New Gets one of the Oldest Lessons Around
Chuck Ponzi March 5th, 2007
What goes up, must come down.
What do you get when your company says this about itself:
What about here?
Anyone who doesn’t know what happens to a local economy when a major employer goes bust… you’re about to find out.
At last count, NEW employed over 7,200 employees. How many of them are in Orange County?
i can’t wait for them to go out of business, and for all their slimy employees to be out on the street sleeping on a piece of cardboard, but i’d hardly call them a “major employer.” let’s just say their the first wave of a major industry that’s on its way to belly-updom here in the southland and in other national hotspots. live by the neg-am, die by the neg-am. i don’t want tar them all with one brush, but what a pathetic, parasitic group you real estate agents are. it’s a rare combination, smug and stupid, but that’s what you losers all are. and i know you troll these blogs, shaking in your boots, little drips of urine running down your leg from the overwhelming fright. then you post all tough and swaggering, and say how you’ve made billions already and you’ll be fine and it’s the newbie realtors who’ll suffer. ha! you’re all so stupid that for every dollar you made ripping off some young dreaming family, you’ve spent two on a Mercedes convertible and a granite countertop. nature abhors a vacuum and a fool, and i for one can’t wait to see you all sink.
“and i know you troll these blogs, shaking in your boots, little drips of urine running down your leg from the overwhelming fright.”
Do I detect a wee bit of schadenfreude? LOL
Practically Giddy,
You say you can’t wait for New Century to go out of business. Why are they slimy employees? You realize that the loans that they wrote only existed because an investor was willing to purchase them don’t you? Does that make them wrong to have given out those loans? If there were investors lining up to purchase a 580 FICO full doc transaction so be it.
What about the financial planner who put people into a 401k 3 weeks ago and just lost his clients a good chunk of his investment? Or how about the guy who sells you a 50,000 Ford Expedition that loses 30% of it’s value the second you drive it off the lot…is he slimy too?
The real issue is not that those loans existed…it’s that the consumer bit off more than he could chew. If a consumer qualifies by the given guidelines then they get the loan simple as that. Now of course if fraud is at play then obviously it’s a different story. But if they qualify then they qualify and they deserve the loan. And you might think that those programs should have never existed right? But if roughly 20% of the subprime mortgages are delinquent…then 80% of subprime borrowers have been responsible, payed their mortgage, gained tons of equity, and are home owners.
So when you say that realtors/lenders made money by “ripping” people off you are ignorant, because market prices aren’t set by agents, they are set by the consumers who believe that the property is worth it. And if you think that market prices are set by agents look in the paper at a house that has been sitting for 8 months. You’ll notice it won’t sell until the price is brought down to the market price…the price that a consumer is willing to pay for it.
Chris,
How is business out in the Inland Empire? Are your refi customers having any difficulty qualifying with the new standards and flat to falling home prices? A lot of bears have predicted this would be the case. What are you seeing?
Irvine Renter,
A lot of these guideline changes took place as of February 1st. Since that time it has been tougher to qualify borrowers. So far my refi clients have been fine because they’ve had good credit however…the ones who don’t are absolutely going to be in a world of hurt. Because the qualified client pool just shrank, it’s definetly bad news for the housing market out here. I’m not going to say that it’s the end of the world, but clearly we will see more short sales and NOD’s. Luckily for people out here who bought more than a year and a half ago they have some solid equity…at least for now.
Chris,
It will be interesting to see if this turns into the dreaded downward spiral. Once the lenders get burnt on a few short sales, they may tighten even further which makes refinancing even harder which in turn creates more short sales and foreclosures. The bearish argument for a significant decline depends on this happening.
I suppose in the short term at least, your business should do quite well. There are a lot of people who will need to refi this year with all the resets coming. Hopefully, they will qualify when the time comes…
They had better hurry. That barn door is closing fast. If people are overleveraged and needing to refi, they may be required to qualify based on the fully-amortized payment. When they could barely do it on a teaser option arm, there is no way under a fully amortized product.
Chuck Ponzi
Uhm,
I feel another person that can’t come to grip with some personal responsibility.
You can always spend a few seconds on line or with a calculator, look up what you payment will be and see if you can afford it.
The math is pretty simple but no one makes an effort.
No one needed to make the effort when prices were always rising.
I enjoyed both of your comments. I’m laughing. I agree that it is the fault of the buyer, primarily, and that fraud probably isn’t as rampant as some people think. I just don’t get how a middle income family gets into a 3/4 million dollar home and think they can hack it. I have a household income of about $250K and I’d feel strapped buying a 500K home. I want to have vacations, emergency money for new tires on my car and for braces for my kids. In order to pay my student loans and have a life of financial freedom, there is no way I’ll pay the Big Money for a nice home in Rancho Cucamonga. I’ll rent until this manic market regains some footing in reality. I don’t think it is going to be very long before I’ll be looking at homes that I can be proud of for 500K. It’s starting to go that way where a couple years ago the best I’d get for 500K is a rat trap that smells like urine ON the freeway. Let’s all just WAIT AND SEE!
I think you’re right…it won’t be long.
Nate,
About your comment, “fraud probably isn’t as rampant as some people think.”
You are wrong. This misperception seems to be rampant.
When you lie about your income on a mortgage loan application YOU ARE COMMITTING FRAUD. Boom.
Fraud is everywhere. Almost every (think 95%) stated mortgage in Orange County and nationwide that has been made is fraudulent.
Buyers lie about their income. Brokers are complicit in the lie. They foster deception. Without the lie, they make no commission.
Lenders like New Century and Fremont and other subprime lenders knew or should have known that stated loans were predominantly fraudulent. They are now suffering the consequence of taking the risk.
Wake up please. There was no real estate bubble. This was a credit bubble. Those extending credit (subprime lenders) have gone kaput or are about to.
Prepare for panic selling, foreclosures, and sellers competing with builders desperate to sell. Price drops of 50% are 3 months away.
I have seen drops of 10%-15% already. If you factor in incentives, add another 10%. That’s 25% people! And its only March! Giddyup.
There was a real estate bubble along with the credit bubble. The speculative demand created by the bubble caused more homes to be built. Hence the record number of empty homes.
Wow. We will see ghost towns again.
Actually I do not think the lenders comitted fraud. I wasn’t considering the fraud committed by the buyers in not truthfully stating their income.
Giving out a loan to people who couldn’t afford it was just plain stupid. Poor use of investor funds. Believing a buyer without documentation of income is amazingly moronic. Even poorer use of investor funds.
I DO NOT, however, believe that people who got into subprime loans did not know what they were getting into. That’s what I mean by less fraud than people think.
Every so often I see an article in the local paper about someone belly aching about losing their home because they “didn’t know” that their payment would balloon. I just am aghast at these people. Do they really think intelligent people would have ANY degree of empathy for them?
I don’t believe they went in without understanding and I do not think the feds should get involved as it is impossible to completely protect people from their own carelessness.
So, I think plenty of people lied about their income, but I don’t think with all the loan documentation that is required that so many people have been duped by fraudulent lending tactics. I just don’t buy it.
In any case, let the crash come, no matter the reason(s). I would like a reasonably priced house, please.
Nate,
If you make $250K and you would feel strapped buying a $500K home then you might need a shrink. I know many people in the Midwest that earn $100K and buy a $300K home and can easily afford the payments and a good lifestyle. I think the real issue is you don’t see any value in the $500K home in the OC. Which tells my you may not have lived in California your entire life. You don’t get your moneys worth in CA, never have, NEVER will. There are plenty of rich people here to keep the housing market afloat. The nice homes you and I want for $500 just won’t happen, it’s wishful thinking. We need to realize we missed the last huge jump up in the market and the majority of the people in these homes also make $150-250K, and they are not going anywhere. OC isn’t home to a bunch of broke losers who can’t plan. Sure there are a few who are overextended but not to the extent that will cause a huge drop. It will take major unemployment to push these homes down! They will trade in the 125K Porsche for an Accord and unload the second home before the primary home is going to get unloaded. And the OC had a lock on the land, they just don’t build that many homes to keep up with demand. Just my 2 cents.
Chris,
I was going to say that’s your guilty conscience talking but the more you defend it the more i realize that maybe you don’t even have a conscience. you knew that you were putting people into loans they couldn’t ultimately afford and didn’t understand and that were going to wipe them out financially, but you didn’t care as long as you made a few bucks off them. I don’t know if you believe in the afterlife Chris, but if you do, know that you are going to a bad, bad place. and all your sad defense-mechanism justifications aren’t going to change that one bit.
practicallygiddy,
That might be a bit harsh. I imagine most sub-prime lenders felt good about creating new homeowners at first. At what point exactly did this become evil and predatory? I don’t know, but I agree with you that it did. They say the road to hell is paved with good intentions, and sub-prime lending started with a good intention. The end result will be very sad for a lot of people, but I don’t know if I could go as far as to condemn sub-prime mortgage brokers to hell for the excesses of their industry (although some will end up there.)
I stumbled across Chris’s website before. He doesn’t seem like a bad guy. If you read his follow up statement, you see he is probably a bit bearish himself (why else would he be here?) He has to make a living, and he will have to live with his own conscious if he knowingly put people into loans certain to go in to foreclosure. We don’t know he did that (of course if he did, then he should go to hell).
I would like to see Chris keep posting here. It is good to have the perspective of an industry insider (just as long as he doesn’t become a troll).
Irvine Renter,
I enjoy reading this site because I get to see things from an outside perspective. As someone in the business obviously I’m hoping for the best in the market. Reading the postings on your site helps me see the views of those who clearly believe that we are in big trouble, at least in the short run.
I believe that in the long run So Cal will be just fine and housing prices will be steep.
I am a bit bearish at heart. More so because of the guideline changes that are occuring now. Before that happened, it was no big deal when 2 year fixed loans began resetting because we could just refi them into a new loan. Now, those people might not meet the new tougher guidelines and will have nowhere to turn to but selling.
We will have to wait and see.
Chris,
I suspect that we have barely begun to see the tightened restrictions… and for that matter, the lender implosions.
That you only had a few neg-ams in the last few years makes you a rare broker indeed. OC had over 30% of all purchases with Neg-am products last year, if memory serves.
That’s a spicy meatball. Many of them will likely not weather a rate reset, or a fully-amortized product.
That is a bit harsh. I wasn’t putting people into loans that they couldn’t afford. And who exactly determines what people can afford anyway. I was in line with my debt ratios on all my loans. I will say that a lot of the loans that I’ve used in the past couple years have been “no ratio” loans which are loans that completely ignore debt to income ratio and go solely off of the borrowers credit score. Now when you have a loan program like that you don’t even use income to qualify. Are those loans dangerous? Well you argue yes and I will too because obviously there is a greater risk. However, these loans were made available to those with good credit and those with a history of paying their bills tend to continue to pay their bills.
As far as me putting people into loans they don’t understand well I can assure my clients know what they are getting into. You see we work on reputation. You don’t seem to understand that. If I were to trick my clients into a neg am I’m only shooting myself in the foot. The truth is I’ve only done 3 neg am loans in the past 2 years and those 3 clients requested them. As far as putting people in a 2 or 3 year fixed note and telling them that we would try to refi them when their credit improves, at the time that was a very wise decision. If the client followed the advice and raised their credit then they would qualify for a fantastic traditional 30 year fixed loan. Of course now because rates on the 30 year fixed are so close to rates on short term loans 100% of the loans I’ve done this year have all been 30 year fixed programs.
The thing is you are just angry at me because you lump me in with loan officers that committ fraud. When fraud is present then clearly the client never deserved the loan in the first place and never should have been extended a loan. Those people of course will be stung bad by the housing market.
I just get annoyed that people get so upset with agents or loan officers. If fraud is present then yes get upset, but if they qualified per the guidelines then lay off. It’s the clients fault. They made a bad decision and that’s not my fault. We are a service industry and we help people do what they want. Yes we sell like any salesman but you generalize and think that we are all fire breathing devil people with tails and pitchforks combing the streets looking for our next “victim,” when the majority of people in our business do feel good about helping someone achieve their dreams of home ownership.
I am not happy with the banks/investment firms that handle my money in a risky way.
I am not happy that the government wants to bail out people who were gambling, speculating or too disintrested to do any reasearch on what they could afford.
I am not happy with loan officers who coached people through liar loans that are flirting with fraud.
Not sure where you fit in with all of that.
Maybe you were on the side. The Daily Breeze had an article; some loan brokers were talking about their clients showing up for a refinance every year. They’d show up a year later with two new hummers, a new pool and need for a new loan. That guy in the story was like said “hey, thanks for the buisness but I hope I don’t see you again in six months but they show up again and again”
Anyhow, I have the least amount of sympathy for the people that wasted their money like that.
Chris,
Come on! “If they qualified per the guidelines, then lay off”? That’s a close second to “I was just following orders.” The powers of denial are strong indeed.
Not necessarily. Consumers like you just want someone to blame. It’s like an alcoholic who says the only reason I’m drunk today is because the guy at the grocery store sold me that bottle of Jack Daniels. If that guy would have just denied me what I decided to purchase then everything would be okay.
Stop fighting for the consumer and realize that they have a choice in what they purchase and need to take full responsibility for their debt load however large.
You know the savings rate in this country is negative. People in the US are spending more than they are making. There are stores on every street corner tempting the US consumer to spend spend spend. Should we close down all stores for 1 week and force Americans to save their money for a week since all the stores are closed?
No…the consumer has a choice. If they choose to save nothing and buy stupid stuff that is their choice.
Chris,
You seem like a reasonable guy, so I’m going to give you the benefit of the doubt on this one, but you have missed the largest factor of all…
Many (I’m not saying most) of these loans are as toxic as rat poison in baby food. The average person (by that I mean not a loan broker or affiliated in your industry) haven’t a clue what a neg-am or I/O loan means; they only understand the monthly payment; that’s the front label of the baby food. You must know that commissions are greater for neg-am and I/O ARMS, right?
Therefore, as has been the case in American consumer protection, the burden of proof rests on the more advantaged party. The analogy of rat poison in the baby food is right because the retailer knew what was in there. Simply putting a warning label on the back and praying for caveat emptor is not enough to alert the consumer… they just see the baby food label and buy it. This becomes especially egregious when the retailer gets paid more to sell the baby food with rat poison in it. It’s likely that selling baby food with poion will be illegal; the mortgage banking lobbyists are probably already kicking their lawyers in high gear to defend toxic ARMs. I wouldn’t be surprised to see this all play out on a national level from a regulatory standpoint.
This is no offense to you… you’re just a retailer (and one that probably tells the consumer exactly whats in the product), but there is too much of a moral hazard to allow the average unregulated mortgage broker with poor education and no requirements to understand the product themselves to be selling it.
Chuck Ponzi
Well said. You are completely right about how wrong it is that a good number of consumers aren’t properly explained the implications of the product they are choosing. I have encountered clients who wanted a neg am and once I explained it to them would say “I’ve never heard it explained like that” or “So that’s how it works.” Good reply Chuck.
Chris,
You seem like a very reasonable guy, and you didn’t get to defensive when it was getting rather heated. I like how you listened and responded appropriately. Please post more.
[...] New Gets one of the Oldest Lessons Around [...]
The real estate mantra during the housing run-up was “real estate never loses value,” “or “get in before it’s too late.” So to profit from the hysteria, it subprime loans were offered to people who clearly could not afford the price of the home based on fundamentals. Common sense amongst these “professionals” would have indicated that these people were bound to be in over their heads. New Century execs were raking in the $$ and only had to “show up” to make a killing.
That is not the same as purchasing mutual funds that have a disclaimer -that indeed they can lose value. Plus, you can more easily get out of a mutual fund than a home loan. And buying a Ford Expedition or any car is not even in the same game - it doesn’t cost $500K payable over 30 yrs…and no one expects it to appreciate or last that long –it’s a poor comparison to what is actually going on in mortgage brokering.
There is a serious lack of morals and ethics in the RE and lending industry —greedy “professionals,” making loads of $$ off the naive borrower -profiting from what they should have known would be their future misfortune. And most of these borrowers simply wanted the so-called “American Dream.” To own your own home. I cannot sympathize with the RE leaches and surely do blame the industry’s lack of self-regulation. We need a law for everything so that people will act human rather than like blood suckers.
What I heard a lot of real estate professionals say was “get in before it’s too late” which WAS true because those who “got in around 2002, 2003, and 2004 have made substantial equity gains and are much wealthier than those who rented all those years (unless of course you are talking about someone who rented and dumped A TON of money into the stock market and invested wisely rather than pay a higher mortgage). In fact…those people who DID buy back in 02, 03, 04 and even 05 could sell now, still have equity (if they didn’t pull cash out of their house) and be renters with cash in the bank from the sale.
If they pulled all their cash out to pay off their bills and then ran their bills back up then that is too bad because you are right they are in a very bad spot.
I also heard a lot or RE professionals saying “real estate always goes up in the long run” which is true.
I always told my customers to take out equity to better themselves like pay off high interest credit card debt that would have never been paid off if they continued to make the minimum payments (which is usually what they always paid).
Unfortunately, some people give into temptation and max themselves out no matter what you advise them to do.
True it may have been “good intention” to lend $ to buyers who might not qualify with traditional standards. But the incentive to abuse it is built into these loans and even if the buyer is responsible, in my view –lenders should regulate these transactions tightly. To say that a bunch of ignorant people in a community are just dumb for having gotten themselves into the mess - is to ignore that professionals should know the fundamentals and history of the market.
The bottom line, aside from financial loss, is a loss of community standards.
It wasn’t that it was a good intention to lend to those buyers. It was like you said that it was profitable. Wall street was paying big bucks for these loans. They felt comfortable using their dollars in this manner. They were comfortable for a long time because the appreciation, and because at the time foreclosure rates were SUPER LOW. The data was showing that people were able to make their payments in the subprime arena. At the end of their 2 or 3 year fixed because apprecaition rates were high I’m sure investors figured refinancing of that loan would be no problem and their would be equity if the borrower got into trouble which there was.
Bottom line - A lot of the people who will get into trouble will be those who took out their money and used it unwisely. OR they used it wisely by paying off debt only to rack the debt right back up again.