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Thursday, September 07, 2006

11pm News: Fiscal responsibility is waning

It's 11pm. After my spouse wrote a piece over at Rain City Guide earlier this evening, I decided to write about something on my mind here at Seattle Bubble.

The blame rests on me

I've made some stupid financial decisions in my life. I blame me. And, my ignorance in financial matters.

When I do filing of closed transactions, I usually spend some time quickly browsing some details of the transactions. When the two large file cabinets we have in the office are full, it is usually my cue to move'em out into storage to make room for deals closed within the last month or two.

I've noticed on bubble blogs that lots of blame for the real estate bubble is directed at Realtors and Loan Officers. But, you know what? I've come to realize that over the last two years, we have had a healthy number of customers, who I've coined "refinance refugees," for lack of a better term (like repeat customers), who return to our office to close their 2nd or 3rd refinance transaction.

I don't say this in a condescending manner at all. It's just --that's what it is. I've had several after work dinner conversations with my spouse regarding the probability of borrowers in our market and elsewhere clearly in over their head. I know this sounds terrible, but the truth of the matter is that I do think that some of our clients will be refinancing again or selling to get out of financial problems. Some will return to our office and some will close their transactions elsewhere. But, they will do it.

After meeting with another client today who had refinanced and closed their transaction a short time ago with us, it became apparent that people are in control of their financial lives, for better or for worse. Certainly, to a LARGE extent, we are in a credit bubble caused by easy money, reduced credit standards and fiscal irresponsibility in lending. But, that does not excuse people sitting across the table from me, and scores of other escrow firms across the country, who sign on the signature line. In general, when borrowers refinance over and over and just shift consumer debt onto a home, you can't blame the loan officers and Realtors for other people's decision making. Yes, I understand that loan officers profit from other peoples fiscal irresponsibility. And, I understand that people blame the loan officers for "putting" them in that predicament. But, I just don't think that you can relieve the responsibility (or lack thereof) of the consumer.

This does not excuse some loan officers that gain a financial windfall by preying on the elderly, or who participate in fraudulent loans or some Realtors who participate in unethical or fraudulent behavior.

Escalating home prices due to easy money. People financing purchases that don't prepare for rainy days and don't live within or UNDER their means. Folks who refinance out of trouble and tap out the housing ATM. These are all part of the game to ruin. When people only prepare and live for today and not 5yrs. or 20 yrs. from now, that's what creates bubbles.

"If you strive for mediocrity, that's what you get." - Ken Foreman, Ph.D, U.S. Olympic Track & Field Coach (Seoul Korea 1988 Olympic Games) & former Seattle Pacific University Track & Field Coach.

This is what he literally screamed at me and my class at SPU in 1985 during a lackluster and non-participatory day in class. And after that tirade, he slammed his text book down on the podium and slammed the classroom door and walked away from us all. After he left the classroom I don't think anyone moved for at least 2 minutes. The statement can be used for most anything, including financial responsibility. I'll never forget that day.
It's fun analyzing the markets and discussing how the Puget Sound market will do. It's easy to blame other people and professions. But at the end of the day, if I can't make my payment after my ARM adjusts in Dec. of 2009, I have nobody to blame but the guy in the mirror.


Anonymous said...

What happens to the borrowers when they cannot pay the reset ARM payments? If they try and refinance to a fixed rate and do not make enough, do the lenders have a plan to accomadate this situation with some more creative financing. Maybe 50 year loans will become all the rage

plymster said...

I don't know if blame is so easily assigned to the consumer. Sure, Joe Sixpack is buying beyond his limits, but look at our society. This is common. Chronic inflation drives everyone to invest (or else you're losing money to inflation), this causes risk to be under-rewarded. When you keep following that chronic inflation (even at 2%) policy, this encourages a lower premium for risk vs. reward.

So now, in order to make a dime, an investor has to take on a massive amount of risk. It's the same with a homeowner.

And let's not forget that while buying a home is the largest transaction most people will ever transact, there's no reason people should be expected to research the market as thoroughly as people on this blog do. Most people barely have a concept of investing, markets, toxic loans, etc. If you look at posts by Realtors at the PI RE blog you can see that even Realtors don't have the vaguest clue, and this is their livelihood.

Maybe the public should be smarter about their purchases, but when we've developed "creative financing", dropped interest rates to negative real rates, and built up title companies, mortgage insurance, various legal entities that must be involved, HOA fees, etc., we've developed a system that is too complicated to trade in. Honestly, how many homeowners out there have thoroughly read and undertood every document they're forced to sign at closing. There is clearly no "meeting of the minds" on these contracts. They should all be dismissed (theoretically). Hell, I can barely make heads or tails of my grocery bill with all the discounts/lb and club card nonsense that goes on.

So let's not blame the consumer because it's too complex to buy effectively. Let's not blame the investor because he is driven to take on unimaginable risk because the Fed thinks inflation is the best thing since sliced bread.

Blame Canada.

Wringing hands, squeezing dollars said...

And let's not forget that while buying a home is the largest transaction most people will ever transact, there's no reason people should be expected to research the market as thoroughly as people on this blog do.

I'm assuming the above is sarcasm. I do not regard myself as a being of higher intelligence and steadier fiscal responsibility merely because I visit housing bubble blogs and make the maximum allowable contribution to my retirement accounts yearly.

I expect my friends to know at least as much as I do, and invest better, because I think they are smarter than I. But lately I am considering maybe they are merely more optimistic. My spouse and I look at these Shiller graphs, the Maps of Misery, the unsustainable 15% YOY price increase from 2003-2006, and we sit tight and bless our 5% fixed. Our friends are settling into 40-year ARMs, or cheaply constructed rural McMansions and I have to trust that they've read everything and understand their risks.

I research every purchase I make over $100. I don't expect everyone to be the fi$cal candya$$ I am, but I can't fathom anyone with a net worth lower than mine making a $400,000+ purchase without blinking or reviewing terms.

plymster said...

Anonymous -

The reset ARM payments are a big deal, but I doubt that's what is purely causing Housing to fall apart.

More likely HELOCs (the favorite other 15-20% of those initial home debts, and which are pegged to short term rates) are knocking out this first round of defaulters.

HELOCs are also that Housing ATM that everyone goes on about. Imagine you have a credit card with $100,000 on it (for the deck, the new SUV, the plasma screen TV, the wife's boobjob, college, etc.), that goes from 5% (about a $530/month payment) to 8% (about a $730/month payment) over a couple year period. That's assuming you haven't missed a payment (I can't say what the fees/penalties would be in that case, but I can't imagine it's chump change).

Recent refinancing was probably people trying to roll their HELOCs into their ARMS (which will go up in 3-5 years, dragging out the housing debacle for a looooong time). Those that can't refi are stuck with those HELOCs, and are either struggling and trapped (California), or are defaulting (Denver, Northeast).

Housing is falling apart on the Southeast thanks to depleted insurance companies (that's where alot of that stock market money disappeared from in 2000-2002), stronger hurricanes (thanks, global warming!), and our criminally useless administration (thanks, misguided voters!).

Up here, it will likely fall apart once lending standards tighten, credit dries up, and all those out-of-state specuvestors have to sell their million-dollar $hitboxes in the Bay Area, Boston, Denver, Florida, LA, etc. This should hit with the housing-led recession (depression?) and turn Seattle into a post-apocalyptic hell that Snake Plisken and Mad Max would really dig out on (or at least return housing prices to below the norm).

Man, I love Friday morning rants!

But back to those ARMs: When they reset, you'll likely see a huge reduction in consumer spending as people cut back to pay off the mortgage. Refinancing will be an impossibility as current defaults in the east are forcing lending tightening. This means that those who can't cut back enough will be SOL (foreclosed). Unlike Japan, we were lucky to have the deflationary cycle hit us before we got deep into those multi-generational mortgages.

plymster said...


It's not a matter of intelligence; it's a matter of curiosity, hubris, and the ability to understand and analyze trends.

Most people figure: Joe bought a house. I'm smarter and have more money than Joe. I should be able to buy a house. Housing bubble? But prices keep going up; these folks must wear tinfoil hats and chat about 9/11 conspiracies.

You and I figure: I want to buy a house. You want how much!?!? Are you out of your frickin' mind? Hell, everyone's out of their minds. Maybe it's me. What's the deal here? Housing bubble? Prices are rising, but credit is nuts. Sales are slacking off. None of the RE industry professionals can form a logical argument, so I can't trust their analysis. I'll have to dig into this myself.

Keep up the good work of worrying and pinching pennies. It's folks like you that keep the world grounded.

S Crow said...

Plymster -

I agree with your comments. It's great to have these discussions because I learn so much.

Every time I think I'm on to something, someone offers another angle that has merit.

You mention about the "process being so complicated" I think I'll do a post about that issue over at Rain City Guide where all the real estate folks hang out. This is what needs to be read, to better understand what consumers are thinking about.

In fact, I invite everyone to post observations over at Rain City Guide from time to time.

redmondjp said...

Is there any real surprise here, regarding consumers' behavior? I completely agree that the responsibility lies solely at the feet (ergh, ouch, sorry) of the consumer or customer. Paraphrasing the bible, people are like sheep--it was true 2000 years ago, is still true today.

Every day driving to/from work, I hear these ads on the radio claiming "no-cost" loans (no-cost? Now how can that be?), or that they can save you hundreds of dollars a month if you refi with company X (also usually a lie, as in the end you will pay much more).

The TV ads beat into our heads for 4-5 years that we all need to drive an oversized, uncomfortable, very expensive military transport vehicle--and then, guess what? You start to see them in people's driveways. WHO KNEW 10 or 20 years ago that it would be cool to drive around in a military vehicle? Advertising works! Even if it's selling us the last thing that we really need.

I also agree that blaming RE agents and mortgage brokers for the situation is no more correct than blaming lawyers for all of the personal injury lawsuits being filed, or blaming stock brokers for wild market speculation. Certainly in each of these cases, there are the enablers who profit from these transactions, but they all depend upon the CUSTOMER to buy/sell a house, file a lawsuit, or buy/sell stocks, respectively.

As long as big corporations are profiting handsomely from people's (stupid?) decisions, nothing will change. Once the financial industry gets bit by all of the exotic financing going on now, you can bet that lending standards will certainly be tightened.

Anonymous said...

RE agents are not culpable for lies they make regarding "RE always goes up" and other unethical practises that are DESIGNED to screw people into houses they cannot afford.

I believe it against the law for a portfolio manager to guarantee that a stock will hit a certain return for their client. No such laws exist for Realtors who can blithely cheerlead that RE will appreciate X% this year FOR SURE!!!! so buy now, don't get left behind.

The NAR, David Lereah was touting virtual guarantees last summer at this time. He even wrote a book to spew these lies.

Now , one short year later, he's beggig sellers to get on board and lower prices to get the markets moving.

Lenders are also not culpapble for screwing borrowers into loans that they know cannot be repaid.

The consumer is gullible and trusting representatives of industries that benefit most from you, the consumer, over-paying.

When a used car salesman rips you off, who do you blame?

The buck stops with the gullible consumer.

But that doesn't mean that the REIC is squeaky clean or had nothing to do with people overpaying. They ENCOURAGED it to the utmost and in many cases LIED to make their profits.

But there is nothing in the Realtors code that says they MUST be honest or that they are held accountable for their lies and deceptions or just plain stupidity.

Just witness the multitude of properties delisted and relisted one week later as "New on Market!!", in order to make the market appear stronger than it really is.

So as always, it's back to Buyer Beware.

The consumer is ultimately responsible. Period.

S Crow said...


Thanks for the feedback. Good points.

I wonder if escrow companies that are owned by the mortgage or title firms are also culpable to an degree.

Although our small business is owned by just my spouse and I, we profit from the transactions too. Although we are paid among the least, sometimes I wonder what others think about escrow's role. We have to be neutral, but it does make it awkward when we are only paid if the deal closes. Could that be a conflict of interest?

Anonymous said...

I heard one ad on the radio that said something along the lines of "home prices are so high, so why risk your money on a down payment when you can finance %100"

seattle price drop said...

Anon 6"01-

this line of reasoning, ie. "why risk the deposit, go with 100% interest" is just one of the many perverse things that happened when the housing market turned into a gambling casino.

as such, it will be one of the many things that bring it crashing to it's knees.

seattle long term owner said...

simply put, America is poor in math...

The math that they learn is this:

My co-worker who makes what I do just bought a house... that means I can too.. and his came with a plasma TV... so will mine..

There's still money in the bank, let's spend it all since it's not doing anybody any good sitting in the bank..

There's some equity in the house... let's buy a HUMMER so people think we're rich...

What??? I'm supposed to pay all of this money back? No Way... that's Junior's problem... he better start working when he finishes kindergarten coz there's no way I'm sending him to grade school...

And so junior becomes poorer in math and learns math through his parents examples...