Trimming The Muscle
By Mitch Berg
Joe Doakes from Como Park writes:
I work with real estate in the Twin Cities. It’s no secret there have been a lot of foreclosures in recent years. But I’m noticing an ominous change in the nature of the foreclosures.
The economy was sliding before September 18, 2008, when Treasury Secretary Paulson said the wheels almost came off and McCain suspended his campaign to rush through the first TARP bailout, but the intensive media news afterwards and the government reaction to the problem, accelerated the decline.
Joe notes that there’ve been three waves of foreclosures:
The first wave of foreclosures starting in 2007 were limited liability companies owning rental shacks in Frogtown who saw what was coming and walked away in strategic defaults. The foreclosures dumped foreclosed homes on the market, depressing market values just as politicians and bank regulators started getting tough on loans, making it hard to move those homes off the market.
And, in Saint Paul terms, just about the time the city’s idiotic housing policies started laying the groundwork for the further gutting of the city’s housing market.
The second wave in 2008 – 2009 were 3 and 5 year ARMS taken between 2003 and 2005 taken by Asians and Hispanics in Central Corridor and the East Side using alternative loan programs (no doc, stated income, ALT-A, etc). These were subprime loans given to people who got in cheap but couldn’t refinance when their interest rates reset because property values had fallen so they walked away, also some flippers who bought Frogtown shacks in 2007 thinking they’d gotten a bargain but couldn’t make the payments when more foreclosed homes flooded the market driving down rental prices.
Not to mention the city dumping the properties it owned due to its vacant building ordinance back onto the market.
But both of those waves were mildly predictable, and old news.
Now, Joe’s got the bad news:
The third wave in 2010 to now are occurring all over Ramsey County, to borrowers on 30-year, fixed rate mortgages. These are traditional Minnesota borrowers who’ve homesteaded these properties for years, hanging on hoping for a turn-around but finally had to give up; or people who wanted to retire but can’t sell their home for enough to cover the loan so they let it go.
The first wave was froth and had the economy rebounded, that would have ended it. The second wave was fat – people who shouldn’t have had loans anyway – but the third wave is the muscle and bone of the economy. These are prudent borrowers who raised families in their homes and now have lost their life’s savings. That’s going to have a lasting impact on our economy far beyond this election.
Joe Doakes
Como Park
Between the glut of city-owned properties (being handed to non-profit friends of the City Council, natch) and the continued Obama recession, Saint Paul’s housing market is screwed for years to come.
August 2nd, 2012 at 12:32 pm
“That’s going to have a lasting impact on our economy far beyond this election.”
Freaking Community Reinvestment Act…..Thanks for that Messrs Carter & Clinton.
August 2nd, 2012 at 12:36 pm
Ok, work with me here. The third wave is “prudent borrowers who raised families in their homes and now have lost their life’s savings”?
You’ve raised a family in a home. That’s 20 years. After 20 years on a 30 year mortgage you’ve paid off about 43% of the principal (which is why I never went with a 30 year mortgage!).
Sorry, the market’s not declined 43% since the peak, much less where it was 20 years ago.
The problem is that most folks HAVEN’T been prudent in how they deal with their house or their debts and they’ve treated their house as an ATM or savings account rather than a liability to be paid off.
Honestly, we’ve become far less fearful of debt than we need to be. We’ve seen far too many people leveraging themselves and becoming little more than serfs. This is especially true with debt owed to the government that can’t be discharged, like student loans.
August 2nd, 2012 at 2:04 pm
I’m with you Nerdbert. The signs of bad things to come were obvious (to me) when you could get a loan for 125% of the appraised value of a given property. Too many folks did that and used the money for cars, boats, motorcycles, etc. When the bubble burst and economy tanked it didn’t take a rocket scientist to figure out that we where in a hell of a mess. I don’t think it helped matters any when “tinkering” by the Feds prolonged the pain of the foreclosure process which has just delayed the necessary market adjustment. Any dimwit that thinks the lenders should forgive parts of those loans needs to be kicked in the privates.
August 2nd, 2012 at 3:27 pm
If you issue a secured, no-recourse loan, and the property that secures it turns out not to be worth what you thought it was, I have no sympathy for your losses.
August 2nd, 2012 at 3:40 pm
Yet the big banks were bailed out.
Geithner was the worst. As envisioned, TARP would have had the government save the banks by buying troubled assets. These assets would then be under the control of the people’s political reps in congress. Geithner decided to “recapitalize” the banks instead, e.g. shovel taxpayer money into them.
I imagine ol’ Geithner will see his career take off when he leaves the government.
August 2nd, 2012 at 3:59 pm
There are responsible people who purchased homes circa-2007, then had the double wammy of being laid off and seeing their house value fall to a level below their equity.
August 2nd, 2012 at 4:27 pm
Chuck, I purchased in 2005. But I purchased something of comparable value to what I had and I rolled all the proceeds from one house to the other. We had all sorts of “advice” from “mortgage and finance professionals” who tried to upsell us (“You qualify for a house at 3x the price, why are you buying soooo low?!”), who tried to convince to take money out of the house “to spend on the good life you’ve earned”, who tried to foist off 2nd and 3rd mortgages (“You have too much equity in the house to just leave it lying around!”), etc.Strangely enough, the idea of living below your means and not having to constantly worry about needing every paycheck exactly on time has a lot of appeal to me. You know, if you take the 10th Commandment seriously and don’t covet what other folks have life really is better.
After we signed (not before since it was her idea to move she’s no dummy) my wife asked, “Did we pay too much for this house?” “Yes, we did, but someone paid too much for ours, too.” So I’ve seen paper losses, but no major real ones that weren’t worth it to keep my wife happy. But if I’d listened to the modern professionals rather than my parents and grandparents’ Great Depression era hard-learned lessons on debt, I’d be in serious, serious hurt these days.
August 2nd, 2012 at 4:57 pm
“You know, if you take the 10th Commandment seriously and don’t covet what other folks have life really is better.”
No truer words have ever been said. I didn’t buy or sell but a realtor friend made the same comments to me as they did for nerdbert (around ’05). My wife had in her mind that because the house value went way up we’d be able to move upwards as well until she realized that any move would be only lateral without incurring additional debt.
August 2nd, 2012 at 5:45 pm
“As envisioned, TARP would have had the government save the banks by buying troubled assets. These assets would then be under the control of the people’s political reps in congress.”
– and that, I’m sure, would have worked out well.
August 2nd, 2012 at 7:53 pm
Let’s rephrase this, then, per the comments about not being able to get nailed if homeowners were responsible; now the foreclosure crisis is hitting those who were less irresponsible than the initial two waves. I remember getting really uneasy when I heard about 95% loan to value–for a loan my sister-in-law took out.
Having watched the foreclosure listings for the past few years, by the way, I concur with Joe’s analysis. Not all, but most earlier ones appear to have been ARMs, and now I’m seeing a lot of guys who are losing homes they bought much earlier.
August 3rd, 2012 at 9:38 am
I’ll agree bubbasan, that as the Obama Depression continues more responsible folks are getting hit. But there are reasons the old, conservative rules on financing worked. You just don’t want to get loans that are as speculative as 95% LTV, which is why PMI is so expensive.
Look at how mortgages have changed over the years. Even before the Great Depression you typically had a minimum 50% down on 5-10 year mortgages, and the 80% down 15 year mortgage was a post-WW2 boom invention, and 30 year mortgages were a 60s and 70s invention. That’s a HUGE increase in risk taking behavior both for banks and consumers.
But our cultural attitudes have changed in the last 80 years and we’ve frankly been lulled into complacency on debt. We’d be in serious trouble these days as a country if it weren’t for Europe being a complete basket case and the US being the relatively safe haven.
August 3rd, 2012 at 11:27 am
A few years ago in Frogtown everybody was worried that the light rail would raise property values too much causing “gentrification” and forcing out the current residents. How funny is that? The house behind mine sold for under $30k. It’s like Detroit here.
August 3rd, 2012 at 2:05 pm
Nerdbert, agreed, but quite frankly, I’d prefer the term “less irresponsible” to “responsible” per what you said above. :^)
And agreed 100% about the old rules of borrowing. Some of my fondest memories are spending a week at a time with Grandma and Grandpa and hearing their stories of how things used to be. Since they made it through the depression by saving and not spending, that’s something written on me like carving on stone.
One other fun thought; a restaurant I used to frequent in Longmont, Colorado had 1940s era newspapers on the tables, including houses for sale. Typical prices were $2000 to $5000–when the consumer price index was “only” about ten times lower than it is today.
In other words, the house behind Bandit’s may be competitively priced, and all of our fancy ways of mortgaging homes may….simply have achieved rampant price inflation of the same and a ton more foreclosures.
Oops.