to have, because prices just go up and your house will doubtlessly be worth twice as much then!

The whole sub-prime mess created the housing bubble. I'm not the only one who feels this way. The inherent self-interest of the real estate and banking industries only served to encourage people who shouldn't have been buying to buy, and made what were ultimately speculative purchases possible. We've all had the American Dream of home ownership pounded into our heads as long as we've been around. Ownership is fine for what it is, but when you remove the false concepts and outright lies of the real estate industry and start ignoring the political bias towards home ownership (never forget how much campaign cash comes from the realty/mortgage industry), it gets harder to justify home ownership as a prudent majority housing option.

Back in the day before we started saying "back in the day", banks generated income by investing in people by loaning them money. Because they didn't want to get stuck with illiquid undervalued assets, there were underwriting standards; they'd only loan 80% to value without mortgage insurance, vetted the buyers carefully, and wound up with a solid base of performing loans.

The rules changed, the giant pool of money started chasing new places to invest, the geniuses of finance created new instruments, the mortgage broker took over from the bank as the place to get your loan, and up it went.. the speculators came along happily, flipping away, creating massive new developments in what used to be in the middle of nowhere.. nobody really paying attention to the minor detail that incomes weren't increasing to match the rise in housing values and eventually people really *wouldn't* be able to afford that mortgage the broker put them into. And now look what we have. It's a fucking meltdown.

In a way i'm living proof of this. In late 2005 I wanted to buy a home in Salem. I hadn't sold my other home yet -- it was on the market. I thought "i'll either have to make the purchase contingent or just wait until i get a firm offer for my house." Ha ha! I didn't understand how things worked then. My realtor said "no worries, I know a broker who can do this." Just on my income and "good credit history" I received another mortgage for the new house.. on top of the one I already had. The fact that the combined mortgages added up to about 80% of my net income didn't seem to factor into anything. Everything turned out OK -- I sold the other home within a couple of days of listing it; that's the way the marked was then -- but what if it hadn't?

For 20 years I've been trying to tell anyone that would listen that if people were ever in a position of having to purchase a new car that they could really afford, the auto market would go in the shitter. It took a while but that's exactly what happened. , and the same thing's happening in housing.

So I don't feel guilt-trippable, or that it's condescending, when I say there were a whole bunch of loans handed out between 2002 and 2006 that, if we weren't in Bizarro Financial World, wouldn't have had a snowball's chance in hell of passing underwriting. And, yes, some of those loans were given to first-time homeowners who bought into the whole Benefit Of Homeownership program. Ultimately they're the ones getting screwed. The bankers all kept on making their nut. The realtors were just doing their job, which is selling things. America the Beautiful.

Durn fool kids these days all thinking they can "buy their second house first," encouraged by the gov't, browbeaten by the realtors, walking off a cliff blindfolded while the bankers wipe their asses with their profits and buy their own vacation homes in cash with their bonuses.

A whole industry (industries, really) gorged itself on the concept that the quality of a mortgage loan against developed property didn't really matter because when it came to home ownership, a price of p wasn't *really* outrageous because someone would undoubtedly come along in n months and give them xp for their asset, where x > 1.5. Greater Fool Theory and all that. Too bad the Greater Fool Theory has a mirror component.