gee tanta. you types a lot.

Houston, I think we've found the problem.

I believe Tanta has arrived at a very good approximation of the underlying problem. Nothing like having to write a check for thousands or tens of thousands to focus the mind. More than the actual act of writing, the ever present knowledge that this amount will be whisked out of your account in a day or two makes it all the more corporeal.

This is one of the most thought provoking posts that I've read here (and I do read them all). An excellent analysis! Thanks!

Sebastian,It was a pleasure doing business with someone like you! someone who recognizes that getting a mortgage shouldn't be any harder than ordering a Pizza! God bless you and all those like you!YOU are nice people too!

Of course lenders can make things absurdly difficult too. A friend of mine had a second mortgage loan from Northern Trust with a $60,000 limit. He is worth about 15 million net. After getting the loan by giving NT all his tax returns for the last three years, he thought that was the end of it. Oh no. Three years later NT came back and told him he would have to produce all his tax returns for the next three years before they could renew the loan. Needless to say, he told them he didn't need their "f*ckin' money and paid off the balance.

Tanta is Totally wrong on what's at risk

I'm working on a post that defines the risk for every demographic

it starts with

Newly married man...
If I don't sign this stinkin mortgage, my wife will think i'm a loser and i'll never get L**D

'i'll never get L**D'---is how each demographic description will end

The last time I went through a refi on my place, I foolishly used my current lender (Wells Fargo), figuring that they had been good with handling the loan, and would do good work. WRONG!!! They took months to close the loan, mostly since they mishandled a subordination agreement.

However, the closing was a jewel. I arrived at the given time, and the closer didn't yet have the papers. They were remote printed from a another office, and of course were WRONG again!! (The fourth try about a week later got it right). They then proceeded to F*ck up the escrows, failing to make both insurance and tax payments.

So I agree that reading the docs is important, but our fast and easy world of lending sometimes doesn't permit it!

Well, I was talking about "perception of risk."

Of course "tax savings" has something to do with the benefit of homeownership/debt consolidation refinance.

So was I talking about risk perception (and exposure). The imprimatur of government weighing in on a situation alters peoples' perception of risk exposure. Think flood insurance and the implicit GSE guarantees.

I rant periodically about the mindset that sees loan standards or processing requirements as being well-designed only if they meet the "needs" of people who don't need loans. That's stupid.

Same friend had his revenge, however. When he was thinking of refinancing, he went to the same woman at NT. She told him, in the course of the conversation, that NT's mortgage rates "are a bit higher than other banks." !!! He didn't waste a minute in replying "Well then I'd have to be very very stupid to use you, wouldn't I?"

banker jumps from 27 stories

Facing jail, banker leaps to death : More Business : The Rocky Mountain News

Lost in Translation:

Bookmark that.

If this is concluded to be a suicide, it will disprove revisionist claims that bankers jumping out of windows was an urban legend of these hard times, as it supposedly was in 1929.

Great topic. I've been really intrigued by the perception of risk from the lenders point of view over the several years. Just think of how different the decision making process is for someone who started underwriting in 2002 as opposed to someone who started in 1992. Younger UWs I talk to don't seem to have a sense of how leveraged a transaction a home purchase is.

My last (and quickest, least intrusive) homebuying experience ...
I'm beginning to believe that not only am I one of the luckiest people of middle-income in America, but the only one.

Sebastian

I'm there also. But I think I'm just lucky. And lucky that empty nesting came along at the right time to downsize and lose less going forward.

I wasn't in the US when the RE boom was in full fling, but to me the number one reason why some people took unreasonable mortgages was primarily the prior years' appreciation and their progression into the future. I don't think the "hassle effect" would have been a major deterrent. - Just my view.

Let's also ask us the question if the expansion of ownership in the US is not a good thing in general as owners take better care than tenants. This is certainly not only an effect of the last RE boom, but a longer trend since the 1950s. And it's good. At the beginning of the next upswing in RE we'll also have more ownership than we had at the beginning of the last one in ~1993. So, in my view it's more good than bad.

O-Joe

Wow. Excellent post, Tanta. And I completely agree that people respond to their emotional perception of risk rather than the rational or mathematical explanation.

As another example: rationally speaking, surgery is deliberate, planned physical violence, albeit with the purpose of helping you. But people perceive the risks of getting, say a nose job, as minimal if the surgery center they go to looks like a day spa, has soothing music, and accepts all major credit cards.

How effectively you can erase people's intrinsic emotional revulsion to having their body cut and re-arranged makes much more of a difference to whether a patient will agree to surgery than the legally mandated informed consent process.

anyway, the point i was vaguely trying to make is that i suspect that even for borrowers who read all the disclosure, the risk involved seems very dry and abstract...people make very different decisions about the same risk depending on how it is presented to them and how vividly they can imagine the consequences.

"Insurance is an interesting comparison.

Has filing an insurance claim gotten harder or easier over the last decade? Is less paperwork required? Do you get the check faster, with fewer conditions? Are you less likely to have your claim amount reduced because of some internal calculation of what is "reasonable" by the insurer that doesn't match your reality?

Insurers know that making it hard for people to make successful claims drives down frivolous claims (and of course non-frivolous ones too).

They would be startled by the idea that making it easier for folks to take their money is a great business model.
Tanta "

Hideous analogy. Banksters expect to get paid back. Insurers are pulling the money paid out, out of amortization portfolios.

Cheers,

Tanta,

I think there's another aspect of the too-easy process that influenced behavior: not for everyone, but for a large group.

If they put out a plate of cookies in a park, with a jar for people to put in their quarter, with no one around, and if that plate of cookies belongs to a big corporation rather than a charity bake sale; then what do you think would happen?

Too many people thought they'd never have to put the quarter in the jar.

MOM,

Yes, I've argued for a while now that without any skin in the game, people will readily gamble with OPM.

Cheers,

dryfly,

LOL

Cheers,

Tanta - I enjoyed your article this morning, as I do most every day with the content provided by this blog (for free, no less). Since I haven't posted before, I thought it important to make clear I read the blog a lot and benefit from the articles and discussions here.

However, today you really missed the point. When the final chapter is written on the currently unfolding crisis, it won't say, "oh...if only we had gone back to the future and let bankers administer more proctology exams, everything would have been peachy". It will probably read more like, "we need to improve our administration of proctology exams to the bankers and professional investors."

Yes, your prescription for a return to the good old days might make borrower/exploiters think twice, but what about the other 90% of us? Your approach will ultimately just slow the velocity of money and hurt everyone in the process. A classic "kill-the-patient-with-the-cure" kind of approach.

Besides, your argument supports the idea that borrowers are mainly responsible for where we are today. While I certainly agree that we aren't introspective enough about the "rookie" speculator's role blowing stock, real estate, and other bubbles, you've missed the mark here.

For every dollar of capital that ultimately gets destroyed by a borrower abandoning their responsibility to repay a loan, I'll bet you there will be $10 (or more) lost by the "professionals" who supposedly understand risk. The guy who lied on his loan did not, after all, write, market or sell the CDO/SIV/Other Structured Product. She certainly didn't lever it 10x - 30x (or more) to generate improved investment return. And I doubt that any serious-minded person believes the original loan was always generated as a result of borrower frauds and misrepresentations exclusively.

This happened because bankers, investment bankers and other professionals got greedy. They over-levered and divorced servicing the loans on one's own balance sheets from selling the loans for a fee. The rationale appears to be, "it's not on my balance sheet so it's not my problem".

Penalizing the overwhelming majority of users of loaned capital because a minority of exploitive borrowers joined together with a collection of explotive financiers isn't a solution. It's a new problem. It's why legislating by anecdote is a bad idea.

Were the financial professionals who aided and abetted this behavior a minority? Probably. But we don't know yet, do we? I mean, there's a lot of time and effort being spent by the banking world right now to frustrate transparency. We already know what percent of borrowers are subprime. When all is said and done, I guess we will see what fraction of bank and quasi-bank lending institutions promoted this mess and levered it into a crisis.

Subprime defaults are not the cause of the current mess... they are an (early) symptom. Bankers and other financial professionals are at the heart of

I get it. If you require buyers to put some of their own money into the deal, they will pay more attention to what they are signing.

Entrepreneur,

Well said. However, were it not for the fact that many of the big financial companies owners of the gov't created FR banking cartel, much of the recent shennanigans could not have occurred.

Cheers,

tanta, where were the regulators when all this transpired. We have a lot of them that are supposed to be monitoring the banks, thrifts and the financial instruments - FDIC, OTS, OCC, SEC, Federal Reserve and others. Why are they even in existence if this huge rush to extract fees could go unnoticed? I haven't heard of a single firing so how can they be trusted to correct any of it.

and you can bet the entire operation could never have gained even 1/2 of the traction if it weren't for those Investment grade ratings, including AAA. If they had been rated as junk as they ultimately will be the charade would have never made it off the first floor.

energyecon - not sure how you derived the idea that I consider the current situation "baseline". Perhaps I'm just a poor writer.

My point is the focus should be on the pros. That's where the train derailed here and that's where the real capital will be destroyed.

I don't take issue with Tanta's points. I just think the overall focus was misdirected. Bad subprime loans isn't really the large problem here. It's overextended risk by clever professionals who are playing games with balance sheets with the intent of hiding bad business. If they know their jobs well, they knew it was bad business when they booked it. I think they were just hoping to always find one more sucker who'd take it off their hands...

Misean - this is a hard admission, but I fear you are exactly correct.

correct spelling is Rorschach

It's irrational because the probability of the reward was less than the probability of disaster. Some of these people lost their primary residence (on which they had years of spotless payment histories). I don't care how many episodes of flip this house you watch it's not low risk. The high HPA of the last few years is an aberration that made it appear that way.

Tanta wrote: "you want to make the ludicrous claim that the only kind of "pain" is physical pain, or that "pain" does not routinely have an understood idiomatic English usage as a synonym for "hard effort" or "unpleasantness.""

I've made no such claim: an interesting misreading.

Tanta wrote: "The belief that sweatless learning is possible is ruining a lot of our schools and universities."

Perhaps the problem is (more) that students see themselves as all above-average and therefore demand no-sweat curricula?

Tanta wrote: "... a lot of forces ... have converged to make people think the process of homebuying or refinancing should be sweatless."

No matter how much you "Tanta-ize" the mortgage process, serial flippers and others convinced of imminent rewards would not be discouraged.

Also, to be fair to lenders and others that bought billions of (now worthless) paper, what painful process would you put them thru to ensure that "a risk-free 12% forever" is not possible?

Can we blame consumers for being lazy when lenders also paid little or no attention to risk? In other words, the problem is more complicated and endemic than lazy borrowers not bothering to read the fine print.

Great stuff. Thanks.

People also buy lottery tickets without thinking

some do, not this kid

i fantasize,fantasize, fantasize...

i stretch that five dollar ticket way past the point of , say, a $8 movie ticket ... and come up with some pretty fun stuff

Tanta wrote: "Earnest money weeds out recreational and impulse buyers, and also forces serious buyers to pay attention to the process.

Virtually everything was being done with borrowed money in the anticipation that the (highly-leveraged) real estate would quickly appreciate and thereby provide more "free" manna that could then be "earnestly" applied, re-applied and multiplied.

I think we are in basic agreement. My point, though, is that the idea of "earnest" money is an oxymoron when money can be conjured up by fiat. Throwing "earnest" money into the ring is easy when you are playing Monopoly.

Lenders handed billions to hedge funds levered 50:1, who bought and resold highly leveraged CDOs that supplied endless capital for similarly leveraged home buyers.

In a culture of "riskless" double-digit returns, "earnest" had a quaint ring to it. And as long as borrowers believe(d) the game is riskless, "earnest" has no meaning, except as something else borrowed.

Great stuff. Thanks.

Tanta,

Excellent post. And being a cheapie (as in not paying up to buy the NBER article) I am going on guesswork, but I am pretty certain the research focused on "activity" as end state, not process.

Although it wasn't for a refi or a purchase, an anecdote that proves your point re borrowers not reading documentation: my father asked his bank to provide him with the agreement for a home equity loan he was considering. This caused considerable tooth-gnashing and consternation, and he was told that NO ONE EVER BEFORE HAD ASKED TO SEE THE AGREEMENT. He had to get pretty insistent to get them to produce it.

He found the document to be so one-sided that he decided not to proceed.

Thanks. Good point that I had not considered myself about the credit boom the past 7 years until recently.

I "recapitalized" a company I co-own to buy out a partner and the loan process was not easy. It tooks many thousands of dollars in attorney fees to review; multiple iterations; negotiations on a dozen or more points of the "standard" docs. There are coverage ratios, means by which the lender can force my hand on certain operational matters, etc., etc.

There were representations and warranties to be made; there were very serious consequences for improper disclosure, or making "side agreements," there were audited financials; and requirements to submit annual budgets in advance; quarterly conference calls; etc.

I am happy with the loan, of course, or I wouldn't have done the deal. But it was very intrusive and I can assure you that nothing was treated as "legalese" be glazed over, since it was very clear by the process that I could lose a significant portion of my networth and perhaps my business if I made a dumb decision about that loan.

Yes, efficiency would suffer, home ownership would go down, and transaction costs and the due diligence would kill a lot more deals. But a lot of deal should have been killed and a lot of people now suffering the pain of (gasp!) losing a house they never really could afford, would have been spared that experience if the process had not become so easy.

It's Saturday, the Steel Toed Bunny Slippers are out being polished and sharpened.

Anyway, there is one side to faster and easier loan processes that I can agree with. A whole lot of the questions they used ask for and things they made you sign were not about the loan but about data collection. Information has value and they were getting some free material. Last refi I did was fast(ish) and easy(ish) and they still wanted me to sign a BLANK UNDATED authorization for release of tax records.

It is the attempts to make the process of financing or refinancing a home quick and "painless" that is at the root of the problem.

First thing this reminded me of was the stupid notion of "taking the stigma out of welfare".

"Promises to lend against assets transferred from a bank to the new fund, known as the Master Liquidity Enhancement Conduit, would qualify as a committment needing less capital, the Fed said in a letter last week to Citigroup."

Can I be angry now?

Robert Coté, nice find. Now only it would be interesting to discover just how this contraption is going to function and how deep this hole can get. This has PPT "NO LOSSES EVER" written all over it. Commit 1/10 of the otherwise required capital? What are the obligations of the institutions trading in toxic crap? Hell, why would ANY CDOs be kept by ANY institution, EVER. Just dump 'em. Start creating MORE with a bottomless pit target customer.

Maybe they can re-securitize the derivatives with FULL BACKING of the US Government into SubPrime Treasury BONDS and make money on the fees? Without knowing any details I am guessing this will cost taxpayers north of $500 Billion.

"Tanta Ranta" - That one definitely has to go into the CR lexicon ...

Anyway, that said, I have a fairly dated copy of Microsoft works on my computer and I came upon this paragraph on its mortgage spreadsheet template:

Qualifying
Mortgage companies usually qualify you for monthly payments no higher than the lesser of the two results. By default, this worksheet assumes a housing cost ratio of 0.28 and a total debt service ratio of 0.36, which are often-used standards for conventional mortgages.

No news to anyone here I realize, but I wonder if that paragraph survived the 2005 release.

(PS Tanta, in 1989 I remember raging at our loan officer for making us provide a written explanation for a six year old, $15 late fee on that appeared on our credit report.)

Tanta--

just heard a blurb for NPR's Morning Edition next week which promised a story on HOA rules against hanging laundry out to dry. Thought you'd like to keep an ear out for it...

Also, in response to one of your comments above--my daughter actually is the cutest thing ever born

And what's wrong with "data collection" (as long as it isn't stored with personally identifying information that puts you at risk)?

Tell that to the 37 thousand odd people who found some of the their mortgage information on the Countrywide REO website for several hours last Monday morning. And week before the dumpster full of mortgage docs. And...

And thanks for a lovely illustration of my point: even well-informed people like you will sign a doc with blanks in it.

For the record, I didn't sign. I know why they wanted that blank 4506 in the folder but they were perfectly happy to close just the same. 18% LTVs have that effect on lenders.

barely-

the hazards are clear, move onto balance sheets, properly reserve, tighter credit, severe ramifications to growth.

liquidation, distressed values, margin calls, tighter credit, severe ramifications for growth, potential for someone to break the buck

both choices, deflationary.

on another note, fleck-

"The prestidigitation that minimizes inflation
Look at last Wednesday's report on third-quarter gross domestic product. Our government would have us believe that inflation was running at only 0.8%, which allowed the growth of real GDP to be 3.9%. If the government had calculated the annualized rate of inflation to be 3.9% (probably a low estimate), then real GDP growth would have been zero. One number cannot be incorrect without the other number being incorrect."

The Fed digs us a deeper hole - MSN Money

Tanta,

I think you're on to something. Part of the reason I took taking on a mortgage seriously was having to write checks (very painful) -- escrow, application and especially down payment. I think, though, that another part of the reason for not paying attention to the words on the paper is that we're hardwired for sociability and we tend to believe the mortgage broker, the ads, the pressure to do what everyone else seems to be doing (but maybe that's just part of the pleasure).

Different topic: what do you think of what I think is the crazy statement being put out by the mortgage bankers that permitting cramdown of residential mortgages in bankruptcy would raise rates 2%? Do you have the energy to debunk that? Myself, I find it hard to believe that the inability to reduce the security interest to market value increases recoveries on defaulted loans enough to reduce rates on all loans by 2%....

Allen C,

You were good right up until "...and the dollar will recover". The end is nigh for the dollar. Not today, not tomorrow, but the epitaph is already written.

"I am reliably informed that RE transactions still take 45-60 days, even though the loan approval now takes 24 hours. Why did we need to speed up that part of the process so much? Could it be that once the borrower is approved for financing, there's little incentive to spend the 45 days prior to closing having an attorney review your sales contract and advising you about that "cash back" shit, or talking to someone who understands money about the effect of financing closing costs or taking out a premium interest rate?"

The problem I have with your presentation is that no one is forcing the borrower to sign in 3 seconds. All this 24 hour approval stuff is just hooey anyway. The process still takes 10 to 25 business days unless you have a real emergency situation that requires a real fast turnaround.

The borrower can still take their time and get advice from their CPA, Lawyer, Financial planner, Union Agent and their Pastor.

The move to fast tracking the mortgage process from the old loan committee to a non-biased automated system has really nothing to do with whether one takes it seriously or not. I do think people in general are less fearful of getting a loan and can be less educated about the multitude of programs available now. That's why I think the borrower should receive a more visual "illustration" of how their loan will work, similar to what we do in the insurance biz.

risk, you're probably right. But, I would like to know a lot more about MLEC. Now that the Fed is onboard it's beginning to look a lot like a well-orchestrated panic-cobbled PPT conspiracy. They are probably genuinely afraid of the frankenstein they created and are busy trying to hide it in a cage. I see a bailout in our future, of course not borrowers, no matter how hard they try to convince otherwise. It never had anything to do with saving them. They were shown the plank a long time ago. This is about bailing the lenders. Taxpayers take it in the a$$.

I can't get past the fundamental reality of how much wealth America STILL has AND we dominate key industries.

True, but irrelevant.

Long time reader, first time commentor...
I am a 15 year veteran as a mortgage 'originator' and have learned SO MUCH from CR and Tanta-thank you! All of you that comment on this blog are terrific, BTW.
I had to comment on this Ranta-I live in Charlotte, NC and remember BofA advertising "80% Less Paperwork" on billboards and Charlotte Observer ads. About sums it up...

I think it's a dynamic feedback situation, and it's not possible to say which came first, nor is it particularly important to do so.

dynamic feedback = chicken/egg

"Harry M. Markowitz won the Nobel Prize in economics as the father of "modern portfolio theory," the idea that people shouldn't put all of their eggs in one basket, but should diversify their investments. However, when it came to his own retirement investments, Markowitz practiced only a rudimentary version of what he preached. He split most of his money down the middle, put half in a stock fund and the other half in a conservative, low-interest investment. "In retrospect, it would have been better to have been more in stocks when I was younger," the 77-year-old economist acknowledged.

At least Markowitz invested more wisely than some of his fellow Nobelists. Several of them concede that they have significant portions of their nest eggs in money market accounts, some of the lowest-returning investment vehicles available.
"I know it's utterly stupid," confessed George A. Akerlof, a UC Berkeley professor and 2001 winner of the Nobel Prize in economics."

Nice post, however, anyone who is currently thinking that diversification with the majority of their holdings in the stock, is going to protect them in the next several years is going to be in for a rude surprise.