Sunday, February 3, 2008

House Of Cards





"Sometimes you have to apply to get a loan, [this time] you almost had to apply not to get one..."

It was all predicated on the idea that real estate prices would keep going up, and up and up, and for a long time they did. But by the summer of 2005, speculators flipping houses in Stockton had helped drive the price of that four-bedroom house to more than $400,000 and the market began to soften, then to tumble.

All of a sudden those subprime borrowers who had taken the free money found themselves upside down, owing more on their new house than it was worth.

...They cannot refinance because the value of the house fell below the existing mortgage. They say they can afford the higher payments but see no point in making them.

Matt: The value of the house keeps going down and the payments keep going up. Where's the logic in that?

Stephanie: Why make a $3200 a month payment on a 1200 square foot home? It makes no sense.

Steve Kroft: But that's what you agreed to do when you bought the house.

Stephanie: Fine if the value was going up. The value is going down.

Steve Kroft: You are saying essentially you are going to stop making payments.

Stephanie: The only advice we've gotten so far is to walk away.

That's exactly the advice that so many "homeowners" will begin to take, as property values plummet.

There is a certain cold logic to just walking away.

Kevin Moran, the real estate agent who gave Kroft the tour of foreclosed houses in the Weston Ranch subdivision, says it is happening every day.

They were never really invested.

Most of the people who lost the houses didn’t lose any money because they never put any money down.

Though their credit is damaged, and they could face legal action in some circumstances, they got to live in a new house for a couple of years, and some of them even managed to get some money with home equity loans or by refinancing.

"Nobody seems to be saying, 'Look, I made a contract with you. I borrowed money from you. I'm gonna do everything I can to pay off that obligation.' People just seem to be saying, 'Look, take the house. Good-bye. I'm leaving,'" Kroft says.

"There was a time, I think, when people felt really bad about not paying off a debt."

"Yeah, I think in those days, loans were made by your local banker or building and loan associations or savings and loan. They were guys you saw in the grocery store. They were on the little league team with you, the PTA, the school. And I think as mortgages became securitized and Wall Street became involved, they became very transactional and there was no relationship built with the borrower and the lender. And I think that makes it easier for someone to see it as an anonymous party at the other end of the transaction and just walk away from it," Moran says.

"Just a business decision," Kroft says.

"A business decision that has to be made," Moran agrees.

"It turns out that if you give people free money, they will take it without really worrying too much about giving it back. Because after all, it was free," Jim Grant says.

Asked if it's a case of greed, Grant says, "Greed, sure. Greed on both sides of the table."

"What do you mean?" Kroft asks.

"Lenders and borrowers," Grant says. "Everyone was gaming the system."

Read more here...
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