Sunday, August 12, 2007

Bridge for Sale - Collapse II

Tucson, Arizona. Anyone driving around Tucson can see the proliferation of "Payday Loan" sharks getting rich on the backs of the poor. Lotteries across the country, which have sales exceeding $50 billion (yes, billion). Who buys these tickets? Your humble blogger is a dissertation shy of a PhD in mathematics whose specialty was probability theory. How much do you think I have spent on lottery tickets?

Payday loan sharks screw the unsophisticated. The lotteries screw the unsophisticated. But wait, there's more. For just $4.99 a day, you can RENT TO OWN this fabulous television, and for only an additional $9.99 a day, a nice leather sofa to sit in while you watch. Got financial woes? Head to the local pawn shop where they'll pay you top dollar for your goodies.

We'll skip what for-profit education institutions do to gullible students.

More problematic and a headache on the way involves the mortgage industry practice of teaser rates and second mortgages up to 125 percent of the appraised property value. Check out and look at the banner reading $300,000 for $719/month at 5.5 percent. The astute will grab the computational aid of choice and instantly realize that a 30-year loan at 5.5 percent for $300 grand has a P&I of $1700, not $719. For the years the teaser rate applies, the loan balance spirals upward at the unmet interest applied, in the above case about $700 a month.

A bunch of folks have bought a bridge (mortgage) about to collapse when the fictitious $719 becomes two grand. The reader can google around, but the punch line is that the mortgage industry fattened up on a lot of nonsense that shouldn't even be legal.

The page requires registration so I will reference the source and quote directly. From Steven Pearlstein's 8/11/2007 piece at The Washington Post:

In a matter of months, the number of mortgage loans in arrears has gone from historic lows to near historic highs, with the worst yet to come as teaser rates are reset.

This is a financial, economic and political time bomb that is likely to force families out of their homes; dump millions of houses and condos onto an already glutted market; and result in massive losses for mortgage lenders, hedge funds, banks, insurance companies and pension funds that hold securities backed by, or somehow tied to, these troubled mortgages.

Remember the savings-and-loan crisis of the late '80s?

When are we going to wake up and eradicate policies and loopholes that allow if not encourage unscrupulous behavior that exploits the vulnerable and unsophisticated? It should not be legal to loan someone $300 grand and tell them the payments are $700 a month. If someone wants to provide payday loans, fine, but the rates permitted are unconscionable. The lottery is regressive taxation and the aware know it. The rent to own shops should be shut down entirely. What possible justification exists to allow someone to get rich manipulating stupid people to pay two grand for a $400 TV?

The apparent lack of conscience in so many people is frightening. The themes are consistent. Greedy criminals see an angle, screw the system, and the rest of us end up paying to clean up the mess.

The impending mortgage fiasco is going to hurt.


Anonymous Anonymous said...

I have worked in the mortgage industry for thirty years and currently manage a branch office for a major mortgage company.

Your story is "spot on" perfect.

I was a senior underwriter and managed underwriters, sales staff, reception. A year ago we had 15 people. By the end of next week we will have 3, a clerk who also does reception, one sales position, and myself. I will do all of my own underwriting, and we will only make the most solid of loans.

I think our company will make it, but we will downsize by at least 50%. I layoff three people tomorrow.

I read "Something Else." Good work, but depressing. The part about the dogs was sickening. That your story is true is without question.

No one could make that up.

8/12/2007 5:19 PM  
Anonymous dustin said...

I have to wonder if the wise old men of washington knew about this possibility ahead of time. That they reworked bankruptcy protection (in a bad way) around the same time all this was in full swing seems to coincidental.

8/13/2007 6:19 AM  
Blogger Sirocco said...

Payday loans are legalized usury. The annual interest on them would be in three digits.

It's no coincidence foreclosures are hitting hardest in areas where poorer working-class families were buying houses. Meanwhile, neighborhoods like mine, which are considered a little more "upscale" are continuing to appreciate.

Of course, while the lower rungs of the economic ladder get shat upon once again (both via foreclosures and layoffs), the people making the decisions that got us into this mess will still walk away with their large salaries, the larger bonuses they received, maybe a healthy severance package ... and everyone will start eagerly looking for the next market opportunity to get wealthy at the expense of the less well off.

The cycle of greed spins on.

8/13/2007 7:25 AM  

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