The reason the subprime lending market is in trouble is that most of those people could just barely afford the payments when gas was $2.00 a gallon. $3. a gallon gas has pushed many of them over the edge. So what the real problem is again, like in the Carter years, is gas prices that are draining liquidity from the economy. Eventually, $3. a gallon gas in the US is going to cause many of the same problems we had in 1979.
Thanks Exxon! Your outright greed has put a dagger through the heart of an economy that was otherwise in good shape.
Gosh Charles, you're starting to sound like JoeSpareBedroom now, blaming people's misery on someone else, not their own actions. The reason the subprime lending market is in trouble is because they started breaking the industry rules regarding lending to people who couldn't afford those payments.
The root problem is the failure of lenders to protect themselves. They're enthusiastically loaning 105% (or more) of value during a time of sharp price increases (not necessarily unsustainable but what goes up often comes down) and qualifying lenders at the come-on rate, ignoring the effect of the inevitable loan rate increases down the road. You go into a closing and sign forty pounds of ridiculous documents that give the lender NO protection whatever since the loan is for more than they can reasonably expect to recover on the house if you default.
For their part, borrowers often buy the house they want, optioning it up (granite countertops, anyone?), stopping at the max the lender says they'll qualify for, rather than buying to meet their needs, leaving them with a loan that's untenable in the event of a market hiccough.
Builders, in turn, increase their median house size to meet some turbo-charged demand and option them up. That maximizes their per-house profit (sort of like GM building ever-bigger SUVs). The builders aren't at fault quite the way the lenders and borrowers are but they, the the Realty sharks do like to whip up a frenzy of consumer "need" with the seemingly endless Parade of Homes promotions (Detroit's own advertising helped dig their hole, too).
The role of the Realty shark, of course, is to maximise transaction price to maximize commission. I'm sure their hard sell helps to move the particle board.
Surprise! The bubble bursts (or the market softens), rates rise, energy prices drive inflation or maybe some economic contraction (but the median wage is falling) and suddenly everybody's screaming for relief. The greater the leverage employed, the further we fall.
There's a book I read a while back, called "Funny Money," by Mark Singer, which described the destruction of a few very big banks by very bad loans and really bad loan practices (fraud, really) into an energy-industry bubble, circa 1980. Many elements are the same and the book was very entertaining.
When we bought our first house (during a time of fairly high interest rates, twenty-some years ago), we had to put 10% down, that is to say the bank only loaned us 90% of the house price, AND pay all closing costs, so our up-front cash was over 10% (I think it was close to 15%). Even 10% isn't a lot of protection for the lender but it's something.
Today it's very common for a borrower to put down absolutely nothing, the seller pays all closing costs and the bank loans 100%, often with new-home builder's incentives of some sort involved. Neighbors just sold their house that way (sellers had $goose-egg at close). They agreed to pay all the closing costs, which reduced their net proceeds but they'd held the house for 21 years and this wasn't burdensome. And the lender went zero-down.
The problem goes beyond housing, of course, with lenders writing nothing-down car loans that include an extra chunk of cash to take care of the fact that the buyer's upside-down on his trade.
There is another dynamic here, too. The mortgage lender makes the loan to a person who is ill-equipped to pay it back in the first place. Also, a good deal of these are variable mortgages, another way for a sub-prime borrower to buy more house than (s)he can really afford.
Then, the company that cut the mortgage sells it. They recoup their money. No problem there, but what is happening more and more is that the institution purchasing the mortgage often borrows *more* money against it, and is now in debt themselves. When the homeowner runs into trouble, not only is the original amount of the mortgage at risk, but the money the current mortgage holder borrowed against it is at risk as well. So now there are *TWO* entities that may not be able to meet their obligations. Multiply this by one or two MORE mortgage 'buyers', and we have the mess that we have now.
In part, Charles is correct. These people usually have a tight budget to begin with, and when the price of gas goes up it becomes harder to fuel their SUVs. Also, the price of food goes up when the price of gas goes up (remember my little treatise on lettuce?) and utility bills go up as well.
Especially if the homeowner is reliant on oil, gas or electric heat.
There is no doubt the price of gasoline affect all other aspects of living. However everyone must learn to make sacrifices and live within their means. You must make allowances for prices rising, they always have. In the case of the mortgage lenders, there is plenty of blame to go around but it always comes back to the individual and the one lending the money.
Some people have more babies than they should. They cry they can't feed or clothe them. Who's at fault?? God?? I have no sympathy for those who get in over their heads before, present or later. I'd make a good banker. Stupid deserves to be screwed. Mark_
My brother signed one of those contracts. He understood well what he signed, but $3.00 a gal gas cost him two ways. I stopped living there, which cost him rent, and he still had to drive to Chicago to work. He is once again on the cutting edge of societal evolution, he lost the house.
SUV's? Most of the subprimers around here are driving Toyota Corollas. . . . The sudden spike of gas is slowly starting to permeate the entire economy. Subprime loans are just one facet.
Well, I have read all of the good posts here, but all seem to miss an underlying problem affecting the entire economy - Generation of National Wealth.
Dr. Adam Smith wrote "The Wealth of Nations" several years ago, in which he defined the mechanism of generating National Wealth in a Capitalist Government. Basically, only manufacturing creates wealth. There is no such thing as a Service Based Economy - they only move money around, making some people richer and others poorer. Of course, the government then prints more paper, making the existing paper worth less (as is happening with the US dollar now).
The problem became horrendous when the Clinton administration gave China total access to every American market without restrictions, yet they have restrictions on what we can export to China. I spent month in China last year. They are manufacturing everything - much of it not even available inside China. GM and others even have plants in China making autos.
As for Gasoline prices here - look at the bottom line - the profits of the oil companies! We learned a few years ago from a local news survey that the oil companies in Florida have developed maps of their service areas, according to the affluency of the neighborhoods. They then raised the price in the most affluent neighborhoods. Ever wonder why the same gas is priced widely different in the same town in the same company owned stations?
There's a gasoline pipeline in California that transports fuel between the L.A. area and San Diego. In San Diego, the fuel is loaded onto tankers and shipped overland to Arizona. There the price of fuel is lower than in San Diego by 25 cents a gallon.
Figure that one out.
My daughter lives in Texas. The same disparity between San Diego and Texas exists as does SD and Az.
I have a debt from 9 years ago that was charged off by the original debtholder.
Then a collection agency bought it. Every time I think of offering them a payoff, something happens (I get laid off, something needs repairing, etc...)
They started calling me last month or so....every day! I got on the phone with the agant and asked how old this debt was. He told me it was 'newer' than it actually was. Then I asked him why he supposed the bank charged it off. Then I asked him why *HE* bought it, after the bank charged it off! So, I told him, if I didn't pay the original debtholder off when they held it, why in HELL am I going to pay a charged-off debt?! It's no longer on my credit history, so what do I care? Then I asked him how he is making a living buying bad debt. (He told me that, actually, 75% of the people he calls pay it off in a LUMP SUM! I said, Why not just pay the debt in the first place?!?!?! I don't get it)
I also told him I had a JC Penney insurance policy on the debt, and that it was supposed to pay in case I got laid off, which I did. I contaced JC Penney when I was laid off, and they never paid! So, I told him to contact JC Penney about this and get them to pay what they should have paid, and then call me after that.
Not that I don't *want* to pay it, just every time I think of paying it, something happens. Guess I'd better just forget about it! ;)
I don't *want* you to worry about anything. I want the SUV owners to sell their behemouths and buy something more economical if they can't afford it.
Let's face it: if the price of gas goes up 10 cents, it's going to affect me on my 'paper route', but I get 27 MPG. It's REALLY going to affect the guy who's doing it in a Pathfinder, or the girl who has a full-sized GMC SUV!
No sympathy. "We need an SUV for safety". No, drive more safely. We ferried our kids around in an 8 year old Corolla and a 12 year old Caprice, but paid the mortgage until we could afford a newer car (Caravan). But even the Caravan averaged about 26 MPG.
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