The Nature of the Mortgage Crisis

My favorite personal finance blog Get Rich Slowly gave me a heads up earlier this week about an excellent radio piece that you should make the time to listen to.

It’s titled The Giant Pool of Money, and you can download the mp3 for free through the 18th of this month. They interview a handful of people from up and down the chain of mortgage lending over the last few years, and lay out the nature and source of today’s mess in plain language.

You’ll hear from a borrower that took on far more mortgage than they could afford, a lender that wrote and immediately sold the loans (while making obscene amounts of money), and a CDO manager that owns pieces of millions of loans that he literally looks at as lines in a spreadsheet.

It’s an excellent piece, and although many of you may have already seen mention of it elsewhere, I felt I should link to it here as well.

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

41 comments:

  1. 1

    YOU MAKE A GOOD POINT TIM

    A friend of mine was talking to a group of realitors a bar about a year ago and they envied my friend; as he has no debt and is paying as he goes. They regretted buying their rental investments that have plummetted in value [yes, even a year ago] and stay empty for months with no tennant(s), because the pool of tenannts is slim [many resort to ex-cons now] , eviction rates high, destruction to their home(s) high and the rentors left today in Seattle are much lower incomes; since the subprime mess got low incomes in hock and out of the rental market.

    The foreclosure rate increases may be the landlord’s best friend…lol

  2. 2
    Sean says:

    I’m a big fan of This American Life and the piece on the Mortgage Crisis was them at their best. Obviously as a regular reader of this blog (and someone saving for their first home) not much of the story was truly eye-opening, but it clearly and concisely laid out how we got in this mess and showed how at every step of the home buying process there was fault all around.

    Of course, as an educated future home buyer, I put the burden more on the lend-ee who took out more mortgage than they could afford. I can’t sway the “Global Pool of Money”, but I do have direct control over how much money exits my bank account each month for expenses and so I’m more critical of the home buyers in these situations.

    \$0 Debt
    \\renting
    \\\saving
    \\\\patiently waiting

  3. 3
    The Tim says:

    FARK much, Sean? :^)

    \never understood this meme
    \\seriously, what’s the point?

  4. 4
    Ray Pepper says:

    WOW..”regretted buying their rental investments” because they have plummeted in value and stay empty for months with no tenants. “Pool of tenants is slim and destruction of their homes. ”

    Well I’m here to tell you that the investors that I work with are happier then ever with their purchases. Rents are going up up up. The pool of tenants is far better then it was 3 years ago when many people were buying homes.

    Just yesterday I placed a rental in North Tacoma which rented before for 1200, we raised it to 1500 and had over 10 calls already with appts set for walkthroughs. The tenant doesn’t even move out till the 31st!! Good Lord!!

    Like any investing. Many people just buy the wrong property, in the wrong area, for the wrong price, at the wrong time.

    Ray Pepper
    http://www.500Realty.net

  5. 5
    B&W Nikes says:

    The giant pool of money is a great show. TAL nailed it with their sense of humor. For anyone interested in hearing still more, the bbc world service did a great 2 part show last year available here and here. The information is probably well understood by most here now, but the anecdotes from the subjects interviewed are something else and worth listening to.

  6. 6
    Sorin says:

    Good clip. It does just re-emphasis that it was desperation for high returns on the part of investors, greed on the part of brokers and lenders, and ignorance on the part of the people that took out these mortgages. Effectively, nothing better than (mostly) legal loan-sharking.

    It boggles my mind how these brokers that made 25k a month in the boom times can be so stupid as to spend even more than that. Same thing happened in the tech boom and bust of course. The only conclusion I can make is, people in every sector, including finance, are mostly ignorant of economics and personal finance.

    I’m looking forward to the yo-yo finishing its unwinding.

  7. 7
    mortgage brocker says:

    Edit: Plagiarized and non-attributed WSJ article snipped. -The Tim

    Just an opinion for you to consider. Cheers!

  8. 8
    EconE says:

    Why does everybody pick interest rates from 1981 to explain how things are different this time?

    Why not the 7-8% rates that we had during 1993?

  9. 9
    Everett_Tom says:

    mortgage brocker,.

    if your gonna just copy from the internet, you should list your source (The Housing Crisis Is Over
    By CYRIL MOULLE-BERTEAUX
    )

    And this article was already discussed here , and pretty well debunked.

  10. 10
    The Tim says:

    Whoops, thanks for catching that Everett_Tom. I’ve edited the comment in question.

  11. 11
    Everett_Tom says:

    The quote from the WSJ article

    The flip but true answer: because they always do.

    Really intrigued me when I first read the opinion piece. It seemed to be the same kind of logic which people used when creating the Mortgage Backed Securities and CDOs in the first place. (i.e. Well, since forclosers are ALWAYS less then 2% to 3% this is a no risk setup…..)

    It also was a dead give away when it “popped” up again in the plagiarized post…

  12. 12
    Mirtika says:

    My favorite program on my public radio down here (Miami) is This American Life. It’s always interesting and often really informative. I also caught this terrific one on the mortgage crisis on WLRN (while I was showering and blow-drying my hair, so caught the whole thing), and I recommended it to my whole family, for anyone who wanted to understand how this mess got snowballing.

    Thumbs up!

    I was able to get a very nice deal on a car this week. Dealer was DEAD Saturday (only one other couple shopping on a prime car sales day) and dead Wednesday late afternoon/early evening (only one father/son shopping). We got to be pretty choosy (cars were brought in from other dealers, even, cause they didn’t have teh color I wanted.) We got a very nice price and I went in with all three credit reports, scores (excellent), and more than half down. And I got a lower interest rate on the financing than with our credit union. They practically fell over themselves to thank me profusely for coming in, for buying, etc.

    The credit situation sucks a dozen eggs out there, but if you have some cash and great credit, this is a great time to make some purchases that you’ve put off. (My previous car was 10 years old, had served me well for 9, and had been paid off for 4.5 years.)

    Now, we’re gonna see how low rentals of homes go. If we can find something closer to hubby’s work, so we can save on gas (he drives about 30 mins to work, each way), something that is in great condition, maybe even a pool for the grandnephew and grandnieces to enjoy, we may rent for the first time in 25 years, and rent out our current place (no mortgage, all paid) until selling conditions improve.

    I want to stay pretty liquid during the roughest of the times to come, save, save, save and keep safe investments.

    thanks for the great info on this blog.

    M

  13. 13
    EconE says:

    Here’s a great article from todays NYTimes on how condos are being affected.

    http://www.nytimes.com/2008/05/15/business/15condo.html?em&ex=1210996800&en=1ebc381fa67f7183&ei=5087

  14. 14
    Olaf says:

    Rents are up? I don’t think so, Ray. Despite what the newspapers would have you believe. Here in Eastlake, where I live, a bunch of big new buildings are coming online that were meant to be condos and are now vying desperately for tenants. They’re putting out balloons and offering discounts.

    Our landlord is so glad to have us that he’s raised the rent about 2% a year. That’s less than inflation, folks. And that’s on a gorgeous 3BR with vaulted ceilings and a view of Lake Union. (It was going to be converted to condos, but he dropped that plan in a hurry.)

    Month-to-month, too. And others in the neighborhood tell me the same.

  15. 15
    jg says:

    I agree Olaf. I just signed a lease on a 3 bedroom condo conversion the owner needs to rent out. Everything is new and it’s less than I was paying for a 2 bedroom. He is also including utilities!!! He is relocating for his job for 2 years and owns it outright BTW. Rents are FALLING as far as I can see. Lots of for rent signs everywhere and even more for sale signs on Kent/Covington area. Huge glut of new housing out there.

  16. 16
    redkardinal says:

    What an interesting TAF article. I actually used a product like those brokers were hawking.

    I bought my house in 2001 for $270k with a 30 year fixed at 6.5 percent and 10 percent down. I was not pressured by the broker to go with one of the exotics at that time. I paid down my principal by another 15 percent over 2 years and then shopped around for a lower rate. A guy at WAMU offered a variable mortgage at prime rate minus 0.5% so I took it after a few days of mulling. It was at that time less than half my fixed interest rate. So, what did I do with the extra cash that I saved each month? I used it to pay down the principal. As the rates went up, I gradually shifted the flow of money from my savings and investments to pay down the principal. I did not bother to refinance to a fixed rate because I only had $50k left in principal as of 2 years ago. A few months ago, I was able to pay off the mortgage and now my savings rate has gone up again. I am accruing cash in savings waiting for the next investment or buy opportunity (Vanguard Mutual fund, TIPS, real estate) at the time of my choosing.
    I am preaching to the crowd when I say this but the fundamentals exist for a reason. They are time tested! I did not succumb to buy more of a house than I could afford. I bought a modest house that was 2.5 times my gross salary. I did not use my house as an ATM for I figured I will have to pay my debt eventually. I ran the numbers on my own before I decided to refi into an exotic loan. I did gamble that if the prime rate increased, it would not increase faster than what I can afford to pay.
    Some of my friends said that I should not have paid down the mortgage. I should have refinanced into a fixed rate 30 year mortgage and use the extra money for other investments. The mortgage payments will remain the same in absolute terms but relative to the costs 30 years from now, it will be much less. My argument is that no job is certain. If I lost my job, I will still have to make mortgage payments. I also max out my 401k and maintain an emergency cash reserve, just in case. A real estate friend said that my taxes are now higher as I don’t have any mortgage interest deductions. I counter that I only get 30 cents back for every dollar of interest I pay. I was wondering if any of you could comment on my argument for paying down the mortgage, especially if you disagree. I still cannot justify prolonging the debt status. Perhaps this is a topic for a different forum.

  17. 17
    Alan says:

    redkardinal, If you are married your standard deduction in 2007 was $10500. Based on a 6% interest rate, that comes out to interest on $175000 loan. If you could borrow $300k on your house then you are losing a tax deduction on approximately $7500 of interest income. But as a benefit you don’t have to pay out $18000 of interest every year.

    If you have a lot of other deductions that you can’t take because you take the standard deduction then these numbers get a little worse.

    You can also think about your house as earning 6% interest tax free a year since you don’t have to borrow that money.

  18. 18
    patient says:

    redkardinal, you’re a clever guy. Well done and congratulations to being debt free and owning a home! You put yourself in a very enviable position in less than 10 years. It can be done.

  19. 19
    WestSideBilly says:

    The tax deduction is a farce. Paying interest so you can get 25-35 cents on the dollar back in reduced taxes is not what I consider sound economics.

    IMO, RedKardinal, you’re doing it right. If anyone tells you different, it’s because they’ve bought into the rat race way of life and/or they have no concept of money.

  20. 20
    shawn says:

    Hi all,

    what is the best way to find rentals, condos, townhouses, houses, in North Seattle and Redmond.

  21. 21
    Mikal says:

    Shawn,
    Craigslist.

  22. 22
    alex says:

    I hadn’t heard this – the MP3 is extremely amusing!

  23. 23
    jon says:

    “Paying interest so you can get 25-35 cents on the dollar back in reduced taxes is not what I consider sound economics.”

    It’s actually very sound economics if you have the right investment to plow the money back into. It’s called tax arbitrage. If you find an investment that you are comfortable with the risk on and can defer the taxes, you should go ahead and take out a mortgage and invest the proceeds. The difference in interest and taxes rates can amount to a several thousand dollars per year.

  24. 24
    Mikal says:

    Mortgages also force people to save what they would justify spending instead of saving. Not everyone has the discipline to not spend money.

  25. 25
    Alan says:

    Shawn, I second Mikal’s suggestion.

    Make a link like this one and check it every morning.

    http://seattle.craigslist.org/search/apa/est?query=&minAsk=min&maxAsk=1200&bedrooms=2

  26. 26
    The Tim says:

    Shawn, Here’s a how-to I wrote for finding a great rental on Craigslist.

  27. 27
    bitterowner says:

    I have mulled over the same pay down mortgage vs invest money elsewhere conundrum that redkardinal describes. I’m not sure what the right answer is but I tend to agree that the tax deduction benefit is considerably overstated. Also, something that is rarely mentioned is that if your income is above a certain level (not sure where the cutoff is but it’s not insanely high), then you cannot take the full deduction and would have to resort to various tax tables that determine what percentage of your deduction you are allowed to claim, further eroding any mortgage deduction benefit. Maybe somebody more knowledgeable in taxes/accounting could comment.

  28. 28
    Happy Renting says:

    I just renewed my lease for another year, near Capital Hill, and there was no rent increase at all. If there had been, I’d have just picked one of the myriad other rental places available and negotiated a better bargain.

  29. 29
    Ray Pepper says:

    Olaf and Jg you maybe correct. My rentals are all in North Tacoma (walking distance to Proctor and UPS) and other highly desirable areas in Salem Oregon and Fallon Nv near the Top Gun Navy base. Across the board I have been raising rents a minimum of 10%. The investors I work with also own over 50 properties around me but none of us own Condos or anything North of Federal Way. Condo’s I could never make cash flow so I just never bought them. Except one flipper in Kirkland for 125k that I dumped for 175k 8 months later. I should have held.. It s now 215k and that was just 6 months ago.. Ah well.

    I’m happy your rental areas are soft and you can negotiate down your lease. We just don’t see it on our investments. Take your time and FIND Your GEM!! BUT ALWAYS LOOK!

    Ray Pepper
    http://www.500Realty.net

  30. 30
    olaf says:

    Hi Shawn —

    Craigslist is good… but if you have a particular neighborhood in mind, you should just go there and walk around. A lot of the smaller buildings just put up a sign in the front yard. Some of the landlords (mine included) are still old-school… and that means you’ll find them before some of your more internet-minded competition does.

  31. 31
    duplex says:

    the reason many of those deals are out there is out of desperation. Many of those condo converters are ready to go tits up and need cash FAST. We are running 10% increases on all units in south Seattle. I can guarantee that this is not as desirable as capital hill.

  32. 32
    Jonny says:

    My rent just increased by less than half the inflation rate. An effective loss for the owners, but frankly a smart move as there are vacancies here that go unfilled some months. They don’t need more of them.

  33. 33
    Cougar says:

    In the very desirable downtown Redmond my rent finally had an increase of 4% after I have been a tenant for three years. There is low turnover, nice neighbors and landlords who aren’t slummy. I also inherited a rental in Kirkland and the tenants have been there 40 years! Sure we could raise the rent to meet current rates but they have paid for the property. They do all the maintenance, keep the property nice and we never hear from them, rent is on time. There is a difference between a landlord and a cashwhore.

  34. 34
    Tsuru says:

    In the very desirable downtown Redmond

    Okay, I just have to know. Where is this “very desirable” downtown Redmond area? I don’t even know what part of Redmond would be considered “downtown”. Redmond Town Center? The intersection of Leary and Cleveland (there’s a Matador there now! Whoo!)? The horribly smelly industrial fish frying and freezing plant right beside City Hall? Out by the new Whole Foods?

    I don’t know if anyone’s noticed, but there are currently turning Redmond into a high population density zone (see the new construction behind the KFC on Redmond Way by the railroad bridge and where the Tony Roma used to be on the corner of 160th and Redmond Way) yet no one has given any thought as to how the roads are going to be able to handle all these 10’s of thousands of new residents. That won’t be pretty when those places are all occupied.

  35. 35

    I STUMBLED ON TO A GREAT BUSINESS INTELLIGENCE NEWS ARTICLE IN CONDE NAST PORTFOLIO, MAY 2008

    The author is Jesse Eisinger, its called, “It’s (Really) the Economy, Stupid”. It makes it clear, the worst subprime mess Wall Street turmoil in a generation is going to wipe every other issue off the table for the next Presdident.. The enormity of the crisis by the political establishment just isn’t grasped. He calls right now the “Great Recession”; and we need a New New deal. Over the next year he’s predicting more blood, continued home price depreciation. Layoffs are just beginning he says. The future holds massive pension shortfalls and retirement agonies [I’d add this to his great article too: a massive fist into Seattle’s financial stomache is the retirees plummetting incomes putting a wrench in plane tickets, new cars, restaurants, etc, etc….]

    This Conde Nast Portfolio magazine is actually pragmatic business news mainstream media keeps us from hearing….a must read for any Bubble Brain. It makes Forbes look like a fairy tale joke book.

  36. 36
    NostraDamnUs says:

    NEWS ALERT
    from The Wall Street Journal

    May 16, 2008
    Home construction turned up unexpectedly in April and showed surprising vigor, making the biggest increase in two years, while
    building permits also rose, a sign of optimism for the sickly housing sector. Housing starts increased 8.2% to a seasonally adjusted 1.032 million annual rate, driven higher by a surge in apartment building construction, the Commerce
    Department said. Starts plunged by a revised 13.8% in March to 954,000. Economists expected April starts to drop by 1.4% to a 934,000-unit annual rate.

  37. 37
    matthew says:

    Nostradumbass,

    Read the actual report, SFH construction was DOWN 1.7%, the lowest since Jan. 1991.

    The increase was all condos. If you think that singles something positive : SOLD TO YOU!

  38. 38
    uptown says:

    It’s not scientific but the neighborhood weekly was much thicker this week, 30 pages of legal ads, up from 25 last week (mostly foreclosure related). I remember in the old days when it used to be full of housing ads, oh yeah – that was last year.

  39. 39
    MacAttack says:

    Salem, OR a hot rental spot? Eh? In Portland, the Wyatt condo tower will pay $2000 of your moving expenses – read the ad on Craigslist. The rental places around Portland – houses included – are running specials.

  40. 40
    shawn says:

    thanks everyone, esp Tim for the instructions. I will be up this weekend through middle of next week visiting family, doing an interview (free trip) and looking around, still on the fence where to live LA, Seattle, Minneapolis.

  41. 41
    Garth says:

    I think the craigslist landlords are going to be kind of invasive around here for a while. Last night they ran a big news story on king tv on how to avoid sex offender bombers like this guy:

    http://www.komotv.com/news/17736629.html?eref=time_us

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