Buying houses you can't afford

[Gerald McGrew]

Once the housing bubble burst and people started defaulting on their home loans en masse, many pundits and talking heads on the right began decrying people who "bought houses they couldn't afford". Why in the world would people take out a loan that was beyond their means to pay?

Since the Bush era economic collapse, I've seen several reasons cited for the above. Home buyers were swindled by loan officers, they were irresponsible and stupid...and no doubt there are examples of both out there. However, until I read the article below, I had totally forgotten about the "Get Rich by Following my System" cottage industry that sprang up during the bubble, where people were told that just by buying and selling houses in volume, they were guaranteed to become millionaires.

http://www.nakedcapitalism.com/2012/10/ ... ubble.html

A lot of people still wonder how and why so many millions of people bought such ridiculously overpriced homes and took out mortgages and loans they clearly could not afford?...

...Well, this book provides a part of the answer: people were explicitly instructed to do so.

The Automatic Millionaire Homeowner hit the front bookcase displays at Barnes and Noble in March 2006, at the very top of the real estate market and just a few months before the whole thing crashed and burned. Its main message was simple: If you take out a mortgage to buy a home, you will always make money. There is no way you can lose—no matter when you buy, how much you pay or what type of loan you get. And the kicker is: both the book and finance expert who wrote it were bankrolled by Wells Fargo and Bank of America.

So Wall St. firms were publishing books telling people that they were absolutely guaranteed to become millionaires by buying and selling homes, no matter if they could afford them or not. And of course, those same Wall St. firms then bundled those mortgages up into mortgage backed securities, rated them as "AAA+" and sold them to investors.

But the whole thing was a fraud, shamelessly boosted by some of the biggest names in news media—none of whom have been held accountable for their role in defrauding millions of Americans.

So let’s take a look…Crack open the book and turn to the introduction, it begins like this:

What if I told you the smartest investment you would ever make during your lifetime would be a home!

What if I told you that in just an hour or two I could share with you a simple system that would help you become rich through homeownership?

What if I told you that this system was called the Automatic Millionaire Homeowner—and that if you spent an hour or two with me, you could learn how to become one? [emphasis mine]

Would you be interested? Would you be willing to spend a few hours with me? Would you like to become an Automatic Millionaire Homeowner?

Interested? Intrigued? Want to know more? Well, turn a couple of pages and you get this:

As I sit here in August 2005, I have no idea when you will be reading what I’m writing. Maybe it’s March 2006 (when this book is scheduled to be published)—by which time the real estate market could be slowing or cooling down to modest single-digit annual gains (or not). Perhaps this book was bought by a friend of yours who passed it along to you—and it’s now 2007 and those once “certain” boom markets are going bust due to speculation. Or maybe the opposite has happened—interest rates have remained at historic lows, and home prices have continued their march upward.

In fact, it doesn’t really matter when you happen to be reading this or what’s going on right now in the markets. This book is not about the boom . . . or the busts. . . . What this book is about is the truth. And the truth is this:

Nothing you will ever do in your lifetime
is likely to make you as much money as
buying a home and living in it. [emphasis in the original]

What’s this sure-fire system? Well, it’s so simple it fits on the inside flap! Here’s how you do it:

What Makes The Automatic Millionaire Homeowner Essential:

■ You don’t need a big down payment to buy a home.

■ You don’t need great credit.

■ You should buy even if you have credit-card debt.

■ You can buy a second home even if you’re still paying off the first.

■ You can get started in any market-boom or bust.

■ It’s easier to be a landlord than you think.

And what is this same Wall St.-backed shyster doing now? He's selling "How to Get out of Debt" books, which encourages people to cut their living expenses to the bone so they can pay off their mortgages. IOW, now Wall St. is sending this same guy out there to make sure those people whom they swindled before, keep making their mortgage payments to those same firms!!

Someone needs to go to jail for this.

[laklak]

Yep, the whole "leverage till it hurts" philosophy had a lot to do with it. People thought the bubble would never burst, because they didn't look at history. To be fair a lot of people made a lot of money for a few years, but all bubbles eventually burst.

We got hurt by the collapse because we mistimed buying by about a year. If we'd bought our home just a year later we'd have saved almost 100G. Oh well, it's paid for so I can't complain, but I wouldn't mind having that 100G floating in the bay as a nice sailboat.

[Rum]

The housing bubble worked a bit differently in the UK. Evenn when interest rates were higher housing inflation was higher. People bought houses they could only just manage the mortage for in the knowledge that they could pay the thing off after perhap[s spending a bit on it, waiting two or three years and selling it. It really did boost a lot of people's standard of living. It also meant that DIY, the furniture industry and general house improvement and repairs industries did pretty well out of it. People weren't being greedy - well not outrageously so anyway. This was the way things had worked for years, with a few short hiccups now and again, probably since the 1950s or before.

When the bubble burst and mortgages were suddenly hard to come by many people found themselves owing far more on a mortgage than they could possibly get from selling their property - so called 'negative equity'. It means millions here are trapped.

We were very lucky in that I retired at a point where our house was worth about 15 to 20% less than when we bought it. I used a big chunk of my lump sum to pay off the majority of the mortgage so we don't have to worry thank goodness.

We also have an interest only mortgage. They were offering those without so much as a check when we got ours. Now you can't get one for love nor money.

[amused]

Real estate bubbles are a great way to pump the economy using mostly private money rather than public money. Wall Street provided the mechanism to pump money into the real estate markets which in turn funded growth in banking, construction, architecture and engineering and all the other related parts of the construction industry at large. It employs a lot of people, from laborers to mortgage bankers, and everyone in between. They knew what they were doing, and I suspect the government knew what they were doing but turned a blind eye.

We did this in the mid-1980s with the Savings and Loan real estate bubble. Now we've done it again, and as soon as the hangover debt is discarded, we'll do it again. It's a matter of knowing where we are in the cycle if you want to make money on it or avoid getting hurt.

[Gerald McGrew]

It's the cycle created by the Wall St. firms that pisses me off. I wonder how many people would have bought into all this had they known who was behind every step of the cycle?

[laklak]

I got roped into one of those real estate seminar things a year or so ago. Despite the market crash it was still the same "no money needed", "overnight millionaire" stuff. It was nonsense, basically just a scam to get you to pay for more seminars, more training, a "mentor" and other garbage. Anyone that buys into it has no one to blame but themselves. They use bog standard high pressure tactics. If you don't sign up TODAY the price will DOUBLE. One time offer, folks, step right up. People need to engage their critical thinking skills and realize that if it was actually that easy to do then everybody on the planet would be doing it. Why wouldn't you want to work 4 hours a week and spend the rest of your time on a yacht? Bottom line with almost everything in life is if it sounds to good to be true, it is.

[Warren Dew]

It's the cycle created by the Wall St. firms that pisses me off. I wonder how many people would have bought into all this had they known who was behind every step of the cycle?

Let's not forget that the government was suing banks who didn't make a sufficient number of imprudent loans.

In fact, they're still at it:

Banks have been widely castigated for causing the housing bust by lending too much to borrowers who couldn't repay, but now Eric Holder's Department of Justice has taken its antidiscrimination campaign to new lengths by whacking a bank for having been too prudent.

In a complaint filed Wednesday and settled the same day, Justice claimed that California-based Luther Burbank Savings violated the 1968 Fair Housing Act and 1974 Equal Credit Opportunity Act by setting a policy that had a "disparate impact" on minorities. Between 2006 and mid-2011, 5.2% of Luther's single-family residential mortgage loans went to African-Americans and Hispanics, compared to an average of 41.7% for other lenders in the area. The complaint doesn't cite evidence of intentional discrimination because there wasn't any.

Luther Burbank might not have been in this business were it not for government. The bank was largely focused on multi-family mortgages until its regulator, the former Office of Thrift Supervision, asked the lender to diversify its portfolio in the mid-2000s. Luther Burbank then hired a team to do "nontraditional" loans such as interest-only or option adjustable-rate mortgages that the bank would keep on its own books. Yes, this is the same stuff that eventually blew up the housing market.

Luther Burbank wasn't a fly-by-night operator that marketed those loans to any and all. The bank insisted on a minimum $400,000 loan amount and made loans with an average 680 FICO score and 67% loan-to-value. Over the period that Justice examined, Luther Burbank foreclosed on a mere 11 borrowers out of 629 loans outstanding—a loss ratio of 1.75%. In a normal world, Luther Burbank would get a medal from regulators for its risk management, having chosen borrowers even at the height of the housing mania who could meet their monthly payments.

But Assistant Attorney General for Civil Rights Thomas Perez has a different priority: He wants banks to meet lending quotas to minorities—regardless of whether those borrowers can afford the loans. Many minority borrowers have low incomes that make them riskier lending bets. Is that a bank's fault?

http://online.wsj.com/article/SB1000087 ... 41740.html

[Gerald McGrew]

Meanwhile, the Dept. of Justice's side...

http://www.justice.gov/opa/pr/2012/Sept ... -1104.html

And the original complaint...

http://www.justice.gov/crt/about/hce/do ... ercomp.pdf

Nothin' like blaming the blacks for the whole thing.

[laklak]

Oh the Feds were certainly complicit. One of few things I learned about in the aforementioned real estate seminar was that the Community Reinvestment Act is alive and well. It basically forces banks to loan to low income customers. The first rule of real estate speculation is to use someone else's money, Banks are quite happy to loan you money to buy in a low income neighborhood if you've got anything approaching decent credit, because that loan goes on the books as a CRA compliant loan. Then you sell the property to someone on a lease purchase that matures one year and a day after you bought it ('cuz it wil then be taxed as capital gains). If they can't get a loan kick them out and find another one. Bank's happy, Fed's are happy, you're happy and (maybe) the buyer is happy.

The housing crash was a perfect storm of heavy-handed, short-sighted Federal meddling, predatory banking practices and greedy, unsophisticated buyers. It can't be laid at the feet of any one group or organization.

[amused]

Yup, and everybody was happy when it kept going up, up, up.

[laklak]

It's just like Kilimanjaro. It goes up, up, up till you reach the very top, then it tends to slope away rather sharply.

[Gerald McGrew]

There was nothing in the CRA that forced any institution to loan money to people who had no way of paying it back....nothing that mandated zero down, zero proof of salary, zero credit check loans.

If the CRA and its encouragement of lending to minorities was any sort of significant factor in the housing bust, there would have been some sort of difference in the default rates in housing and commercial real estate loans (which are not covered under the CRA). There wasn't. Further, the vast majority of home mortgage defaults were in white suburban areas.

I know the right-wing media is trying to blame blacks, hispanics, and poor people for the collapse, but the data just doesn't back it up at all.

[Svartalf]

and who bankrolled the subprime buyers and pushed uneducated people into contracts they didn't even properly understand?

[Warren Dew]

Meanwhile, the Dept. of Justice's side...

http://www.justice.gov/opa/pr/2012/Sept ... -1104.html

That just confirms exactly what I posted. The lender maintained a low default rate of 5.2% by sticking to loans over $400,000, and the Department of Justice is forcing them to make loans below that amount, which resulted in a default rate of 41.7% for other lenders.

The government is forcing them to make bad loans, just as I said.

[John_fi_Skye]

Banks are such arses. I know a couple who haven't got much, and they're in a rented house just now with their two kids, and they've saved up a deposit, and they're both working as hard as they can, and they found a house they wanted to buy: they needed a mortgage of 30% of their proposed purchase price, which their mortgage broker said shouldn't be a problem, but today they've just heard that the bank the broker was dealing with won't give them less than 70%, on the grounds that if they defaulted on a 30% mortgage the bank couldn't repossess their house, whereas if they defaulted on a 70% mortgage it could.

Bastards.

We poured thousands of millions of OUR pounds into the banks to sort out the fucking mess THEY had got THEMSELVES into, and that was supposed to make it easier for people to get loans. Wait a minute - what's that up there in the skye.....a pig, by the look of it.