Is the Sequel to the Subprime Mortgage Crisis a Subprime Education Crisis? NPR Takes a Look [mortgageinsuranceguide.blogspot.com] Question by Newlywed: What caused the subprime mortgage crisis? What caused the subprime mortgage crisis? In laymans terms please! It seems like it just happened overnight - why were the homes not appreciating in value (equity), and what will happen to the owners of the homes once they have been foreclosed on and the banks go out of business? Best answer for What caused the subprime mortgage crisis?:
Answer by realtynewsman
Who's To Blame For Mortgage Morass? by Broderick Perkins (Sept. 11, 2007) When a Fortune/CNNMoney.com writer recently opined about those responsible for the mortgage morass, the Feds and Wall Street were at the top of the list, but mortgage brokers and lenders weren't far behind. FREE Agent Online Powerhouse Kit including a FREE business consultation According to Peter Eavis, there's plenty of blame to go around for subprime mortgage foreclosure-induced credit tightening and the resultant fallout that's blanketing the housing market and spreading to the general economy. In "Subprime: Let The Finger-Pointing Begin!", Eavis spreads the blame with a 1-to-5 finger-pointing scale, called the "Blame Factor," where 1 pointing finger is little blame and 5 pointing fingers indicate the highest level of blame. Eavis isn't your ordinary man-on-the-street-on-a-soapbox. Relatively new to Fortune, Eavis is a TheStreet.com alum who won a Gerald Loeb Award for his Fannie Mae coverage back in 2005 and is noted for early coverage of subprime issues. He was also among the first to cover the Enron debacle. The offenders according to Eavis? # The Federal Reserve gets 4.5 fingers because, said Eavis, it had the power to stop the risky business of subprime lending sooner, but actually encouraged the use of riskier loans as financially savvy. Eavis specifically blames former Fed chair Alan Greenspan for keeping interest rates too low for too long. Low rates helped spawn the housing boom. "Those rate decisions showed that Greenspan had chosen to use the housing market as his main instrument to prop up the economy after the 9/11 attacks. Using monetary policy to encourage a rise in home prices would be a highly unorthodox move for a central bank. But evidence suggests that Greenspan was overly keen to use housing for exactly that," Eavis writes. Recounting how Greenspan encouraged the use of adjustable rate mortgages (ARMs), he writes, "Greenspan gave a speech that blessed the creation of new loan products, including subprime home loans." # Eavis gave Wall Street 4 pointing fingers for backing the money to make the loans. He called the effort a "remarkable mortgage machine Wall Street's investment banks and hedge funds concocted." The investments initially earned billions and, as such, became a monkey on Wall Street's back until it was ripped off by soaring numbers of failing loans. # Mortgage lenders also earned 4 pointing fingers for making NINJA loans (loans made to those with no proof of income, no proof of a job or assets). The industry has paid for its loose-money ways in terms of lenders going belly up, branches getting shuttered, stock prices crashing and demand plummeting. # Mortgage brokers warrant 3.5 pointing fingers for enabling borrowers to get a fix when they couldn't really afford it. Many of them continue to offer come-ons. "And let's face it, with their nonstop marketing on the radio and the Internet, they're easy to scorn. They made millions, and as pure middlemen, they will feel relatively little in the way of consequences -- aside from a sharp drop off in business," Eavis writes. # To the rating agencies, who blessed risky mortgage funds with invincibility, Eavis points 3.5 fingers. Calling rating agencies' work "financial alchemy," Eavis says the raters are too often influenced by the investment fund makers and were under experienced in the new subprime based funds. "The shortcomings of the system became blindingly apparent in July, when Standard & Poor's and Moody's abruptly downgraded nearly $ 6 billion of subprime-mortgage-backed bonds. Many of the subprime mortgages backing the bonds were less than a year old. That means the rating agencies had little idea about the quality of those loans when the bonds were issued," Eavis wrote. # Those who purchased homes with risky loans and took on debt they couldn't afford, the borrowers, earned 3 pointing fingers for getting hooked. Ignoring common sense, borrowers allowed themselves to be overwhelmed by low-interest rate carrots, TV shows promising real estate zillions, Web sites revealing home value jumps, offers of overnight home ownership and other come-ons. "Now many will pay dearly for their poor judgment -- losing their houses, having their credit ruined," Eavis writes. # Finally, appraisers, considered "bit players" in the game, get 2 pointing fingers for acting as "brokers' handmaidens … who too often buckled under pressure from lenders to overvalue houses." Published: September 11, 2007 -------------------------------------------------------------- I wrote this August, 2007. American Dream Financing Opened Pandora's Box by Broderick Perkins The mangled mortgage market is spreading monetary mayhem to a growing number of credit sectors throughout the financial world. FREE Agent Online Powerhouse Kit including a FREE business consultation Mortgage industry related conditions are melting down credit cards, wrecking commercial deals, sweating even the most creditworthy customers and causing foreign banks to cover their assets. Unfortunately, just like the credit card customer who enjoys years of cheap credit spending, only to wind up in a protracted 12-step recovery program, the mortgage market hangover isn't going to go away overnight. Inebriated by speculative over-indulgence, Wall Street is reeling and the housing market hangs in the balance. "The origins of the current crunch lie in the financial follies of the last few years, which in retrospect were as irrational as the dot-com mania," wrote New York Times columnist Paul Krugman, in a recent opinion piece. "The housing bubble was only part of it; across the board, people began acting as if risk had disappeared," he wrote on. From the dawn of the predatory lending push in the late 1990s to the subprime system breakdown in recent months, de rigueur high-leverage, low-cost loans were the word and the way and the key to the latest rendition of the American Dream. The word was, get in now, by any means necessary, before home prices skyrocket. They did and they did. During the boom, lenders branded ever riskier mortgages and the real estate industry herded homebuyers like sheep toward loans which buyers have since learned they couldn't afford. Long and frequently considered "unsustainable" it was a housing boom fueled by risky mortgages never tested under the assembly-line production pace at which they were delivered. Financing the American Dream this time around has opened a Pandora's Box. First out of the box were foreclosures that mounted as adjustable rate mortgages (ARMs) reset and sent ripples of financial distress through households and communities of low, fixed-income home owners who realized they'd been sold a bill of goods. Several studies reveal up to 2 million homeowners will lose their home before the market bottoms, due to poor lending decisions, fraud, consumer ignorance and a host other factors. As foreclosures mounted, the feds moved in to re-regulate the industry, but by then it was too little too late. Lenders failed, shuttered branches and, if they were still standing, began tightening underwriting on new risky loans and withdrawing offers for others. With the financing rug pulled out from under the stratospheric price of homes, speculators bailed, and fewer non-investors could afford to buy. The supply of homes for sale and for rent swelled and home prices shrank. Some real estate market experts were still murmuring about a quick housing market recovery when Wall Street tycoons began to suffer the same fate as the home buyer on Main Street -- a tapped out till. Mortgages are often sold and repackaged as securities for sale to investors, but because of the added foreclosure induced risk associated with subprime and other risky loan-based securities, buyers (investors) balked and bailed out. Two subprime loan-based Bear Stearns hedge funds, at one point controlling assets of more than $ 20 billion, this summer filed for bankruptcy protection, value all but drained from the funds. Other such funds likewise have been crippled by the events. Bailing investors aren't limited to the shores of America. Credit Suisse Group more recently shut the door on lenders selling its subprime loans, second mortgages, negative amortization option ARMs, and two or three year ARM hybrids. And just last week BNP Paribas, a large French bank, froze operations on three funds worth $ 2.2 billion, citing U.S. subprime market problems after investors pulled out of the funds in droves. This week BNP's U.S. based Homebanc filed for bankruptcy, following in the footsteps last week of large home lenders American Home Mortgage Investment and New Century Financial Corp. Krugman explains, "When liquidity dries up ... it can produce a chain reaction of defaults. Financial institution A can't sell its mortgage-backed securities, so it can't raise enough cash to make the payment it owes to institution B, which then doesn't have the cash to pay institution C -- and those who do have cash, sit on it, because they don't trust anyone else to repay a loan, which makes things even worse." Sitting on money to lend is also crushing so-called Alt-A level borrowers, those with better credit than subprime borrowers, as well as prime home loan borrowers with the best credit. Where mortgages are available for them, lenders loan small amounts with higher interest rates. San Francisco, CA's Wells Fargo Bank recently curbed financing Alt-A loans and Charlotte, NC's Wachovia, stopped making Alt-A loans through brokers and smaller lenders while curtailing some ARMs. The one saving grace in the mortgage mess has been mortgage rates for conforming loans (those $ 417,000 or less and eligible for purchase or guarantee by Fannie Mae and Freddie Mac) remaining flat and even falling in recent weeks. Not so with jumbo loan rates (for less-protected loans larger than $ 417,000) which reached 7.35 percent last week, the highest since April 2002 according to Bankrate.com. Jumbo loans are crucial to the growing number of high-cost markets like California and others with already-high home prices heavily inflated during the last boom. And just forget using those zero-interest rate credit cards as a bail out. Credit card issuers are also beginning to raise rates, reduce credit limits and tighten controls over who gets plastic. Capital One Financial, said Friday, what's in your wallet will begin to cost a lot more. A minority of its card holders enjoying credit at the bargain annual rate of 4.99 percent will soon have to pay 13.9 percent. Even the otherwise relatively fit commercial sector is beginning to feel the liquidity drought caused by the overcast residential mortgage and housing markets. A potential buyer for a 6.9 million square-foot portfolio of 100 properties, including those that house Apple and Microsoft offices in Silicon Valley's otherwise fit commercial market, was unable to find the asking $ 1.8 million in financing to close the deal last week. The San Jose Mercury News reported that area real estate mogul Carl Berg was unable to sell the portfolio "In a tangible sign that the crisis crippling the housing market is spreading to commercial real estate ... ." The vast majority of those who comprise the residential real estate market, home owners, real estate sales and lending businesses, home builders and affiliated industries, will survive this downturn unscathed. But for those who don't, it won't be a pretty picture. Published: August 14, 2007
Answer by donald e
there are numerous reasons why the problem has occurred, the main one u see in the media, involves arm loans, these are loans that have a variable rate, adjustable rate mortgages, and depending on the size of the loan and the rate monthly payments over the life of the loan can go up, lol never seen one go down, if the loan was large enough and the rate goes up high enough the monthly payment could increase 1000-2000 a month. a lot of folks who didnt qualify for a regular mortgage took these loans to get into a house, and some who did were sold a bill of goods saying look at the low start interest rates and what they werent told was the adjustment period which could be 6 months, 1 yr, 2yr, 3yr, etc, the rates started low but could increase 2% every adjustment up to a maximum of normally 13% for good credit for poor credit it could go as high as 18-20% a loan for 200,000 @6% the payment is 1200 a month same 200,000 at 13% is 2214 without taxes and homeowners, lots of loans were made to folks with poor credit, they didnt have to prove income with good credit, etc. lots of self employed folks took no income verifciation loans, and now lots of folks due to job layoffs, slowdowns in business, accidents, health probs. etc can no longer pay the strting rate mortgages let alone the increase, their credit has deteriated and they cant refinance at the going rate because of late mortgage payments, one 30 day late on a mortgage hurts your credit badly 2 30 day lates or one 60 day late destroys your credit and you cannot refinance with a conventional bank for 2 years, basically. now the rates are up, those not paying are losing their homes, and there are so many no one can buy them all, therefore the lenders are losing money as its not coming in and they are sitting on vacant homes to be sold for less than what the lenders are owed. athe analogy is like a snow ball rolling down hill, the bigger it gets and the faster it goes, till crash, and thats just what has happened, hang on we have at least till summer of 2010 before this levels off as these mortgages were sold in abundance thru the biginning of fall 2007, and yes i predict its going get worse in the next 18 months. i have sold over 1000 mortgages in the last 10 years only one of which was a arm loan, i am totally familiar with interest only loan, pay option arms, etc, and once i explained to a client the pitfalls and the worse case scenario of these loans i had only 1 client in 10 years demand to be put into an arm. the rest thank goodness were smart enough to listen, i sleep well at night as i now know although i didnt make as much as my coworkers, i didnt hurt anyone, all the loan officers were taught to sell armloans better commission rates and u sold it by telling the client dont worry about the adjustment we will refinance you before then, what they didnt tell the customer is oh by the way we will double u p on what we make off you by charging you again for the second loan. lol u would be surprised at the doctors, lawyers, school teachers, law enforcement officials etc. that were sold loans that i wouldnt sell to my worse enemy and they didnt understand what they were signing there name and lives to. today these folks are in trouble as some of them owe more than the house is worth, and the property values for the first time in 20 years are declining
Answer by Chuck P
Stupidity and greed, lenders abandoned their policies and good sense and fell for this make a deal at any cost philosophy. They started lending with no down so the buyer had no vested interest in the property, big mistake. Second they had no chance of building equity in their homes because they financed the entire amount, this compounded the problem. Because when it came time to refinance there was no equity to help offset the additional costs. Falling prices on the homes also contributed to the d ecay so people faced with this dilemma opted to walk away. And finally the biggest culprits were the speculators buying up the houses to flip them were the first to over inflate the cost and they were the first to bail on the debt since they made their money and it wouldn't hurt their credit. Overall the old system worked before the creative financing took hold. There needs to be more regulation on speculators because they are making it harder for the start up buyers to get into an affordable home.
Answer by catherine s
In laymans terms. Lenders were approving and giving money to just about anybody. They issued "option arm" loans where a person had an incredibly decreased monthly payment, but it never paid the principal of the loan down and that got tacked on to the balance, so now they owe even more than when they started out. They are only allowed to pay this decreased payment for so many years (3-5) and when it came time to make the full payment every month, they can't afford it. They went to refinance and found the loan was more than the house was worth! can't get another loan, can't make the payment, the bank takes the property back and then end up renting a house from me. Those lenders that closed only made way for other clients to go to the lenders who were still open and now they only lend to more credit worthy people. The option arm loans are only good for people who can make the full payment, but due to say a fluxuation in monthly income (those of us on commission only) might need to make a lower payment ONCE IN A WHILE, or at Christmas! : ) Or maybe a couple who, say the wife is graduating from college and will have a job by the time the full payment is due and they can start making that full payment. That's a good loan for them. In certain areas, you combine the problem with the option arm loans and the falling market values (CA, FL MI for instance) and people get in trouble. Here in Utah, it's a very healthy economy. I realized a 15 percent gain in value on my home last year, but now we will get back down to 3-5 percent, which is normal. Here, those option arm people are able to refinance to save their homes. Other people in a soft market may not.
Answer by Janice F
the big mortgage companies found a loop hole! they notice the government saving the airline companies over and over. so why not them. the big corp companies have banks,credit companies and mortgage companies, all in one. they were able to give credit for every one and rise value on homes, so they get a big profit. once it ran out. they knew and put presser on the government to help out. and go back to the old way of doing mortgage loan. the out come was making a profit for themself. as for the people the government will help or go bankrupt or foreclouser, because life go on. yes they are heartless.
Answer by Lauren
wow....really long responses here..no one has that much time to read what they're posting. I think the short answer can be property flipping. So many people got involved with that, and were drowning in bills before they could turn a profit. All those reality DIY flip shows on TLC, Discovery, HGTV, and whatever other channel they are on had to contribute to it as well. The owners will be SOL for getting another mortgage and the banks won't go out of business because the government will bail them all out and pass the loss onto taxpayers. The homes were not appreciating in value because 3/4 of the time they were a mess - unfinished and no plan to complete to gain equity. Equity is not gained by simply owning a home - improvements usually have to be made to gain more value. Therefore, the banks had to give the owners more money to fix - digging themselves into a deeper hole. Then when the flippers hired lame contractors who couldn't complete the job, the flippers had to pay the mortgage payment instead of paying the contractor. For flippers, it's all about profit. They'd rather do the job 5 times rather than spend extra money on the right contractor. It's a spiral effect and it kills the financial status of all involved parties. Simple, common sense answer.
In broad strokes, the story of the growth of the private student loan market (from $ 5 billion in 2001 to $ 20 billion in 2008) offers an illuminating parallel to the surge in subprime mortgage loans during the same period. Banks figured out they could ... Another "subprime" crisis: Student loans
For-profit colleges and universities have recently taken a very public hit. The U.S. Department of Education released reports detailing higher education student loan repayment rates which specifically targeted loan repayment at for-profit education institutions. "The nonpayment rates for people who attended some for-profits are so high they could jeopardize access to future loans for students at those for-profits."
The U.S. Department of Education produced figures that show a 36% overall repayment rate for for-profit school graduates, significantly less than the 45% repayment rate that the U.S.D.E. reports as standard. Many of the for-profit colleges and universities have fought back, instead showing some repayment rates as high as 55%.
The question now becomes: what's with the disparities? NPR's article notes that, ultimately, the government has the final word on who is and isn't repaying loans.
The loan funding, after all, does come directly from government departments.
What's important to understand, especially for students, is that for-profit schools of even the highest caliber, are for-profit. For-profits, especially online colleges and universities, don't have the resources of public and private universities and earn their revenue strictly through student enrollment.
Regardless of incongruent loan-repayment figures, students should take the time to educate themselves on financial aid options. Loan repayment can be difficult for all students, not just those who graduate from a for-profit school.
In an era where our loan repayment rates are being compared to the "subprime mortgage crisis," students should take care to invest wisely in whichever higher education track, online university or ground school, they choose.
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Is the Sequel to the Subprime Mortgage Crisis a Subprime Education Crisis? NPR Takes a Look Issues
