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How Bad Were The Loans?

Susan Taylor Martin, St. Petersburg Times, provides some background: A financial crisis built one bad loan at a time

Jackson, who said he handled marketing for the builder, bought 14 units between April and August of 2006 and financed them through several different lenders. He was vague on how much he actually paid for the condos although transfer taxes on the deeds reflect purchase prices of $320,000 apiece for eight of the units and $329,000 for the other six.

Jackson paid the higher amount for Units 404 and 418, according to the transfer taxes. BNC Mortgage loaned him $256,000 on each condo at 8.75 percent — a so-called “subprime” rate typically given to borrowers with less than sterling credit.

Eight units at $320K, plus six at $329K equals more that $4.5 million dollars to a guy who lives in a trailer park and rides a bicycle because of DUI convictions. He needs $9,940 to cover the taxes and condo fees every month. What would possess any rational lender to extend him credit?


1 The CultureGhost { 09.21.08 at 5:48 pm }

Excellent article…fascinating in a horrifying way.

2 Bryan { 09.21.08 at 7:19 pm }

As someone who has always “played by the rules” and gotten hassled on car loans, it was unbelievable that a guy on a bicycle was able to borrow over $4 million. Yeah, fascinating, kind of like watching a slow-motion train wreck.

In Florida, felons can’t be barbers but they can hand out mortgages.

3 Badtux { 09.21.08 at 10:25 pm }

At the height of the housing bubble I had a guy whose mom was a mortgage broker try to talk me into buying. He told me that housing prices were going up 20% a year so all I had to do was get in, hold onto the property for three years, and I’d make a huge profit selling it. He said that regardless of my income his mom could get me a mortgage. I told him no, it didn’t make sense, payments were too high compared to renting which meant that we were in a bubble and housing prices were going to come back down. He didn’t like hearing that, but that’s what anybody who had any sense could see.

As for this guy with his investment properties, at the height of the bubble here 60% of the homes were being bought by investors. They bought into the hype of “easy money” — just buy the property, hold onto it for three years, take your 60% profit and roll it over into new properties. It was crazy. Sad to say, a lot of those properties are still sitting there vacant, foreclosed, bank-owned but left vacant rather than rented out or put out for sale because if they get sold the bank has to actualize the loss on their books, the homes just sit there on overgrown lots gradually accumulating broken windows and occasionally burning down when squatters get in and cook some meth in them, our planning department now has a whole division that does nothing but track down ownership of foreclosed homes and send them notices that their properties need to be maintained, boarded up, or demolished whereas five years ago they had one guy who did that part-time. Meanwhile, families are crammed two or three to the apartment and rents just keep rising… it’s crazy, but that’s the situation here. And will stay the situation until those homes are forced onto the market and sold off to people who will live in them, which means prices are going to have to come down another 40% in the local market before people can afford them (prices have already come down 30% over the past two years).

4 The CultureGhost { 09.21.08 at 10:32 pm }

One of my cousins and her husband got into the “real estate business” several years ago. They were buying up properties like mad, turning them around, etc. Then they bought a few pieces in New Orleans right before Katrina hit. I asked my aunt how they were doing and she got very quiet….

5 Bryan { 09.21.08 at 10:41 pm }

The current assessed value on those condos is $172,400 [based on recent sales]. That is a reasonable price given where they are, except you have over $700 a month in condo fees and taxes on them, in addition to the mortgage. That will come down, because the taxes are based on the selling price, so it should drop to about $500 for a new owner, but still a lot of money for a two bedroom.

Until prices come down, real people can’t qualify for a real mortgage.

6 Bryan { 09.21.08 at 10:53 pm }

You can make money rehabbing and reselling. But my friend who has done a lot of it hasn’t even tried in the last three years. We are taking places that have been trashed and fixing them to FHA/VA standards, because there are a lot of people who use VA loans in this area.

He quit when he was offered “too much” for the last place we worked on. He figured that he was being priced out of the market. Builders were paying too much to get the lots, and tearing down the houses. That’s how we lost all of our local “starter” houses.

For him it was more of a hobby, than a job. And it wasn’t “fun” any more.

Yeah, CG, I would say there is plenty of reason not to want to talk about NOLA.

7 Kryten42 { 09.22.08 at 12:08 am }

My Grandfather made millions buying-renovating-selling between the mid 50’s and late 70’s. He’d find what he believed would become a growth area but was currently depressed and buy cheap. He’d renovate cheaply (using family as labor and *contacts* he had many of to get materials cheap). Then wait 5 or 10 years, whatever, and sell. I remember one place he got when I was a kid and he paid 600 pounds (before we converted to dollars), and 14 years later, sold it for over $240,000. Cost him peanuts to renovate. Was a two-story Victorian terrace. He somehow knew they would com back in vogue big time, and he was right. He sold about a dozen of them for a massive profit.

He was a dock worker when he started. 🙂

*The good ol’ days!*(tm)

8 Bryan { 09.22.08 at 12:28 am }

Sweat equity and long term investments should provide a good profit. If you start with a sound structure that is “square”, the money is well spent. My friend would buy houses that were at least 20 years old, and then we would modernize the plumbing and electrical.

The rest of it was cosmetic. There were a couple that really only needed a thorough cleaning inside and out to be salable, but he had his list and followed it.

The big thing was to be willing to climb into the attic and the crawl space underneath to be sure there were no surprises. That’s were you looked for water damage from roof leaks or plumbing. Water is the number one enemy of a building in this area.

The thing is to know your market and what they can afford.

9 Badtux { 09.22.08 at 12:51 am }

Indeed, the thing is to know your market and what they can afford. The affordability ratio got *way* out of whack, until it was basically impossible for the average person to qualify for a conventional mortgage to buy anything on the market. I mean, the median house price got to $850K here. And the median family income was around $88K. No friggin’ *way* that said family was going to be able to afford the average home here. And look, there are houses I’ve driven by that are, like, in the *ghetto* that sold for $500K+ during the bubble.

Until the housing market returns to the right side of the affordability index, ain’t no margin in doing the buy low sell high thing. Because you’re going to be buying high, selling low. That ain’t how ya make money!

10 jolly { 09.22.08 at 5:20 am }

very informative article.
Homeownership is possible for people with bad credit and no credit history at all thanks in large part to a multitude of loan packages made available by countless lenders. Good people with bad credit can now get approved for mortgages and despite what you may have heard from a well intended but misinformed friend or family members, these loans can be at very competitive rates.

11 Bryan { 09.22.08 at 11:14 am }

That is the bottom line, Badtux, the free market at work. Given a stable supply the price has to reflect the ability of the buyers to pay for the commodity. The “magic mortgages” raised the price too far and the market for homes collapsed.

When prices drop enough, the buyers will be back. Until then nothing the government does is going to be effective.

12 Bryan { 09.22.08 at 11:22 am }

The problem, Jolly, is that people bought the concept and it was false. If you can’t qualify for a conventional home mortgage, you can’t afford to buy a house. Too many people have been conned into believing that if your mortgage payment is the same as your rent, or even lower, you can afford a house and that simply isn’t true.

In addition to the mortgage you have the expenses of taxes and insurance that are covered by your landlord if you rent, and the costs of repair. If you own a house you have to be able to set aside additional money for any repairs, because they are your responsibility.

If you have to stretch to make mortgage payments, you can’t afford a house, and anyone who claims you can is running a scam.

13 Kryten42 { 09.22.08 at 12:42 pm }

My Grandfather made his money with decades of hard work and sweat and planning. One Uncle worked for a big building company, another worked for a concreting company, another was a cabinet maker, a cousin was a bricklayer, another an electrician… etc. It was all orchestrated by my Grandfather. And at the end of it, they all owned a nice big home fully paid for in a good area, and had money in the bank.

Now, everyone wants a free ride it seems. Most people work hard at their jobs, but don’t seem to want to work as hard on their lives. It’s the same here and everywhere else I know of too. I have no idea when people became stupid enough to believe they could get something for nothing. It’s never been true, and it never will be true.

“Stupid is as stupid does” – Forest Gump. 😉 LOL Wisdom from a purely fictional character. *What a World*(tm)

14 Bryan { 09.22.08 at 3:51 pm }

On Wall Street you can get money for nothing, and that’s the problem. As long as they don’t have to work for it, as long as they can receive huge salaries regardless of what happens to their company, there is no incentive to do a good job.

Your Grandfather had vision that stretched out for a lifetime, these guys can’t see beyond the next quarter.

15 Kryten42 { 09.22.08 at 11:06 pm }

I know… The problem of course is that it isn’t *money for nothing* in reality, as we know. It’s all numbers on a computer screen, the old *paper shuffle*. It’s fictional money, like my quotes from fictional characters. 😉 The just move debs around in the hopes of having the *actual* money to pay for them sooner or later. And as they saw that *worked* OK, they decided to juggle other fictional money, until they suddenly ran out of hands and all the fictional money balls came crashing down.

Not one of my Uncles or cousins who worked with my Grandfather ever had a loan. They never had a mortgage. Everything they had was paid for, for real. All their kids went to good schools, and they were all taught about the *real World*. The banks hated my family. LOL 😉 I have never had credit, and I never will. If I can’t afford it, I either don’t need it, or I’ll work until I can. My father, on the other hand, was an idiot. He believed in the *something for nothing* BS, or as we used to call it *robbing Peter to pay Paul* syndrome. I have no idea if he’s even still alive, and could care less. 🙂 *shrug*

Most people prefer to live in a fictional World. I prefer reality. Fiction can’t hurt you. Reality will kill you if you ignore it or take it for granted. 🙂

16 Bryan { 09.23.08 at 12:56 am }

I’m reminded of something Sam Walton [founder of Wal-Mart] said to an interviewer after a big market drop in the 1980s. The interviewer asked how it felt to lose a billion dollars in a day.

Sam told him that he didn’t have the money in the first place, so he couldn’t lose it, and if the interviewer didn’t understand that, he should stay out of the stock market.

The only assets in this mess are the houses. The mortgages are debt contracts. Then they were consolidated and bonds were issued based on the mortgages. Then bonds were consolidated and other paper was issued based on the bonds. This is idiocy, plain and simple. What on earth are big time investors doing betting billions of dollars on the ability of people to pay mortgages when you look at the US job market?

Now, people who are still making some money are being obligated more debt by the government to bail out these idiots. This wasn’t investing, it was gambling.