By the time they acquire all of Countrywide's notes, they will hold 25% of the mortgages in the U.S.

I thought it was interesting to note that the CEO of BoA went out of his way to point out that they would no longer do any business in the sub-prime market.

http://www.builderonline.com/industry-news.asp?sectionID=26&articleID=639918

oh thank goodness! I thought Bank of America (my bank) was bailing out nation wide. They were all closing. But Countrywide doesn't = nationwide. whew!

That's a hell of a lot of power. Umm, what's a sub-prime market?

Umm, what's a sub-prime market?
A disaster.

By the time they acquire all of Countrywide's notes, they will hold 25% of the mortgages in the U.S.

I thought it was interesting to note that the CEO of BoA went out of his way to point out that they would no longer do any business in the sub-prime market. That may not keep them out trouble, if they own 25% of the mortgages in the US. Unless they bought 'em cheap.

The banking deregulation, partial as it was, is looking like the S&L deregulation, the defense contracting deregulation, and everything else straight from the Book of Reagan - spectacular fuckup, genuinely bizarre and unbelieveably expensive morass.

Now, of course,they are too big to fail - the bailout of the little guys is going to have an overhead charge.

oh thank goodness! I thought Bank of America (my bank) was bailing out nation wide. They were all closing. But Countrywide doesn't = nationwide. whew!

That's a hell of a lot of power. Umm, what's a sub-prime market?

That term IS a little confusing. First off, it has nothing to do with the prime interest rate. It's just a market term for loans that aren't based on the top-of-the-line conditions.

You can compare it to classes of meat at the grocery counter - there's prime beef and lower grades. A prime loan would be one made to an individual for a $300,000 home that they were buying for $250,000 and the person had an annual income of $100,000.

A subprime loan would be the same house at full price and the individual only making $60,000 a year AND carrying a few maxed-out credit cards. In other words, a riskier loan and they might default - which is exactly what has happened to many, many of those loans lately.

well then why make the loan in the first place?? How could they not see how risky it was. I mean, maybe make a few of those loans, but not many many. What's in it for the lender to make such risky loans?

Big risk, big rewards. People who play things safe tend to make the least profit.

so most of these risky loans were made years ago or are they recent?

well then why make the loan in the first place?? How could they not see how risky it was. I mean, maybe make a few of those loans, but not many many. What's in it for the lender to make such risky loans?

It's like Nick said - big profits can come from big risks. But the main thing is if there hadn't been so MANY of them the lenders would have been in excellent shape! They would have all the money people had paid on those loans before foreclosure AND would have been able to resell the property again.

They would have made money both coming and going if they hadn't been so greedy and made so many of those loans. Except for the mess they got themselves into, wouldn't YOU like to have done the following?:

Loan soneone $200,000 on a home worth $300,000 - have them pay you several thousand before foreclosure and THEN take the house and sell it for $300,000. See why they got carried away?

so most of these risky loans were made years ago or are they recent?

Sub-prime mortgages have been around for years, I would think, but in the last several years I think the regulations on the industry were so lax that many of these loans were made without the proper due diligence on the part of the lender. Home buyers were told they were qualified for a purchase price that was probably unrealistic based on their income/debt ratio. The lenders typically didn't care because they weren't going to hold the note anyway. Their intent from the beginning was to sell the note on the secondary market for a discount.

We noticed the crunch coming last summer, as some of our buyers who had previously been pre-qualified suddenly found out right before closing that they didn't have the scores to qualify for the loan package anymore. The only way they could close the deal was to come to closing with more cash, which in most cases, they didn't have.

imho, the buyers and lenders share the blame in this scenario. I think it's irresponsible to borrow money based on the assumption that your income is going to rise faster than the offsetting costs of a variable interest rate mortgage, which will always go up.

But to answer the question: Why did the lender make the loan in the first place? Because they could charge a higher interest rate, and likely collected points at closing, which raised their origination fees.

It's like Nick said - big profits can come from big risks. But the main thing is if there hadn't been so MANY of them the lenders would have been in excellent shape! They would have all the money people had paid on those loans before foreclosure AND would have been able to resell the property again.

They would have made money both coming and going if they hadn't been so greedy and made so many of those loans. Except for the mess they got themselves into, wouldn't YOU like to have done the following?:

Loan soneone $200,000 on a home worth $300,000 - have them pay you several thousand before foreclosure and THEN take the house and sell it for $300,000. See why they got carried away?

I can assure you banks are not happy to foreclose on houses they made loans against. The costs of re-selling the house is significant, and they simply aren't equipped with the resources to be in the property management business. Finally, there is the question of warranty. The bank does not have a warranty staff to service the house after closing.

well then why make the loan in the first place?? How could they not see how risky it was. The people making the loans often were not planning to hold the mortgages - they sold them. They made their money up front, and sold the risk.

Their only consideration, in amking the loans, was whether they could sell them. For that, the loan needed to meet standards set by regulators. In the past, those standards had been fairly rigorous - the borrower had to present proof of income and good credit history, put money down, etc, the house had to be inspected and found solid and up to code, the house had to be conservatively appraised by reputable and licensed experts, insurance had to be carried, and so forth.

In addition, the sale and bundling and leveraging of these loans involved financial matters which were once closely regulated. Such matters were regulated because of the experiences the US (and many others) has had with what happens when they are not.

Those various standards, which are federal, were slacked recently, both in letter and in enforcement. Loans have been labeled "sound" that did not meet the old standards. Financial manuevers formerly discouraged have been permitted. So recently tens of thousands of loans have been sold, and leveraged in bundles, that could not have been sold under the old standards. The people who made those loans and sold them made lots of money. The people who bought them were buying lower quality stuff than the label indicated. The people who bought and borrowed on leveraged bundles of them were multiplying a hidden risk, and spreading it by sophisticated arrangements throughout the economy.

The entire mess was built on a hyperinflation of housing prices - a bubble. The fundamentals - such as falling incomes and reduced financial power in the US middle class - eventually popped the bubble. Now the only thing of value at the bottom of the leveraged investment pile is the original borrower's ability, and willingness, to repay the loans. Much of the collateral was misrepresented, and no longer exists. And the loans are becoming increasingly difficult to repay, as incomes fall and the interest rate on them rises.

so wouldn't all these foreclosures make the houses a cheap buy? Wouldn't people be frantically be trying to unload them?

so wouldn't all these foreclosures make the houses a cheap buy? Wouldn't people be frantically be trying to unload them? Some will. Some can't sell them for what they owe on the loans. So they may as well just live in them for free until formally booted out, and put some money in the mattress for relocation (of themselves and anything they can carry).

And the frantic part is just starting. The adjustiments in the "adjustable mortgage rates" are due to kick in over the next couple of years, foreclosures take a year or more often, and markets vary across the US. In the hardhit areas, various possibilities.

Flint, Michigan, got hit something like this some years back, for different reasons. It has established a city fund to buy abandoned houses and bulldoze them, then sell the lots to the neighbors for cheap. Might make a pretty nice town, of about half its original population, in a bit.

The financial markets are going to come to the Fed for big bailouts and legal slack. If the Fed prints money to give them, serious inflation can be expected.

Pyramid scheme.

The whole banking system is a giant pyramid scheme. It is destined to fail, no matter what " checks or balances" are setup to make it last longer...it just hurts more when it crashes, with fewer rats at the top of the pyramid able to walk away with their shirts.