Fed slashes rates to boost economy

[DaddyMac]

A couple things folks.

1) This is hardly a "sub-prime" mortgage industry issue alone. This very much falls over into the conforming mortgage realm as well. The sub-prime firms were first and foremost, there are hundreds of thousands - probably millions of defaults and foreclosures occuring in the conforming market.

2) The problem has more to do with the collapse of the housing industry as a whole. CyclonePride above nailed it. It's not affecting Iowa or the midwest that much. But the coasts ans the south are most certainly seeing big trouble. I think the stat a few weeks ago was somthing like 1:10 (or less) homes in CA are in some form of foreclosure.

3) And more importantly, protection of the borrowing institutions altogether. The record number of default puts most high cost industries at risk, not least of which includes the auto industry. Bad credit, bankruptcy, or just the spiralling interest rates (credit cards, loans, etc) allow for less money to be spent. Less money = less purchasing = less production, so on and so forth.

I guess what I'm saying that these cuts aren't simply for the sake of protecting a few dumb borrowers. For staters, it's protecting millions, not thousands. And it's trying to give a leg up to a struggling housing market and the credit industry on the whole.

FWIW, I think interest only or long term ARMs should just go away, perhaps even outlawed. But they do have their place - investors, contractors, and such. In fact, the gov't does a pretty decent job of doing what they can to protect consumers. I know our company jumps through hoops constantly to meet fed regulations. But despite that, some just don't understand, don't care or don't bother. I mean, how many of you read all 50 pages of that mortgage contract word for word? And to Cyclonesworld's questions above about going after the lenders. Unfortunately, I'd guesstimate that over 90% of the current note holders did not originate the loan they hold.

The good news, from the industry standpoint, is that the herd is most definitely being thinned. Although at the cost of some very good people - keep that in mind. But the more unscrupulous characters are being run off. But there's enough bllowback from the lending institutions that the industry is "over-correcting", which isn't really a good thing either.

I find it a little funny that people weren't freaking about the rates in '02-'03. How many here didn't get a loan, new house or refi during that low?

[jbhtexas]

DaddyMac,

I understand your points, but regarding (2), but IMO, some (or maybe most) of the housing market problems, at least in my area, seem to be the direct fault of the builders and housing speculators.

Several years ago, the builders put up a bunch of expensive speculative homes. They would fence off a small development, and stick a few $500,000-$1,000,000 homes in areas where the prevailing housing prices were in the $150,000-$200,000 range. Most of those homes sat empty for a long while, because they were beyond the resources of those looking to buy houses. There's one in such development in my area where 6/7 of the new big $$$ houses were empty for nearly two years, with a big "price reduced" sign out front of the development. And then, along come ARMs and a few other types of "creative" mortgages...all of sudden, folks could now "afford" to buy those big expensive houses. Perhaps some of these creative mortgages arrangements were developed by mortgage companies in cahoots with the builders to help these builders unload their expensive houses???

I've also read that at least a couple of the national builders have huge land inventories, and they are building them out hoping to sell the houses because they need to get rid of that land, even though there is not demand in those areas for the number of houses they are building. Basically, they are in firesale mode, and driving their own market down.

I guess it just seems to me that the Fed is risking inflation to help the housing industry, whose problems are largely due to bad decision making on their own part.

[DaddyMac]

You're right, of course. That is a issue within the market - but only one part of the overall. Mine is just a part as well.

What I'm speaking to the large number of foreclosures, particularly in the higher population centers, ala CA. Again, it's something like 1 in 10 (actually I think it was 1 in 8, which seems unbelieveable). Alot of people will simply say, "well, they lost their home - too bad, should've planned better". What's not considered is the flip side of what happens to that home. It's quite the error of thinking that banks profit from foreclosures. More often, quite the opposite. And to make any money, they have to offload that property to a new buyer. Traditional rules of supply and demand are coming into play and run the risk of driving prices down - way down. Companies lose, borrowers lose... current home owners trying to sell their homes legitimately, lose.

There's a ton of blame to go around on this. Borrowers, lenders, builders. Problem is (as I've been told and am in the mortgage/banking industry) is that it goes way beyond just the subprime market and will leach out in other areas of the economy. I think people listen to the 5:30 news and all they hear is sub-prime, as if everything else is immune from all this.