But I have yet to hear anyone say why these people suddenly couldn't afford their mortgages, and it seems to me it's at least partly because of the steep increase in the cost of energy in the last year, especially oil, which took awhile to permeate through the markets to affect food, manufacturing, and other industries. Energy really isn't something you can go without, so they had to cutback somewhere/everywhere.
I'm not an economist so maybe this is wrong-headed. But in the last several days I haven't even heard any mention of it, when to me the run-up in oil prices is one of the most significant economic factors of the decade.
And -- if we really are at Peak Oil -- a small sign of the larger nastiness yet to come.
My understanding from the news reporting I've read is that the majority of those who are unable to pay their mortgages have exotic adjustable-rate mortgages that reset to a significantly higher payment after some period of time. The assumption always was that they would be able to avoid the dilemma by refinancing. But because housing values dropped, on one would give them a new mortgage large enough to replace the old one, because the house wasn't worth it any more. Energy prices are a tiny margin here, and these people would be losing their homes anyway because the higher costs when the mortgage resets are enormous.
ReplyDeleteTim McDermott here. I think the core reason for the housing meltdown is that people were getting mortgages they had no hope of paying. I sold a house 3 years ago and turned down a buyer who had been approved for loans requiring interest payments of $7,000/month (that's ~85K$/yr!) but he had no money down. I turned that deal down because it didn't feel right. I took the second buyer, with a loan package almost as bad. The first buyer bought the house across the street, and neither of them is still there.
ReplyDeleteThe folks who wrote those loans did not keep them; they sold them. The companies that bought the loans didn't retain the risk, they bundled lots of mortgages and sold securities backed by the bundle. The rating agencies said the paper was good. The regulators said greed was good. The folks who bought the paper lost a bundle.
And in the 2 years before I sold that house, its price went up about 50%. It has come back down since.
Energy is part of it, but it is bad loans to risky clients. Then the reselling of them to companies shuffling paper around in Mortgage-Backed Securities.
ReplyDeleteAs I've written elsewhere, my first career was in banking - data and systems - and we jumped thru flaming hoops every quarter for the OTS. No longer.
Best,
D
This Kleiman post gets at it pretty well, too (O'Hare, just as good), spreading the blame a bit:
ReplyDeleteAmerican petroleum reserves should be used up as quickly as possible...
You should spend all the appreciation in your house on stuff you can use up now, like dinners out, travel, clothes. Get a really big mortgage with a couple of years of low payments; your government is ready to help your bank ship you buckets of money. ...
Investors should put money into smoke-and-mirrors derivatives and mortgage-backed securities. If you make the deal complicated enough, no-one can price it, so you get to say its worth whatever you want! ...
The way to have a war is, you put it on your credit card. ...
...
A government surplus is an abomination. It denotes having wealth, and having wealth is prima facie evidence of not having burned up value as fast as possible. ...
Best,
D