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Quote from the article: "The business proved extremely profitable for the banks, which earned a fee for each mortgage they sold on. They urged mortgage brokers

by indie01 19y ago

Quote from the article: "The business proved extremely profitable for the banks, which earned a fee for each mortgage they sold on. They urged mortgage brokers to sell more and more of these mortgages." This is a very interesting topic, one I've thought about a lot. In attempting to understand the cause, I've forumulated some hypotheses about how and why the sub-prime 'crisis' came to be. But first some background. After earning my Master's ('04), I was having a very difficult time finding employment. I thought what any lifetime academic tends to think -- maybe more education will help? So I enrolled in and aced just over 3/4 of this "ProSchool" course for Real Estate Brokerage. In it, I learned all about how Realtors and their mortgage broker cronies operate. Suffice it to say that I also came to discover that my personal ethics possess integrity > the ethics of most people in the real estate industry, which is why I decided to not pursue that path. Sub-prime mortgages are to the real estate industry what lemons are to the auto industry. And while there are laws protecting people from rapacious salespersons in the automobile industry, there aren't really any such protections for homebuyers. It's probably important to note that I don't really consider "mounds of paperwork" a means of protection, especially when buyers don't understand what they're getting into for the long-term; it doesn't matter how many pieces of paper they're told to sign -- those pieces of paper are usually protecting the interests of real estate and broker-finance persons. The root cause, the motivations of realtors, brokers and car salespersons are the same: commissions and fees earned, amounts directly proportional to amount exploited from customer. Think about it like. . . commissions and fees are beneficial to people 'from the top down' in a type of order-of-operations' that's similar to the mathematical order-of-operations. Who gets paid and when, according to this model: 1. Financial Institutions (banks control real estate brokers; as the article states, banks pay themselves first); 2. Brokers (brokers control agents; brokers pay themselves first and then pay agents); 3. Agents (agents or specifically real-estate agents conspire among themselves to artificially inflate housing and property values. There's no such thing as a real estate agent who rents!) [P.S. I think they are evil root cause of insane rents as well]; 4. Property Managers or Landlords (both can be controlled by agents, managers pay themselves first, by rules have no qualms about repossession or eviction). Obviously, the entities in the list all get paid their fees or commissions immediately, or at least within a couple of months of the occurance of a sale or the sub-prime mortgage. Or even a regular mortgage. Fast-forward to the time of the ARM-adjustment, and the mortgagee can't pay the significant increase. Poor dumb customers? Not always. . . isn't it job of the fee/commission earning realtor or broker or finance person to explain exactly to the customer what he or she is potentially getting into? Yes, but often these people gloss over the details. This is why I think the lemon analogy makes a lot of sense. Who in their right mind would pay full-price for a vehicle they know is going to be inoperable within a year or two? I think what this essentially boils down to is people in the banking and real estate industries transferring their risk to the people least able to handle it and then not being legally accountable for their ethics.

mynameishere 19y ago
Who in their right mind would pay full-price for a vehicle they know is going to be inoperable within a year or two? Someone who thinks that they can sell it to a bigger sucker in less than a year or two? ... Someone's holding the bag on these mortgages, and it isn't the home"owner" usually, who probably went from zero to zero, or from bankruptcy to bankruptcy. Investors who believed the credit agencies are the ones who had something to lose. Bad bets happen all the time in the marketplace.
- run4yourlives 19y ago
  >Someone who thinks that they can sell it to a bigger sucker That's usually where the ethics thing comes into play for some of us.
- timr 19y ago
  If I may over-generalize, yours is the "city" opinion, and the OP is the "rural" opinion. There were a lot more risky loans made for cynical profit in the cities, but in rural areas, you tend to hear more sad stories about destitute grandmothers and orphans. I feel badly for the working people who are going to be ruined by the sub-prime crash. Yes, they should have known better than to take such stupid loans, but the OP's analogy to a used-car salesman is a good one: if it weren't for consumer protection laws, there would be a lot more people who get screwed by unethical car scams. The real-estate "industry" needs more consumer protection laws. That said, I'm severely annoyed that the smug, get-rich-quick mentality that has been promoted by agents and "investors" in the cities might be rewarded with a government bailout. For the last three years, I've watched people in Seattle (among other places), go insane with speculative greed. I've been told that real-estate never declines in value, that renters are of a lower caste, and that anyone who didn't buy into the bubble would be priced out of the market forever (a statement which is transparently mathematically ridiculous). The number of "talking haircuts" driving around in leased Mercedes and BMWs has skyrocketed; the perception of wealth is at an all-time high. Meanwhile, landlords are evicting low-income tenants from apartments (to capitalize on the bubble with sketchy condo conversions), raising rents, and using market forces to otherwise screw people who can't stomach the idea of paying 3-4 times as much to "own" a property as to rent one. As far as I'm concerned, our society will be better off if this latter class of people go bankrupt -- if not to jail. But I still feel for the grandmothers and orphans.

by indie01 19y ago

mynameishere 19y ago

Who in their right mind would pay full-price for a vehicle they know is going to be inoperable within a year or two? Someone who thinks that they can sell it to a bigger sucker in less than a year or two? ... Someone's holding the bag on these mortgages, and it isn't the home"owner" usually, who probably went from zero to zero, or from bankruptcy to bankruptcy. Investors who believed the credit agencies are the ones who had something to lose. Bad bets happen all the time in the marketplace.

run4yourlives 19y ago
>Someone who thinks that they can sell it to a bigger sucker That's usually where the ethics thing comes into play for some of us.
timr 19y ago
If I may over-generalize, yours is the "city" opinion, and the OP is the "rural" opinion. There were a lot more risky loans made for cynical profit in the cities, but in rural areas, you tend to hear more sad stories about destitute grandmothers and orphans. I feel badly for the working people who are going to be ruined by the sub-prime crash. Yes, they should have known better than to take such stupid loans, but the OP's analogy to a used-car salesman is a good one: if it weren't for consumer protection laws, there would be a lot more people who get screwed by unethical car scams. The real-estate "industry" needs more consumer protection laws. That said, I'm severely annoyed that the smug, get-rich-quick mentality that has been promoted by agents and "investors" in the cities might be rewarded with a government bailout. For the last three years, I've watched people in Seattle (among other places), go insane with speculative greed. I've been told that real-estate never declines in value, that renters are of a lower caste, and that anyone who didn't buy into the bubble would be priced out of the market forever (a statement which is transparently mathematically ridiculous). The number of "talking haircuts" driving around in leased Mercedes and BMWs has skyrocketed; the perception of wealth is at an all-time high. Meanwhile, landlords are evicting low-income tenants from apartments (to capitalize on the bubble with sketchy condo conversions), raising rents, and using market forces to otherwise screw people who can't stomach the idea of paying 3-4 times as much to "own" a property as to rent one. As far as I'm concerned, our society will be better off if this latter class of people go bankrupt -- if not to jail. But I still feel for the grandmothers and orphans.