Okay, I still don't understand why banks would give out subprimes without something else going on???
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 All Forums >> [Life] >> Finances >> Okay, I still don't understand why banks would give out subprimes without something else going on??? | Page: [1] |
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Okay, I still don't understand why banks would give out... - 11/6/2008 10:49:15 PM
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willfs
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I asked this a while back and never got an answer. Fannie Mae and Freddy Mac ended up buying up a bunch of subprimes. So were banks giving out subprimes because they knew that they would be bought up? Why else would they give out such risky mortgages?
For those who do not know, subprime mortgages are mortgages that are given to those who are at high risk of not paying. They are meant to help low income citizens get a house. They ended up being the reason for our current financial crisis when the sub prime bubble burst. Subprimes were pushed by dems in the seventies and nineties. Barak Obama also had two former CEOs from Fannie Mae who were economic/political advisors. But facts like that never seemed to matter this Fall.
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RE: Okay, I still don't understand why banks would give... - 11/6/2008 11:01:07 PM
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ta_mosquito
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Moving from Election 2008 to Finances.
Thanks!
Tricia
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RE: Okay, I still don't understand why banks would give... - 11/7/2008 12:01:28 AM
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creationtalk
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Very simple. Greed.
The short term gains were more important than wise financial decisions that build wealth slowly. It was also very short-sighted and based on the assumption that housing prices would continue to climb so that the homes could be sold if/when the people defaulted.
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RE: Okay, I still don't understand why banks would give... - 11/7/2008 11:32:20 AM
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jod78
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SOME people will point to Bill Clinton as one of the causes of the subprime mortgage crisis. I don't have the details. I'm sure a google will bring up plenty for you, but it is my understanding that Clinton pressured mortgage lenders to abandon some of their more conservative lending practices so that more minorities could purchase homes.
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RE: Okay, I still don't understand why banks would give... - 11/7/2008 12:19:38 PM
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NoShow
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The banks were being pressured to loosen up lending (i.e. give out more loans) by the government. All of the government, Clinton, Bush, Democrats, Republicans... all the finger pointing is simply guilty parties not taking responsibility.
Banks are businesses and answer to Wall Street. When all the other banks got into subprime and were having record quarterly earnings, hesitant banks got in, thinking they had to in order to compete (not, all banks, Wells Fargo never got in as much as the other banks). Some will call this greed, but to be fair, many of the executives probably felt they were honestly doing the job they were hired to do and that required them to be competitive, which meant they had to get into the same stuff everyone else was getting into.
By design, most of the subprime loans were thought of as bridge loans. That they would, a later date, be replaced with another loan, theoretically a more conventional loan. So the subprime was a risk, but the banks thought (hoped) it would be for a temporary period and that they were in a position to ride them out. Most were wrong.
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RE: Okay, I still don't understand why banks would give... - 11/7/2008 3:25:22 PM
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DayStar43
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When Carter was president, the Community Reinvestment Act (CRA) was passed. It was expanded under Clinton. This act made lending institutions lend to individuals who normally would not have been able to get loans because they were high risk. Banks were scored for the number of these high risk loans they made. The higher the number, the better it was for you with the federal agencies overseeing banks. Not making these loans would bring the bank into disfavor and not being "community spirited." This act has not gone away just because we are in a financial crisis that it created. Banks and credit unions are still being pushed to invest in the community (make loans to high risk individuals).
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RE: Okay, I still don't understand why banks would give... - 11/7/2008 3:30:41 PM
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NoShow
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Also keep in mind that subprime is high risk, which includes but is not equal to low income. No document loans used by real estate investors were subprime. Also simply having a bad credit score put some people in subprime. I know a number of people that make over $150,000 a year and bought $650,000-750,000 houses with subprime loans that are waiting to be bailed out.
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RE: Okay, I still don't understand why banks would give... - 11/7/2008 5:19:44 PM
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relady
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quote:
It was expanded under Clinton. This act made lending institutions lend to individuals who normally would not have been able to get loans because they were high risk. Banks were scored for the number of these high risk loans they made. The higher the number, the better it was for you with the federal agencies overseeing banks. Not making these loans would bring the bank into disfavor and not being "community spirited." This act has not gone away just because we are in a financial crisis that it created. Banks and credit unions are still being pushed to invest in the community (make loans to high risk individuals). The original intent of this act was to stop REDLINING, which was and still is illegal, although it was being practiced consistently by banks who didn't want to lend to minorities. Many African American borrowers were shoved into subprime loans who should have been prime borrowers. This piece of legislation was aimed at stopping that practice. It was never intended to FORCE banks to make loans to absolutely unqualified borrowers. That's a line, I don't know where it originated, that is being used to pass the portion of the responsibility rightly laid at the bank's door, on to the borrower. SHAME on whoever started this!
quote:
Also keep in mind that subprime is high risk, which includes but is not equal to low income. No document loans used by real estate investors were subprime. Also simply having a bad credit score put some people in subprime. I know a number of people that make over $150,000 a year and bought $650,000-750,000 houses with subprime loans that are waiting to be bailed out. Absolutely, and this has absolutely nothing to do with the CRA. It has everything to do with borrowers borrowing more than they could afford and banks practically giving it away to people they would have known couldn't afford it if they had done their job of some basic underwriting.
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RE: Okay, I still don't understand why banks would give... - 11/9/2008 8:46:31 PM
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GroupW
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Thanks for clearing that up, Relady. You saved me having to type up a response on my own. As a 25 year veteran of the banking & finance industry, I'm seriously appalled at the amount of incorrect information that gets tossed around. You are correct - if CRA contributed to the current crisis, it was a very small component.
One thing to keep in mind also is that subprime loans are not bad, per se. Doing loans to people with low credit scores isn't necessarily a bad thing to do. Many firms have been able to pursue that line of business successfully. Wells Fargo and BB&T are two such examples.
High risk lending isn't bad in and of itself - there are good ways to do it and bad ways to do it. No doc loans to people who don't manage credit well is one example of a bad way to do it. Another example of a bad way to do it is to price the loans incorrectly and misjudge the risk.
There are very few types of mortgages that are really all that bad. Floating rate products can be good for some people, as can interest only loans and subprime loans. The problem starts when the wrong person lends money to the wrong person at the wrong rate and for the wrong reason. That's basically what happened.
BT
Edit to answer the OP:
Competition in the prime lending space has become so fierce that it's very hard to make an acceptable level of profit given the risks. When it's done well, subprime lending can offer a better risk adjusted return compared to prime mortgage lending. To do it right, you have to acknowledge the default risks in that product and price the product appropriately. You have to market it through reputable and ethical channels where you can retain a fair amount of control over what comes through the door. You have to make sure you have procedures in place to verify that people are being put into products that they can afford and that make sense for their situation. Finally, you have to have an infrastructure that can service the loan correctly. That means calling the day a payment is due and verifying it's been sent, and calling a few days later if it doesn't show up. It means sending out a default notice the minute the the loan goes 30 days delinquent and aggressively engaging the foreclosure/loss mitigation process at the first signs of trouble.
Part of the issue with the current level of defaults is that people didn't realize how aggressively these loans need to be serviced. You really need to know your customer and be in constant contact with them. That's expensive and many shops weren't willing to pay that freight. They're paying the cost of it now, though.
< Message edited by GroupW -- 11/9/2008 8:53:13 PM >
_____________________________
“For every problem, there is a solution that is simple, elegant and wrong.” -H.L. Mencken
"Most people would rather die than think; in fact, they do so." -Bertrand Russell
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RE: Okay, I still don't understand why banks would give... - 11/9/2008 10:25:02 PM
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relady
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quote:
You are correct - if CRA contributed to the current crisis, it was a very small component. Thanks! I'm glad to know I've learned something after my years in real estate. 
quote:
The problem starts when the wrong person lends money to the wrong person at the wrong rate and for the wrong reason. That's basically what happened. And, oh, so much of this seems to have gone on!
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RE: Okay, I still don't understand why banks would give... - 11/10/2008 8:16:09 AM
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P31W
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Teaching lessons on surety
by Crown Financial Ministries
With regard to finances, surety is probably the least taught and least understood principle in God's Word. Considering the number of times the Scriptures warn against surety, its amazing to think that so few actually heed God's cautions.
The fact that so many Christians can violate a basic biblical principle about money and seem to temporarily get away with it neither negates the truth of God's Word nor its caution concerning surety.
In a literal sense, surety means to pledge money, goods, or part payment for a greater obligation. In essence, it is taking on an obligation to pay later without a certain way to pay. “A man lacking in sense pledges and becomes guarantor in the presence of his neighbor” (Proverbs 17:18).
copy from www.crown.org library surety
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RE: Okay, I still don't understand why banks would give... - 11/10/2008 11:53:37 PM
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GroupW
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From: Up in the hills of Colorado (very BIG hills...)
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quote:
ORIGINAL: relady
Thanks! I'm glad to know I've learned something after my years in real estate.
It's always fun to have someone else in the industry take part in these kinds of discussions. I wish you'd been around in a few of the other discussions I've had!
BT
_____________________________
“For every problem, there is a solution that is simple, elegant and wrong.” -H.L. Mencken
"Most people would rather die than think; in fact, they do so." -Bertrand Russell
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RE: Okay, I still don't understand why banks would give... - 11/12/2008 10:09:32 AM
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relady
Posts: 1216
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From: Greater St. Louis Metro
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quote:
It's always fun to have someone else in the industry take part in these kinds of discussions. I wish you'd been around in a few of the other discussions I've had!
Well, what little I know, I have learned from the lenders I know, so my knowledge is limited because real estate agents don't get as much into the nuts and bolts of finance like they apparently used to. But we do get education on the basics. It's nice to hear and insider's view because this is certainly a lot more complicated than just blaming certain legislation, or the banks, or the borrowers.
Believe it or not....as bad as the market is, even here in St. Louis, we are still holding our own pretty well. We didn't see the huge gains during the bubble so we aren't seeing the value declines that many areas are. I am thankful for that. Our biggest problem right now seems to be getting first time buyers good loans and then getting them over their fear of buying.
Of course all the job losses in September and October are going to drive even more foreclosures. Ugh.
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RE: Okay, I still don't understand why banks would give... - 11/12/2008 11:59:58 AM
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GroupW
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From: Up in the hills of Colorado (very BIG hills...)
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Denver is about the same - we didn't get the 2001-2006 run up in prices so we're not getting quite the down draft either.
I'm guessing that based on October's numbers, that will change a bit.
I bought my house in 2004 and still have a small profit in it for the time being. Not much - maybe $20-30k or so but better than nuttin'.
BT
_____________________________
“For every problem, there is a solution that is simple, elegant and wrong.” -H.L. Mencken
"Most people would rather die than think; in fact, they do so." -Bertrand Russell
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