Paul Krugman: Banks Gone Wild

[babylonsister]

Banks Gone Wild


By PAUL KRUGMAN
Published: November 23, 2007


“What were they smoking?” asks the cover of the current issue of Fortune magazine. Underneath the headline are photos of recently deposed Wall Street titans, captioned with the staggering sums they managed to lose.

The answer, of course, is that they were high on the usual drug — greed. And they were encouraged to make socially destructive decisions by a system of executive compensation that should have been reformed after the Enron and WorldCom scandals, but wasn’t.

In a direct sense, the carnage on Wall Street is all about the great housing slump.

This slump was both predictable and predicted. “These days,” I wrote in August 2005, “Americans make a living selling each other houses, paid for with money borrowed from the Chinese. Somehow, that doesn’t seem like a sustainable lifestyle.” It wasn’t.

But even as the danger signs multiplied, Wall Street piled into bonds backed by dubious home mortgages. Most of the bad investments now shaking the financial world seem to have been made in the final frenzy of the housing bubble, or even after the bubble began to deflate.

In fact, according to Fortune, Merrill Lynch made its biggest purchases of bad debt in the first half of this year — after the subprime crisis had already become public knowledge.

Now the bill is coming due, and almost everyone — that is, almost everyone except the people responsible — is having to pay.

more...

http://www.nytimes.com/2007/11/23/opinion/23krugman.html?_r=1&ref=opinion&oref=slogin

[0007]

1. Are they printing money to hold the market up?

Around 25 years ago, American business — and the American political system — bought into the idea that greed is good. Executives are lavishly rewarded if the companies they run seem successful: last year the chief executives of Merrill and Citigroup were paid $48 million and $25.6 million, respectively.

But if the success turns out to have been an illusion — well, they still get to keep the money.
Heads they win, tails we lose.

[babylonsister]

2. That's the problem; how long will that market hold up? Lots of fear out there. nt

[flashl]

3. Neat marquee. n/t

[sam sarrha]

4. the Slump was predictable and predicted.. that is why they, and Democrats, legislated out Bankruptcy

this was just a big criminal mafia RICO SCHEME.. the houses are being boarded up and taken off the market.. mortgage companies are foreclosing on houses they sold the paper on for next to nothing to trusts...

we need to get to the bottom of this SOON AND MAKE HEADS ROLL, STARTING AT THE TOP

[Kolesar]

18. When those houses are foreclosed upon, they *go back on the market*

Not off the market.

[leftofthedial]

22. in some areas there is such a glut of foreclosed homes that just don't sell

that the banks are writing them off, boarding them up and taking them off the market.

this might, perhaps, be what the poster was saying.

[Kolesar]

24. It gets bad if no one has an incentive to get the house occupied again.

I suppose the lien holder is "sitting" on the property and waiting for fortune to change. It could go quite badly though if nobody move in: http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=2329454&mesg_id=2329515

[Bitwit1234]

5. That's the trouble with what is going on in this country today

GREED. The corporations are not satisfied with huge profits. They want mega huge profits. That's why all the companies moved overseas. So they could pay the workers half the salary and keep all the rest for themselves.

[sarcasmo]

6. Had a Women who worked at Remax trying to sell me a house while she was

riding to the airport in my Taxi. The conversation went a little like this, Her: Do you own your home, Me: Yes. Her: Are you looking to move up into a better house, Me: NO. Her: Well the market is great right now for buying, ME: I don't have a way to show my income, I was baiting Her : Her: Well all we have to do is have you sign an Income Statement that shows how much you make and we can put any number down on the Income Statement, I told her thanks but no thanks my house will be paid off when I am 51 and no more house notes for me.
It appears to me that Remax is still in the subprime business, this Women would have sold me a house regardless of my income or credit. I wonder if we will ever recover from this subprime mess if Real Estate Agents are still trying to use Income Statements to get low income people into houses they can't afford.

[bahrbearian]

7. "Well the market is great right now for buying" LOL

Give it a year it will be even better.

[Kingshakabobo]

8. There is still a legitimate market for "stated income" loans for people who can't....

.....prove their income. Those are not sub-prime loans. Sub-prime means mostly bad credit. Your realtor may have been thinking of "ALT-A" which means alternative documentation..........(of course, most realtors aren't thinking about ANYTHING other than a commission).

The problem worsened when they opened those options up to borrower's getting paid by pay-stubs and W2s........borrowers that SHOULD be able to prove their income.

I can count on one hand the number of stated income loans I did in the last 5 or 6 years. Often times, self employed people don't want to produce financials, or a person getting paid by bonuses that don't fit conventional guidelines, will use a stated income loan.........but those loans should have been, and are now back to being, reserved for people with significant down payments, excellent credit scores and substantial assets.

I knew something was wrong when they opened up market for............. - stated income - 580 credit score -investment property - AND zero money down.

THAT'S a sub-prime loan.

[sarcasmo]

9. She wasn't my realtor she was a fare in my Taxi who happened to sell houses.

[Kingshakabobo]

12. Yikes.....Was her name Gil?

"Old Gil needs to eat tonight"

[rucky]

14. Are there any Alt-A's still out there?

I thought that paper went down with the subprime stuff.

[Kingshakabobo]

16. It's still out there but ....

....the LTVs(loan to values) have been restricted and the credit score requirements have been increased.

Here are some rates I just pulled up. I would have to double check the Chase rate as I thought they were done with stated income. It's hard to keep up theses days.

The following scenario is 10% down with 750 fico score and stated income.

Indy Mac is still a big player in the ALT- A market.......for now. So is ALS - Aurora Loan Services (A Lehman Brothers Company)


7.125% Indy Mac(43) - ALT-A Stated Income (NIV) 30 Yr Fixed 01:27:42 PM

7.250% ALS(391) - ALT-A Stated Income (NIV) 30 Yr Fixed 08:53:30 AM

8.125% Chase(273) - ALT-A Stated Income (NIV) 30 Yr Fixed 09:08:34 AM

[rucky]

17. That's without the yield spread?

yikes.

[Kingshakabobo]

19. I'm a lender not a broker so those would include compensation of about one point.

It's called an "SRP" - service release premium - for selling the servicing. We don't disclose it.

[Kolesar]

20. Waitressing tips and "cash" businesses?

Thanks for explaining the process.

[Kingshakabobo]

21. For a loan like that, we would use a "no ratio" loan where you don't state ANY income.

You leave the box blank. "Don't ask Don't Tell"

7.375% Indy Mac(43) - ALT-A No Income (No Ratio) 30 Yr Fixed

The rates are a little higher but you don't encourage (or coach) lying.


Here is a NINA No doc loan.....you don't even state a job. Note: This loan scenario is with 30% down.

8.000% ALS(391) - ALT-A NI/NA/NE (No Doc) 30 Yr Fixed


Loan officers have gotten in trouble for not doing it right and selling the higher rates. Instead, they took the path of least resistance and lied (or coached) to jam people in programs they didn't qualify for.

[Kolesar]

23. In the 1990s, I asked a loan broker if I could get a loan with only investment income, &she said yes

Now I see that it is well-sponsored by "the lending industry".

I had a vision of retiring and buying a house in another location. I would finance it to use it as a tax shelter to protect my retirement and investment income.

Now that long term capital gains and dividends are taxed at low rates, the advantage of that scheme are much less. That fantasy scheme. Retirement.

[snappyturtle]

13. Yes they'll continue to do it...I have no doubt. A Coldwell Banker

realtor did this to my daughter in the Twin Cities and was even so nice to find financing for her :sarcasm:...and it wasn't easy but it was "in house". I thought at the time, well, my daughter is going to be very disappointed because she won't get the loan....little did I know! Her closing date was jacked at so many times...I was two hundred miles north and intended to be at the closing or at least to see the HUD1 but within hours, like three, she was at a closing table for the first time in her life and signed her John Henry on a very bad deal. It's been a nightmare for her (she still owns her home) and for my husband and me. The realtor even offerred my daughter extra money for an addition to the down payment (which wasn't much)! I am still aghast!

edit: To make matters even worse in my eyes was the fact that Coldwell Banker was the selling agency for the condo complex....dual agency, to boot!

[rucky]

15. These "in-house" financiang deals are dubious.

RESPA is pretty clear about these kinds of business arrangements, and many homebuyers don't think they even have a choice. If they MAKE you use their financing, then they should not charge you origination fees. The realtor should also be reported to HUD.

[snappyturtle]

25. Oh yeah! I had a realtor license in the state (MN) in the late 90's

until I saw the dog eat dog routine! I had to quit. But, that license has served me well when buying and selling my real estate. Since I KNEW how things were supposed to go I had no real fears...I just thought there would be disappointment for my daughter. Oh, how I wish I had been the witch of a mom and screamed and hollered and beat my chest with her!

Glad to hear about RESPA...thank you very much. In MN the realtors are over seen by the Department of Commerce....do you think I should report this to them? AND to HUD????

[Orwellian_Ghost]

10. The US economy

is a house of cards.

[sarcasmo]

11. I like to call it a shell game.

[0007]

26. Are they printing money to hold the market up?

Around 25 years ago, American business — and the American political system — bought into the idea that greed is good. Executives are lavishly rewarded if the companies they run seem successful: last year the chief executives of Merrill and Citigroup were paid $48 million and $25.6 million, respectively.

But if the success turns out to have been an illusion — well, they still get to keep the money.
Heads they win, tails we lose.