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Thu

03

Jan

2008

Borrowers: Victims or Accomplices?
Thursday, 03 January 2008 10:30
by Stephen P. Pizzo

Capitol One asks, "What's in your wallet?" Of course, they really don't care what's in your wallet, as long as it's a Capitol One credit card — and only that. The less real cash in the wallet the better. That way you'll have to use their credit card to buy the stuff they know you'd buy if only you had the dough.

Who needs cash anyway when they'll lend it to you, at 18%. Be late on  a payment and they'll jack you ass up to 32% annual interest. (That's $320 annual interest on every $1000 owed, for the math-impaired.)

Over the past decade those offering fast, easy and expensive credit have proliferated faster than Indian Casinos. Everyday they crowd our mail and email inboxes with pre-approved lines of credit in the thousands of dollars.

As a result Americans now owe these plastic peddling John Gotti's an average of $8000 per household. Meanwhile the American savings rate has dropped to minus 1%. Which means a shocking percentage of Americans no longer even live paycheck to paycheck. They have to borrow before that next paycheck.

Then there are the mortgage lenders from hell. Thanks to the Capitol Ones of the world, all those cash-strapped Americans were still able to load up on wide-screen TVs, all kinds of furniture, leaf blowers and surround sounds systems, they now also "deserved" their own home to put them in.

But first lending standards that had, since the end of WW II, had made America the homeowners capitol of the world, had to be chucked. Lenders didn't want the herd culled down to just traditionally "qualified borrowers." No siree, they wanted to lend to all comers.

When we bought our first home back in 1971 no bank would loan one cent more than 80% of the appraised value of the home. That required the buyer to have a 20% interest in the property the day the loan closed. Why? Duh!

But such rules limited the pool of borrowers that could qualify for a loan. So the lending industry sent healthy doses of dough to Washington and got the rules loosened, then loosened again, then again. After all, the Republicans were in charge now, and they believed "government was the problem." And, next to the taxman, federal banking regulations and the regulators that enforced them, were the biggest drag on the economy of all — or say they said.

The first offspring of those efforts were so-called "low-doc" loans. The industry had argued that all the paperwork required before the advent of computers was clogging up their automated systems and slowing loan fundings. So the low documentation loan was born. Borrowers were required to provide fewer and fewer documents supporting their contention that they could actually afford, and are likely to repay, a loan.

Once the housing bubble began to really puff up, lenders even bristled under the minimalist restrictions of low-doc loans. They whined about it and, once again, Bushite banking appointees shrugged and said, "what the hell."

And so were born "No-doc" loans... referred to in the lending industry itself as "liar loans," because a borrower could claim anything and not have to prove it.  It was the lending industry's version of "don't ask, don't tell."

The rush was on. Home sales boomed. Online applications allowed borrowers to refinance their homes on a whim, while drunk or on the toilet. Lenders hauled in lending fees by the billions.

But another limiting obstacle loomed.  Once they lent to finance a home purchase, lenders could no longer actively milk that borrower. That's when lenders decided that the old "home improvement" loan needed some modernizing as well. In the "stupid old days" lenders required that borrowers use home improvement loan money on — are you sitting down? — home improvements. That way if the borrower defaulted the lender would have security for their loan in the form of capital improvements.

That limitation had become a roadblock, keeping lenders from tapping into the rising value of homes already owner occupied. So the home improvement loan was killed off and replaced by the "home equity loan." That put lenders were in the ATM business, encouraging homeowners to tap what equity appeared in their home to purchase whatever they felt entitled to; cars, boats, more TVs, vacations... spare the lender the details. The lender didn't care.

So the old-fashioned American dream morphed before our eyes into a frenzied binge of lend & spend, lend & spend, lend and spend. What our parents would have called a "spend-thrift" lifestyle, Republicans pointed to as proof  "the American economy is on a roll."

But rolling to where? Anyone with a measurable IQ could tell that it wasn't a sustainable path. It was something more recognizable as ski jump, than a highway. Tallyho! Sooner or later borrowers were going owe more than they were capable of repaying. Or the underlying assets securing those property loans would decline in value, becoming worth less than the amounts owed. Or, more likely, both things would happen. And now they have.

Just yesterday I was reading one of the many sob-story articles that are popping up all of a sudden, bemoaning the fate of America's debt-ridden consumers. This article told of a couple that still owed $9500 on their SUV, but really, really, really wanted a new big-cab pickup.

And, surprise, surprise, they found a Dodge dealer more than willing to help them have it their way. Yes, they drove home in their new truck and the helpful dealer and sub-prime lender arranged the whole thing. They simply took the SUV in trade and added the $9500 the couple still owed on it to their new 7-year loan.

Now the couple was now having trouble making the payments on their new $45,000 auto loan.

How am I supposed to feel about that couple? Sorry? Forget about it. The lender, dealer and their  numb-nuts victims deserve one another. The lender deserves to take the loss of a repossession, and the couple deserves to lose their shinny new, gas guzzling big-cab pickup. Darwinism demands a price for stupidity.

The same goes for the folks who bought homes with 100% financing -teaser rated- negative-amortized- adjustable-later- double-mocha- double-sugar-moron home loans. Had those people developed even a passing relationship with a pocket calculator they would have known better. So, back to being renters.

And to all those homeowners that decided it was smart to scratch every life-style itch with equity from their domicile residence, a pox on them too. Their parents and grandparents generations had mortgage burning parties the day they made their final home loan payment. They were smart. Too many of their offspring somehow did not get those genes. Instead of paying down their mortgages they increased them, then spent the money on wasting "assets." Why die with a positive bank balance when you can go out soaked in red ink. Heirs? Let-em eat cake.

Then there's America's lenders. If I were a prosecutor I'd have a great circumstantial case proving that, even as lenders were pushing loans, they knew better than to hold them themselves. Someone was going to get the mother of all screwings, and they didn't want it to be them.

Which is why they "securitized" those loans. They bundled up thousands of loans into packages, mixing in the good, the bad and the ugly, and sold them to investors in heat for higher returns. 

Of course those investors should been a little suspicious of the lenders, "take our loans, please," offer. They should have done their due diligence. Instead they couldn't see — or didn't want to see — past the high returns. Anyway, they figured, what could possibly go wrong with America's housing market?  (You see, in the credit world the list of suckers is not limited to just the borrowers.)

As for those lenders that filled our TV screens with ads peddling pure, unadulterated fiscal crack, let them to die — let them die slowly, painfully and publicly. Let their shareholders sue and then scramble among lending company bones for what pocket change remains.

Lenders, borrowers, investors... I haven't an ounce of sympathy any of them. Borrowers should have done the math, and if they couldn't do simply adding, subtracting, division and multiplication, they were likely unqualified for the loan(s) they got in the first place.

Lenders should have stuck to tried and true lending standards. Instead they embraced a self-serving, "consumers are asking for it spending like that," philosophy. Once respected lenders, like Countrywide,
devolved into the equivalent of child molesters: "Hey there little girl, want a nice teaser rate?"

(An Aside: Now that the mortgage markets are in free fall, lenders have found two new pigeons to roast: students and the elderly. Which is why those "refinance your house," ads have been replaced by ads touting student loans and so-called reverse mortgages.)

All of which answers the question posed above.  They were co-conspirators - one and all. The New Year will see them all singing a new tune. No longer is it, "Happy Days Are Here Again." The new song is more like;

"Bad loan, bad loans — whatschya gonna do,
 whatschya gonna do when they come for you?

Band loan, bad loans..."
 
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RayW said:

0
Thank You..
People used to call me Chicken Little when I would say the housing market was headed for a crash because prices have exceeded incomes and money was too easy to get....Now I'm Nostradamus.

I didn't bite when I was offered the products you speak of and we are renting a house in a neighborhood at 1/3 the monthly cost of ownership.

Who were the fools and who was smart...it's pretty easy to see but everyone is pointing the other direction.
 
January 03, 2008
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