Looks like some lenders are forgiving some debt...

From the WSJ today (Citigroup Feels Heat To Modify Mortgages - WSJ.com

"Mr. Perez, the graphic artist facing foreclosure in La Puente, was one of them. He said recently that he spent two weeks talking to Citigroup, but the bank never offered him a modification. Earlier this month, he says, a representative urged him to unload his house through a "short sale," meaning that if the house sold for less than the outstanding mortgage, Citigroup wouldn't go after him for the difference. Mr. Perez wouldn't wind up with a foreclosure on his credit record, and Citigroup would save money on legal and auction expenses."

by the way, kudos to Tanta for that report the other day...even I could understand it...kinda like a sub-UberNerd post.

Best regards

Consequences starts with a C too.

Dear REBanker,

I wondered about that as well. Find it hard to believe that someone can just walk away from 1000s of debt blithely. I have come to distrust all “colorful personal anecdotes” about mortgages in the press…probably from my reading here.

Regards

This whole concept of "subprime" is still very confusing. The impression I get is that there is simply no solid definition as to what constitutes a subprime loan. Different sources will define subprime with differing criteria, using different FICO scores, etc. There was a very interesting Credit Suisse report on 2006 mortgages which simply relied on surveyed respondents to use their own definitions for subprime when stating how many subprime loans were originated. This would seem to make the results in the Credit Suisse report highly suspect since each survey respondent might have VERY different ideas as to what the definition of subprime is.

This all gets even more confusing when talking about negative amortization, 100% interest, or 100% finance mortgages. Many writers seem to think that all negative-amortization loans are subprime, which is clearly not the case. Clearly, all these terms are being too loosly applied, leaving readers in a mild state of bewilderment as to what is really going on.

--
"The key for all the upside down homeowners is simply time and stability. The best market anywhere is probably where I live--the close in DC suburbs. And yet, people forgot that anyone who bought a house in 1989 was 10-20% underwater almost immediately.....But if you just kept working and could pay the mortgage, it all worked out."

Your short-sightedness and ignorance of history is all too obvious.

DC IS the worst performing housing market in the US for the past 67 years (data for 1940 versus now).

Why would anyone think that what has been true for the past 20 years would continue to be true for the next 5, 10, or 20 years?

Get the hell out of DC, Manhattan, Silly.con Valley, etc., if you can! They are going to be hellholes, relativety. Middle-class in these areas will have to deal with criminal gangs on both sides.

Jas

CR do you actually see cases of what Tanta describes in your world? Prime or Jumbo Alt A to sub-prime?

I ask that because there is a lot of back and forth in my blue collar world (from sub-prime to prime and back again as life's fortunes ebb and flow). That's a given in this circle. It isn't even remarkable or carry a lot of stigma. Stuff happens.

But you live on the 'higher rent' side of the tracks, yes/no? Do you see much 'downward mobility'? If so how do folks take it?

I'm curious because if it hasn't been as common in the past but increasing now then I'd expect to see people not be so happy about it and less accepting. Maybe even some social & political fallout could result.

I'm trying to look beyond the merely economic but don't really see that world close up. Can you comment? What's happening out there?

So can we expect these "Tanta for Dummies" posts in the future?

Consider it an UbiNerd post. It's everywhere.

the further-out DC suburbs are still chock-full of invisible subprimers, right?

Dang, I live in the far-out DC suburbs. Must be why I have such solidarity with the invisible subprimers . . .

This whole concept of "subprime" is still very confusing.

Shorter Tanta: "subprime" is simply a relative, not an absolute, concept. It is "sub" (under) whatever "prime" is. Its boundaries are determined by not just how you define prime, but whether you put a floor under the whole thing--in other words, subprime is under prime, but it only extends so far down (at least in historically normal periods) the credit ladder.

There is no fixed unchanging definition of "prime." When the economy is good and prosperity is high, we's all prime. When things are otherwise, a very great many of us are subprime.

In even other words, "subprime" is like "recession." A recession is a cruddy economy, but it's still an economy.

So,

In an evironment where "all" the collateral is overvalued and falling, any lending based upon that, no matter the quality of the borrower, is inherently more risky, i.e. sub prime.

For example: margin rates in a rising stock market are inherently to high (as the rising assets offsets any other risk), but in a falling market, margin rates if they are anywhere near where they were on the way up are no where near priced right.

After the dot.com bubble burst, ALL stock buyers on margin were a larger risk, not so much for who they were, but moreso on "when" (in which market) they chose to be margin borrowers.

Soooo, in this market, at these rates, with these lending standards, we are all sub prime.

Is this a accurate clif notes version?

The shame of it is, the reporters for the NY Times, Washington Post, CNBC, etc. probably won't read Tanta's post, and just as sadly, may not understand if they did (it is sooooo long afterall).

Einhorn's comments about subprime struck a chord w/ me the other day because I've long noted that the phrase subprime is shorthand for "somebody else," for months now.

But along with allowing people to divorce themselves from the situation, it also serves the purposes of the banks to help convince people who don't see themselves as subprime, but are nonetheless in trouble, that they are unique and somehow to blame for their situation (which of course, they are, but man would they love someone to say their not).

Anyway, if you started to say that "prime" borrowers are defaulting at record rates, then all those prime borrowers who are struggling to keep up payments have an easier time throwing in the towel, because they don't have to blame themselves, they can blame circumstances, you know, "everybody's doing it." Removing the stigma of default would be very bad for the finance industry.

PrudentBear.com puts up an observational quote each day, and my favorite one is attributed to John Maynard Keynes. I don't have it verbatim at the moment, but the gist of it is that bankers don't need to avoid losses, they just need to avoid unique losses that separate them from the other bankers.

The same is true for homeowners and everyone else. When you can say you were dealt a bad hand or had bad timing or the world turned against you, it's a lot easier to accept a bad outcome then when you have to blame yourself.

The way I see it is there weren't "subprime loans". There were subprime borrowers and there were toxic loans - ARMs with or without teaser rates, Option ARMS, etc.

As long as the market doesn't go up, almost everyone with a toxic loan is doomed, even if nothing bad happens beyond the actual terms of the loan they signed up for. A high FICO score sin't going to help them.

And in a falling market, people with non-toxic loans are more vulnerable to anything that adds expenses or subtracts income.

I bought in 11/2005 with 80/15 loans at 6 and 7 % fixed. I'd prolly have to bring money to the table to sell now. I have some because I have a 401(k), so I could get out from under if I had to. But it would be very painful...and it's just gonna get worse for several years at least.

Interestingly enough, I had great income, great FICO and the 401k. I bought at about 2.6x of my income. But I'm sure I'd never get a deal today like I got on that 2nd for 7% - I now realize that nobody should be loaning a 2nd lien to 95% CLTV at only 1% spread from a first. That was insanity, so I guess I am subprime after all.

--
C is for Conflicts of interests.

Crinimal financial "Gangs of New York" specialize in them. The only reason that they can operate is that they control the govt.

Hence, C is for Criminals in-charge. That is the real story of today's America.

Jas

Cal - what a great article! Yes, that is the problem right there. That's a high-risk loan for some time, because one unexpected event or economic setback or significant HOA assessment, and the guy is sunk. He cannot save.

He'd be well advised to get a roommate and bank the rent, because otherwise he's heading for likely problems.

And I have a huge, huge question about why someone living at home at that income even for a year doesn't have more money in the bank? I'd be scared to give this guy a loan. If he had a few months of reserves, it would be doable. But he hasn't shown the capacity to live on the disposable income he's going to have after closing, and he hasn't shown the ability to pay rent. What he has shown is the ability to spend most of the income he's getting. Maybe he saved some of it for a car downpayment. Maybe not. Why does this young man have to buy now rather than after saving a few months of P&I reserves?

REBanker,
I wonder if the IRS will let him refinance the interest and penalties?

According to Cookie Monster
C is for Cookie.

I guess wall st will have to rewrite a classic sesame st song.