Thursday, May 28, 2009

This Problem's Going To Be With Us For a While

From the NY Times today:

About 12.07 percent of all mortgages were delinquent or in foreclosure, up from 11.93 percent at the end of 2008.

Housing specialists said the number of foreclosures would probably keep rising as more people lose their jobs or are forced to trade full-time work for part-time. Nearly six million jobs have been lost since the recession began a year and a half ago, and many economists expect the unemployment rate to rise to 10 percent from its current 8.9 percent.

“More than anything else, this points to the impact of the recession and drops in employment on mortgage defaults,” Jay Brinkmann, chief economist of the Mortgage Bankers Association, said in a statement. “It does not appear the level of mortgage defaults will begin to fall until after the employment situation begins to improve.”

We need a much stronger social safety net in this country to ease the pain of economic downturns so they don't become crises like this. If the price of such a safety net is a reduction in the height of economic booms then that is 1) a cost we should be willing to pay and (or) 2) probably a good thing.

Tuesday, May 26, 2009

No One Knows Nothing. Personal Finance Edition Part 2

Exhibit 3: New York Times Economics Reporter, Edmund Andrews, buys a house he clearly can't afford using a "Don’t Ask, Don’t Tell" loan. This is a guy who should have known better who was paying "over $4,000 a month in alimony and child-support payments" which left him with a "take-home pay of $2,777" and he was still able to buy a house for $460,000, financing $414,000 of it. Would it surprise you that his mortgage company was American Home Mortgage Corporation? In the past, this would be the time where a loan officer says that they are sorry, you just can't afford this house. Instead, The mortgage broker "simply move[d] down another step on the ladder of credibility."

Let's let Edmund tell us how this works:
"Instead of “stating” my income without documenting it, I would take out a “no ratio” mortgage and not state my income at all. For the price of a slightly higher interest rate, American Home would verify my assets, but that was it. Because I wasn’t stating my income, I couldn’t have a debt-to-income ratio, and therefore, I couldn’t have too much debt. I could have had four other mortgages, and it wouldn’t have mattered. American Home was practically begging me to take the money.

"Despite the obvious red flag of applying for a Don’t Ask, Don’t Tell loan, I wasn’t paying that much for the money. The rate on my primary mortgage of $333,700 was a remarkably low 5.625 percent for the first five years, though my monthly payments would probably jump substantially after the fifth year. On top of that, I was paying a much higher rate of 8.5 percent on my “piggyback” loan for $80,300. Even so, I would be paying slightly more than $2,500 a month for the first five years. It would get expensive eventually, but I could worry about that later."

Bubbles do that to people. Bubbles make smart people do stupid things.

Our Government is Broken

Exhibit 1. Our Senators do not represent us, The People. This is a first hand (brief) account of what happens when The People try to offer another alternative to a Senate committee that is clearly beholden to health insurance companies.