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Question of the day - Mortgage crisis * Upated x1 *

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Illinois

* First, the setup…

The home mortgage meltdown isn’t just gutting the poorer parts of town.

It’s beginning to hammer wealthy and middle class Chicago neighborhoods like Lincoln Park, Lincoln Square, Irving Park, Portage Park and Mt. Greenwood — all areas where home mortgage foreclosures have shot up by 100 percent or more from 2006 to 2007.

Data released Monday by the National Training and Information Center shows that in Lincoln Park there were 18 homes in foreclosure during the first six months of 2006 — but that number more than doubled to 37 for the first half of this year.

In terms of sheer numbers, poor neighborhoods still are feeling the worst pain. But percentage increase in mortgage defaults is climbing faster in middle class areas, according to the data.

Poverty stricken West Englewood, for example, had 348 foreclosures, or 111 per square mile — yet that was just a 58 percent increase over the previous year.

But in middle class Portage Park, the heart of the Northwest Side Bungalow Belt, mortgage defaults jumped from 32 homes to 94, a whopping 193.8 percent.

* Here are the Chicago foreclosure numbers, and the Suburban foreclosure numbers.

* Now, on to the question: What, if anything, should state government do about this situation? Explain fully.

*** UPDATE *** Finally, a bit of good news on this general topic. Illinois will avoid the immediate meltdown that’s happening in some other states…

Illinois pulled its investment funds out of mortgage-backed securities long before the subprime meltdown, a move that will save the state from a crisis that faces other state governments.

State Treasurer Alexi Giannoulias said he has been assuring municipal leaders and representatives of state agencies that the more than $8 billion of the state’s portfolio and the more than $6.5 billion in the government investment pool is safe from rising mortgage default rates.

As a general rule, he said the state avoids investing in derivatives products and decided to pull its money out of certain high-risk products long ago.

“We were well out of (high-risk products) well before the first rumblings (of mortgage market troubles),” Mr. Giannoulias said.

Recent news reports are now emerging about state governments holding investments in mortgage-backed securities that are now in danger of default. Florida, Montana and Connecticut have seen their debt ratings downgraded as a result of their financial holdings.

posted by Rich Miller
Tuesday, Dec 4, 07 @ 10:36 am

Comments

This is a tricky QOTD. First, state and local units of government stand to lose revenue if properties are foreclosed upon, but at the same time the state doesn’t have the liquid resources (at least I’m not aware that they do) to underwrite low interest loans to home buyers to make up the difference. On another front, should the state of Illinois enact legislation outlawing ARMs? Probably not a good idea for an individual state to do something that drastic (feds could, but will they?), but it wouldn’t surprise me if we did see legislation to that effect. From my perspective this subprime mess is all related to the same symptom. People thought they were getting something for nothing when they first bought into the idea of an ARM with a balloon payment down the road. Did anyone truly believe they were getting such a terrific deal that they’d never have to pay? Hey, banks are a profit-making enterprise. Sooner or later we all pay the banker.

Comment by Commonsense in Illinois Tuesday, Dec 4, 07 @ 10:43 am
I go back and forth over this. I have always though the whole loan system using ARM’s was deceptive, designed to entice people into getting a low entry level mortgage and then whack them later. That said, the vast majority of people understand how ARMS work, and generally know what they are getting into.

So I am torn between ARM’s being a bit deceptive with the lure of low payments, and caveat emptor. BUT there is a much bigger problem in IL then mortgage rates, that is we have NO usery laws. There is no limit on the percentage of interest that can be charged for loans, such as from payday lenders, or on credit cards.

Overall I lean towards a State law the binds credit card compnaies, banks etc to having to keep the interest rate they offer to entice you to get the loan/credit for the life of the loan. Also I think interest on any loan should be capped at 15%. Many payday lenders charge 1500% (yes 1500) and have almost zero defaults.

We need loan.credit releif across the board. If a credit card company or mortgage lender wants to advertise a 4% interest rate, then make them keep that rate for the life of the loan.

Comment by Ghost Tuesday, Dec 4, 07 @ 10:57 am
There is another dimension to the sub-prime mortgage loan crises. THe ultimate investor in a sizable portion of these investments are pension funds including public pension funds. Being a Illinois tax payer I wonder if any of the state, municipal or Chicago pension funds have amounts invested in structured notes collateralized by sub-prime notes. This issue has arisen in other states but I haven’t seen any information about the situation in Illinois.

Comment by Seeker of truth Tuesday, Dec 4, 07 @ 11:15 am
The state can encourage lenders to restructure loans and perhaps provide business incentives if they do so because a stable realestate market is good for the state. However, as Ghost said above, those incentives likely would not be payments to lenders. Most likely they would have to be changes in policies to make the business climate in Illinois more attractive.

However, lenders and lendees got themselves into the predicament. The lenders by selling their product to people who really shouldn’t have qualified and the lendees by buying more property than they could afford.

Comment by Fan of the Game Tuesday, Dec 4, 07 @ 11:16 am
I agree it is a difficult situation.

There is not a lot of value in foreclosing on a on a structure these days, so it is in the lender’s interest to work out a solution. To the extent that it is in the government’s interest to maintain property values, reviews need to be conducted to see if there is anything in their mission statement that can help in these situations.

I have heard many stories of buyers being ‘fooled’ into ARMs unknowingly. Disturbingly, I do not hear about the Attorney General launching investigations and fining/incarcerating those who perpetrated these frauds on the buyers.

Comment by plutocrat03 Tuesday, Dec 4, 07 @ 11:17 am
While Illinois may not have the power to regulate the types of mortgaqes, rates, etc., it does have the legal power to force full disclosures by mortgage brokers. Penalties can be financial, professional (loss of license) and possibly criminal. Illinois law should require brokers (or any mortgage provider) to put their professional lives, and pocketbooks, on the line to prove that they fully disclosed the financial risks to the buyers of the loan. It may be too late for most borrowers now facing foreclosure, but if Illinois can put teeth into regulation and accountability of mortgage brokers, it could eliminate many if not most of the bad actors who screwed up people’s lives just to get a quick buck.

Comment by suburbanon Tuesday, Dec 4, 07 @ 11:18 am
===it is in the lender’s interest to work out a solution.===

Isn’t there a problem with that since almost all of those loans were sold on the secondary and tertiary markets? Many of those loans are now wrapped up in gigantic fund packages. Not sure, just thinking out loud here.

Comment by Rich Miller Tuesday, Dec 4, 07 @ 11:21 am
Do nothing. If you’re going to make something illegal, how about we making it illegal to inflate asset prices to bubble levels via insane buying. If not for price stagnation, the subprime loans wouldn’t be major problems. Consumers thought they were long free options; alas, of course, they weren’t.

If you eliminate downside, then you remove the sole barrier to bubbles. State funds to prop up mortgages would be a disaster akin to the state of FL subsidizing coastal insurance.

Comment by Greg Tuesday, Dec 4, 07 @ 11:22 am
Rich,

Good point, kind of correct. Mortgages are bundled into bonds, which are mostly owned as you suggest. However, the big lenders (eg, cfc, fnm, fre, etc) still own plenty of them.

You would be correct in arguing that mortage brokers, for example, have absolutely zero interest in restructuring. But bondholders would.

Comment by Greg Tuesday, Dec 4, 07 @ 11:24 am
===how about we making it illegal to inflate asset prices to bubble levels via insane buying===

Closing the barn door after the cows have left?

Comment by Rich Miller Tuesday, Dec 4, 07 @ 11:24 am
I bought a condo 2 years ago with a 7 year ARM through an excellent credit union. It was, and still is, the best financial deal for me. I was able to purchase a home with 10 % down, instead of renting, and didn’t have to pay PMI.

I knew going in that I most likely won’t stay in the condo for 7 years, so I’ll most likely sell before the rates adjust. However, if they do go up, the mortgage is written with a maximum amount the interest rate can go up (or down) once per year after the initial 7 years. I know what I’ll have to pay if I stay past the 7 years and I planned for that possibility.

Eliminating ARMs hurts homebuyers in situations like mine. I bought smart, not a place beyond my budget, made sure I understood everything (and read the paperwork), and worked with a credible lender. I agree that where obvious fraud occurred, or where the elderly or disabled were targeted and taken advantage of, law enforcement should prosecute. Perhaps laws can be strengthened in that regard and to make sure the terms of a loan are made clear to the buyers.

However, I also believe that caveat emptor should still apply. If a person tried to buy more than their budget can handle or didn’t do their homework to understand the complicated process of buying a home, they bear the responsibility for their actions, not the state or the feds. We shouldn’t rush to create some sort of aid package just because it is now effecting Lincoln Park and the more affluent suburbs.

Comment by Velma Dinkley Tuesday, Dec 4, 07 @ 11:24 am
Speaking of full disclosure, I was very disappointed in our elected officials and state agencies when I didn’t hear of any crackdown on radio ads for ARMs. In my opinion, the ads were very misleading. I kept on asking myself “Where is Pat Quinn?”

Comment by Seeker of truth Tuesday, Dec 4, 07 @ 11:26 am
Yeah, Rich, I was joking. Just referring to root cause. No one checks your leverage ratio when the underlying is soaring.

Comment by Greg Tuesday, Dec 4, 07 @ 11:28 am
I agree with Greg. Stay out of it and let the free market run its course.

Comment by PJ Tuesday, Dec 4, 07 @ 11:30 am
Municipalities will be picking up the tab for this problem for years to come. Yet local regulation is severely preempted.

HUD should relax the rules governing use of Community Development Block Grant (CDBG) monies, so Municipalities may use those funds to assist existing homeowners feeling the crunch of “the balloon.”

The State should require mortgage lenders to demonstrate reasonable attempts to keep borrowers in their homes, and require mortgage lenders to take responsibility for properties abandoned by borrowers.

Comment by Platitudinus Tuesday, Dec 4, 07 @ 11:30 am
Not only that Rich, but there are certain buisness advantages to getting out of the bad debt. If you forclose, you get a portions of the loan back. This reduces the mortgage holders exposure and loss. If enough payments have been made on the loan, they may ultimately end up collecting more then the principal amount loaned. Then they get to write off the loss as bad debt. So you borrow 100k for a 120k value home. the “value” of the loan is somthing like 250k with interest etc. I collect 20k in payments from you before you get forclosed on. I forclose, and sell the property for around 90-100k. I recapture my principal and get to dump a bad investment. because I did not collect the full 250k, I write off the lost value for tax purposes.

So their can be incentives to shed bad notes to free up liquidity and secure tax breaks. This is a massive over simplification, and it leaves out other costs lenders face. But investors/owners may be looking to abandon a sinking ship, create liquidty and get out now.

Comment by Ghost Tuesday, Dec 4, 07 @ 11:31 am
State and local governments should do nothing. The real estate and mortgage markets need to correct. Real estate is overvalued, and banks foolishly relaxed their lending standards to approve anyone with a pulse. Instituting ARM reset freezes will only prolong the correction and still won’t help the people who bought more house than they could afford in the first place.

Will there be pain? Of course. There is already. Individuals will lose homes, sadly, but you shouldn’t buy a house when you’ve never made a bill payment on time in your life. The big bad banks are also learning an expensive lesson. If government bails out individuals now (and by extension, banks), what incentive will there be to reform practices or habits? After all, the government will protect you from your bad decisions!

Without action, here’s what will happen. Foreclosures will rise and property values will start to drop to reasonable levels. Borrowers will be forced to save money for a down payment before obtaining a mortgage. Banks will still lend to people with good credit, and housing will recover.

With state/local action, foreclosures will still rise because people bought houses they couldn’t afford and now have to deal with rising energy costs. People who are over their head and who want to sell their house will be stuck. Why? Prices are still overinflated (mortgage is for $350,000, can’t sell it for $275,000) and banks won’t extend them the credit to buy something smaller. Nor will banks approve a mortgage for a prospective buyer who is willing to pay $350,000 for a $275,000 house. Banks issue virtually no new credit to anyone. The economy completely stagnates, and everyone gets frustrated.

Ghost,

If you want credit for middle and lower classes to completely disappear, go ahead cap loan rates or prohibit interest rate changes. Any credit card company who would issue credit in this state would be a magnet for deadbeats. Why? If you can’t charge more than 15% and can’t adjust interest rates, what incentive is there for a borrower to pay you on time? Also, watch how quickly companies re-institute high annual fees, doubled or tripled fees for late payments, shortened grace periods, etc.

Finally, payday lenders do have large default rates compared to banks. Sometimes it’s a consequence of the high interest rate. Other times, people fall into more financial distress and just reneg on the obligation.

Comment by South Side Mike Tuesday, Dec 4, 07 @ 11:35 am
===If you forclose, you get a portions of the loan back. This reduces the mortgage holders exposure and loss. If enough payments have been made on the loan, they may ultimately end up collecting more then the principal amount loaned===

That assumes the lender can sell the property.

Comment by Rich Miller Tuesday, Dec 4, 07 @ 11:39 am
How about letting the free market play itself out.

The real problem is the ultimate buyers of these loans.

You have employees earning less than $100,000 making decisions involving billions to buy for their employee or pension trust funds.

All it takes is a $50.00 dinner to talk them into something.

Comment by True Observer Tuesday, Dec 4, 07 @ 11:40 am
That assumes the lender can sell the property.

Yes, there will be a shortage of people wanting to buy in Lincoln Park.

Comment by True Observer Tuesday, Dec 4, 07 @ 11:43 am
Go read SB 1167. The Gen Assembly addressed, interest only loans, ARMS, appraisals. The problem Federal entities are exempt. The STATE OF ILLINOIS has NO power over these transactions.

Comment by ivoted4judy Tuesday, Dec 4, 07 @ 11:46 am
Three Points:

1) Echoing So. Side’s comments re: Ghost, establishing a usury law is horrible public policy. Illinois had a usury law up until the 70’s, and it became a disaster. In short, mortgage money dried up, and the state repealed it for that reason.

2)We already have disclosures out the wazoo, as anyone who has bought a house knows. But most people don’t bother to read the disclosures, or don’t care - they want the house, dammit, and nobody’s going to stop them. . .

3) Government is not good at legislating in this area. . .they are always WAY behind the curve. Take SB 1167, for example. . regulating ARM and stated income loans - talk about closing the barn door a tad loo late. . .But, I think the general provision in that bill requiring a mortgage broker to verify “ability to repay” is a good thing. . .but the bill only applies to mortgage brokers, not traditional banks or their subsidiaries.

Comment by Matt Foley, Motivational Speaker Tuesday, Dec 4, 07 @ 11:50 am
Like some other posters here, I was able to successfully use an ARM as a first time buyer 20 years ago. Without it I would have had to rent longer. With it I was able to build some equity, save money, and convert to a fixed rate before five years had elapsed. It was a useful tool, but it required understanding some financial details. I agree that there would have been trouble with it in today’s market with slipping home prices, since it required some modest growth in value to work as planned. The ARM is a tool that should remain, but consumers need to understand its potential impact.

Comment by muon Tuesday, Dec 4, 07 @ 11:58 am
The market has proven effective at adjusting mortgage lender practices. But market forces alone will not alleviate the mounting burden on Municipalities resulting from abandoned properties.
The discussion so far has centered on the “middle class” foreclosures. Traditional market forces will necessarily adjust the value of these properties, with no expense to local government, and as pointed out above, little real cost to mortgage lenders.
The real problem here is with the lower value properties, often purchased with down payments provided by government, that will likely end up abandoned by borrower and lender alike once foreclosure proceedings are initiated.

Comment by Platitudinus Tuesday, Dec 4, 07 @ 12:00 pm
Good point on the ability for the lender to sell. technically any lender can move for forclosurer, but if they have a second or third position they end up with nada.

South Side Mike not true, the Payday loans end up in default on a far smaller percentages then banks. That is in part because payday lenders do rollovers to keep people baited into these loans. Many states limit the interest rate for loans, such as NY at 16%. As for incentive to pay on time, credit score. Credit card companies currently increase rates from 8% to 28% for people who NEVER MISSED A Payment based on decrease credit scores. They also jack the rates if your payment is a day late. The use of credit scores and an application process is supposed to allow them to decide to lend to people who will pay themback. They can always, as they do, sue for payment if they are not getting paid. The high interest rates are used irrespective of payment. besides if somone is having difficulty paying, jacking their rate from 8% to 30% as”incentive” really means the person who is cash strapped is even less likekly to pay back the loan. I doubt there is much of a pool of people who have the money, but just decide to trash their credit score by not timely paying because the interest rate on theri card is limited. BTW a 15% cap still allows for a lower interest which is increased if there is no payment, it just maximizes what can be sucked from the turnip.

Comment by Ghost Tuesday, Dec 4, 07 @ 12:02 pm
Nothing…why should the state bail people out for living beyond their means?

Comment by Rex Tuesday, Dec 4, 07 @ 12:04 pm
AS my handle states, I am a banker and we do not make sub prime loans but am aware of the general terms of such loans

First of all lets look at a typical prime home mortgage loan.
1. The ability to repay is fully documented - employment/income is verified, credit standards considered high (credit score) debt service to income held to proven general standards, called the front end and back end ratio.
2. Value of the property is independently established (appraisal)
3.

Comment by Bankman Tuesday, Dec 4, 07 @ 12:04 pm
===why should the state bail people out for living beyond their means?===

That line worked so well for Herbert Hoover.

Comment by Rich Miller Tuesday, Dec 4, 07 @ 12:06 pm
“What, if anything, should state government do about this situation?”

I’m not sure that there is anything that the State can do to keep people in their homes, so the state and local governments had best start shoring up the support services for the working homeless and their children.

Yes, it has come to that.

– SCAM

Comment by so-called "Austin Mayor" Tuesday, Dec 4, 07 @ 12:11 pm
First, the State must continue to suspend HB4050 and any attempts to renew it — we delayed a new bill for a year.
Then we must continue to claim the $25 million we gave Ameriquest was never used (because they were sold).
Then we must tell the pension funds to ignore SB1169 and buy lots of stock from the predatory lenders and ther allies.
Then let’s get some better seats for the hockey game and charter a fast plane for the Rose Bowl.
Geez

Comment by DumberThanYouThink Tuesday, Dec 4, 07 @ 12:15 pm
Ghost,

If payday lenders really have such good repayment rates (does a rollover count as payment in full?), banks would be fighting to build branches in payday loan neighborhoods. After all, if you’re sure to get paid, what bank wouldn’t offer personal loans at merely 75% interest, 1/20th of the rate you claim for payday lenders?

Of course, some of the reasons the interest rates are so high is because of the relatively high costs of making small loans.

Believe me, I hate payday loans and how some of the lenders indebt someone for life, but they exist because there is a need for credit that banks find unprofitable to serve. Close the legal payday loan lenders, and you increase the business of the neighborhood loan sharks who don’t use written contracts but who do utilize alternative methods of repayment persuasion.

Comment by South Side Mike Tuesday, Dec 4, 07 @ 12:18 pm
I should add, My biggest problem with caveat emptor is when the banks end up in trouble and demand a tax payer bailout because of their ties to the economy. Given these ties it seems the reverse should also apply, tax payorers should assert some controls over banks. Afterall the Banks support caveat emptor when they stand to gain huge profits, but when they are in trouble come begging for handouts.

Banking is unfrotunetly entertwined to much with our overall economic health to stand on a pure market strategy.

Comment by Ghost Tuesday, Dec 4, 07 @ 12:18 pm
One thing that public officials could do is to drop the home ownership obsession. There’s nothing wrong with renting. If you just want to “build equity,” start a savings account. Unfortunately, normal people don’t understand cost of carry, so they think renting is for whatever reason a rip-off.

Everytime I talk to fellow 20-somethings, they’re just obsessed with buying something, and all the Excel tables in the world won’t convince them otherwise. We should encourage them to take their time; you are NOT necessarily losing by renting, and your risk is tiny.

Comment by Greg Tuesday, Dec 4, 07 @ 12:20 pm
Asmy handle states, I am a banker and we do not make sub prime loans but am aware of the general terms of such loans

First of all lets look at a typical prime home mortgage loan.
1. The ability to repay is fully documented - employment/income is verified, credit standards considered high (credit score) debt service to income held to proven general standards, called the front end and back end ratio.
2. Value of the property is independently established (appraisal)
3. Loan terms are fully disclosed (ARM or fixed rate). Prime ARM’s typically have interest rate adjustments caps and life time caps, say maximum rate change 2% and lifetime 5%

Sub Prime loans, as the label implies walks down the underwriting ladder (lender takes on more risk and expects at higher interest rate. Many cases the ability to pay is less restrictive in the analysis and verification process and even heavily dependent on the future perceived escalated value of the property being purchased. In any case a sub prime is neither good or bad, provided all parties understand the loan terms. Sub prime loan usually are ARN’s but without the interest rate caps. So interest rates at an adjustment date can go up without limit depending on the general interest rate market. If the Federal Reserve raises over night rates as it has done from 1% to a high of 5.25% any one year ARM without rate caps can increase even further. Now for the excesses

Initial low rates are marketed say 4%, but then when the ARM rate kicks in the rate could zoom into double digit. Coupled with negative amortization ( monthly payments not even enough to cover the interest means the loan balance increases over time and as each annual rate change goes int effect, one can see the required payments can easily get out of hand.

Frankly, ARM’s are NOT necessarily a bad deal. Say a person plans to be in a house only 3 or 4 years, then why take out a fixed rate loan when he/she can get a 5 year ARM at 1% less interest rate.

There is no easy answer, but Government at any level should not “bail out” either the lender or the borrower and the solution to this “sub prime mess means all parties will suffer. Passing laws that forbid sub prime loans does not seem to be the way to go for many people that can not qualify for the standard prime loan will be out of the mortgage market. I do support full and complete disclosures of loan terms. Unfortunately, if anyone has taken out a home loan recently, loan terms (all required) are mind numbing at best and unfortunately anyone important loan term can easily be innocently overlooked.

Comment by Bankman Tuesday, Dec 4, 07 @ 12:24 pm
Good point, Greg. I guess if a mortgage will cost $500/month than a rental, and at the beginning, your equity in the home will only grow by $25/month, it makes more sense to rent and save the extra $500 rather than buy and pay more interest.

I’ll be finishing my Masters next May, and was planning on buying within a year or two after that. But you just added a new calculation I will need to consider.

Comment by South Side Mike Tuesday, Dec 4, 07 @ 12:25 pm
Ghost is right. The banking industry (et al) should EITHER accept more regulation in return for bailout guarantees OR do whatever they want and let the chips fall where they may. There’s a difference between investing and gambling and many have been doing too much of the latter because they get help when they lose.

Comment by yinn Tuesday, Dec 4, 07 @ 12:28 pm
Mike,

I’ll try to avoid turning the qotd into a finance message board, but in short, you should buy if you think the home will appreciate faster than your tax-adjusted cost of carry (ie, if average annual appreciation > ([1-tax rate]*mortgage interest rate + ownership costs). Or if you receive a ton of utility from the warm feeling you get from onwership.

Whether you’re paying mostly interest or principal doesn’t really matter if that equation is positive. Unfortunately that means a ton of people have incredible bets on about everything from price appreciation to the yield curve that they’re probably not aware of.

Comment by Greg Tuesday, Dec 4, 07 @ 12:35 pm
Nothing. Three groups jumped in over their head - buyers overextending, lenders signing up customers they knew were headed for trouble if the housing market flattened, and investors taking on pooled paper that the agencies wouldn’t touch.

Foolish, high-risk behavior has consequences. The state (and Feds) should allow the behavior to have its consequences.

A bailout reinforces bad behavior. Is this really another “too big to fail”?

The market will fix this.

Comment by countryboy Tuesday, Dec 4, 07 @ 12:35 pm
People’s mortgages have been sliced and diced and baked into bonds such that no one bond holder is in a position to work out an adjusted payment plan with a defaulting borrower. Got that part, I think.

At the risk of sounding as ignorant as I am, if no one bond holder is in a position to renegotiate payments, who initiates the foreclosure?

Comment by Don't quite understood Tuesday, Dec 4, 07 @ 12:42 pm
The best potential solution to the problem that I have seen is to pass laws allowing judges to summarily re-write the terms of a loan. Since loans are packaged up into bonds owned by the Bank of China or some Village on the other side of the country, or who knows, it’s going to be incredibly difficult to negotiate with the person/organization that actually holds the debt. And there is little to no incentive for the mortgage servicer to try to cut a deal between some organization half a world away and one mortgagee.

But, if you could challenge your foreclosure in a court of law (or potential foreclosure) and the judge could change the terms of the loan, then you could work things out in a mutually beneficial manner. It could be as simple as striking a provision that forces a borrower to pay a penalty on early replacement (which prevents people from getting new mortgages), or it could be adjusting the interest rate down to a level the borrower can make payments on.

anyway, that’s my two cents.

Now, should Springfield do something? Yes. Can/Will Springfield do something? Pfff! Yeah, right!

Oh, and Greg - the Economist did an analysis a couple of years ago (yes, they saw this coming - I was telling my real estate agent friend 2.5 or 3 years ago this was coming) that showed that if home prices stagnate, it would take (and this is 2.5+ years ago - prices have gone crazier since) as much as 10-15 years (depending on where you live) for it to be a better deal to buy than rent. This is assuming, of course, that rents continue to appreciate at historical norms (roughly the rate of inflation).

Comment by jerry 101 Tuesday, Dec 4, 07 @ 12:46 pm
Do nothing. These loans were all understood to be a gamble by the banking industry, and they made those who took out these risky loans to pay much more to offset any failures for the banks. Now that there appears to be a higher failure rate than expected, some money institutions will not make the profit they expected. Tough noogies. It was the job of the loaners to separate those who could not pay from those who could pay. If a money institution’s portfolio is too top-heavy with bad loans, then let’s hope they got the cash their risk entailed while the going was good.

It is a business deal. Governments do so much to assist citizens during difficult times, bailing them out of bad loans will be forcing those of us who kept our noses clean to pay for those who didn’t, or couldn’t. This is where we have to say “no”, to those who took these risks.

Comment by VanillaMan Tuesday, Dec 4, 07 @ 12:55 pm
Who deserves credit for having Illinois avoid the risky investments?

Comment by Carl Nyberg Tuesday, Dec 4, 07 @ 12:56 pm
Some excellent points being made. I can’t resist adding a few comments.

Greg, you’re absolutely right. One of the worst public policy mistakes occured beginning in the mid-1990s, when HUD, public housing authorities and agencies like the Illinois Housing Development Authority figured out they could subsidize home ownership cheaper than they could maintain low income rentals.

It is cheaper to entice low-income residents into home ownership (through one-time down payment and interest subsidies) than it is to provide people with subsidized rental units that must be maintained over a long term.

They put a lot of people into homes who do not have the resources to maintain the home. But, they didn’t really avoid the costs, they just pushed them off — because now these home owners are unable to maintain the properties and are defaulting on homes that are no longer worth the value of the loan.

South Side Mike, you’ve got it right too.

Home buying has become a form of speculation, no different than stock speculation. I wonder why there is so much sympathy for middle and upper income buyers who used the home market to speculate in hopes of turning a quick profit. Would there be the same sympathy for them if they had put their money into technology stocks?

Should we be bailing out investors when the stock market drops?

Home ownership is not a “right” any more than owning a Lexus or a HDTV is a right. Homes are just a commodity and people who overbuy shouldn’t generate any more sympathy than people who can’t make the payment on a $6,000 Plasma TV.

Finally, as others have pointed out, there will be a benefit to this in the long term as the market corrects itself.

The last thing we need is for government to interfere with the market. Let’s look at the benefits of not doing anything — Home prices drop as demand decreases. In the meantime, interest rates also fall, because banks need to attract new loans.

When prices and interest rates drop enough, buyers re-enter the market and get more home for the money. They have more disposible income because their payments are less. So the overall economy benefits.

It doesn’t come without pain, but the liberals out there should like this, because it’s a redistribution of the wealth that is now concentrated in banks and speculators to the general public in the form of lower home prices and more disposible income.

Of course, if we really want to screw things up, let’s get the government in the “solve” the “crisis.”

Comment by Old Elephant Tuesday, Dec 4, 07 @ 1:03 pm
Soth side Mike, I am not in full disagreement with you. The Rollovers is where the payday loenders tend to see their defaults, but these do not count as defaults on the loan. Payday lenders report a roughly 34% return on investment. They like to talk up the problems to try and keep banks out of the game a number of other States, like NY, have a 16% cap on loans, and they are not reporting problems with such caps on lenders or lendees.

The pentultimate or ultimate question seems to be what overall effect one the State’s fincial status if everything is just allowed to play out with no releif. UofI is reporting the State is still doing well and not headed towards a recession, even with its declining economy. If the mortgage loan stuff has little impact on the rest of us, I am for leaving it alone. If it creates trickle down problems and throws off the economy then we need to step in and do somthing.

Comment by Ghost Tuesday, Dec 4, 07 @ 1:11 pm
Bankman made some informative comments, but his last two sentences stand out for me.

“I do support full and complete disclosures of loan terms. Unfortunately, if anyone has taken out a home loan recently, loan terms (all required) are mind numbing at best and unfortunately anyone important loan term can easily be innocently overlooked.”

One problem that the state might address is consolidating the vast amount of consent, waiver, and disclosure forms signed by a borrower. Each one seems to be a meaningful attempt to help protect the transaction, but the total can numb the mind. It certainly discourages consumers from trying to get to a clear picture of their cost and the future impact. In my experience I got clearer information from life insurance purchases than from loans.

Comment by muon Tuesday, Dec 4, 07 @ 1:32 pm
It is my feeling that we have another crisis in housing, low and moderately low income affordable housing, as well and it occurs to me that certainly two if not a domino effect of several other issues could be cured.

I propose that some landlords who have multiple units serve the public need by accepting approved funds from the Chicago low income housing trust fund, thereby creating affordable housing opportunities and satisfying a portion of their mortgage. For instance, if an owner has a building with four or fewer units and they reside on the property, certainly it could serve the public need to make the remaining three units into low income housing.

It is an idea. I am not certain of the numbers in terms of what is available from the trust currently, I am certain that there is a great need. A program could be implemented to help guide and council families into home ownership, thereby freeing the unit for the next family and placing the first in a well educated first time home ownership situation.

Comment by Andrea Tuesday, Dec 4, 07 @ 1:35 pm
For informational purposes, my understanding is that the lenders or investors in the loan portfolio set the terms under which they will work with borrowers that are in trouble. When the troubled borrower contacts the servicer, the servicer has a sheet that indicates the extent to which they can attempt a work-out of the situation. As you can imagine, some are flexible, and others are not. For people that are in various government programs through IHDA or FHA, the lenders have to attempt a work-out.

Alos, a HUGE problem is that many borrowers that are in trouble wait way too long to contact the lender or servicer, and it os often too late to salvage the situation. Of course, people are often in denial or are ashamed of the situation. But, the best thing a person can do to save themselves is to communicate with the lender or servicer when a problem arises.

Sorry for the public service announcement. . .

Comment by Matt Foley, Motivational Speaker Tuesday, Dec 4, 07 @ 2:08 pm
So the State Treasurer quietly took action to avoid potential issues and liabilities for clients while the Rodney J. Blagojevich points the finger at Washington DC and begs for action. Who looks more like the Governor in this situation? A real leader announces what steps he/she has taken to address a problem while a wannabe leader puts out a press release begging others to take action.

I know the real point of the story is the approrpiate role of government, but I found some irony in WHO in government was working to address the challenge and who was working to score cheap political points.

Comment by DC Tuesday, Dec 4, 07 @ 2:33 pm
Alexi can put his activities is his “Points to Make When I Run for Governor” file.

Many may wish that day will come soon.

Comment by Cassandra Tuesday, Dec 4, 07 @ 3:19 pm
In light of the Feds rush over the last 7 years to make Housing affordable to every American including non documented illegals, Mr. what’s his name Greenspan urged the Banking sector to create loans ie; exotic, subprime etc. of the 14 million loans that were written since 2001 over 7 million are of the exotic kind. Most will reset in early 2008. What do you think will happen then? How about all you Hedge fund managers getting your pencils ready and start buying all these bad loans for say 50cents on the dollar? The rich get fatter and the middle class gets subprimal.

Comment by Seeker 187 Tuesday, Dec 4, 07 @ 3:53 pm
Seeker,

Citadel (Chicago) just bought a bunch for a lot cheaper than 50 cents. The bondholders are the sellers. Focus on housing price changes, not what subprime debt is trading for, that’s just a symptom that doesn’t affect you. Your class obsession is overpowering your accuracy.

Comment by Greg Tuesday, Dec 4, 07 @ 5:08 pm
I hate to be a wet blanket but I took a peek at the assets held by the Illinois State Employees Retirement fund and the Illinois Teachers Retirement Fund and I found this:
Assets

State Employees Retirement Fund $11 billion

Teachers Retirement Fund $42 billion

Quite a bit more than the $14.5 billion mentioned in the statement from the Treasurer. I suspect that information concerning pension fund exposure to sub-prime loans can only come from the pension funds.

Comment by Seeker of truth Tuesday, Dec 4, 07 @ 5:38 pm
“True Observer” (not) observed;
“You have employees earning less than $100,000 making decisions involving billions to buy for their employee or pension trust funds.

All it takes is a $50.00 dinner to talk them into something.”

Hey True, in Blog-approved language, bite me. I guess you’re one of those who think that pension funds should only be overseen by “private sector professionals.” OK. Exhibit A: Stu Levine. Exhibit B: John Glennon. Exhibit C: oops, getting ahead of the story there. I’ll take a room full of people whose own money is on the line before I would take a room full of Levines.

Seeker of Truth, here’s some for you, pal: The State Treasurer’s funds are in fact separate from the State-supported (not funded) pension systems. Besides, the total fund assets have squat to do (other than provide further validation that teachers are better investors than the SERS/ISBI “private sector professionals”) with their subprime exposure. All the state funds have indicated publicly that their subprime exposure is nominal.

PS: Today, the Director of the Florida pension fund fell on his sword for the debacle down there. The Florida Governor actually sits on the pension fund board (and attends the meetings) and says to the guy at the meeting, “Do you have any clsoing comments?” after which the director said adieu.

Anyone here have a hard time visualizing Gov. Puck a) going to the meeting 2) staying until the end c) personally firing someone in public?

AA couldn’t, even after a nice adult beverage or two.

Comment by Arthur Andersen Tuesday, Dec 4, 07 @ 11:45 pm
To: Arthur Andersen

You wrote “All the state funds have indicated publicly that their subprime exposure is nominal.” This is what I’m looking for but haven’t been able to locate.

Comment by Seeker of truth Wednesday, Dec 5, 07 @ 7:03 am
Lets face reality the Fed screwed it up and now they need to clean it up, have you seen anyone talking about a real solution to the Mortgage Meltdown? If you hear something good please let me know……

Comment by Seeker 187 Wednesday, Dec 5, 07 @ 6:47 pm
Greg,
My class obsession has nothing to do with the Feds did by over shooting the Mortgage debacle. What subprime is trading for is absolutely going to affect my property values. Real estate is still very local so the more bad loans in your neighborhood the lower your values….. Call Greenspan for a solution….

Comment by Seeker 187 Wednesday, Dec 5, 07 @ 6:53 pm