Bankers are trying to blame borrowers for the deflation of the housing bubble. The geniuses who came up with the toxic Option ARM are lecturing the rest of us on the need for math proficiency.
Irvine Home Address … 4 MONTGOMERY Irvine, CA 92604
Resale Home Price …… $280,000
I got six.
That's all there is.
Six time one is six, one times six
He got six.
I put mine with his and we got twelve
Six time two is twelve, two times six
I got six, you got six,
She got six.
We got eighteen altogether.
If we can get 'em all together.
Six time three is eighteen, three times six
Multiplication Rock — I Got Six
Did you like word problems in math class? Many students didn't. If you didn't do well in math class, the children who did math well may have mocked you for being inferior. Those kids grew up to be bankers, and now they are still mocking you.
The role of mathematics in America’s housing bust
May 13th 2010 | From The Economist print edition
IN HINDSIGHT one of the worst things about America’s subprime housing bust is how predictable it was. Subprime borrowers were by definition people of limited means with poor credit histories. Yet economists who have looked at the pattern of payments on subprime mortgages point out that even when house prices topped out and then began to fall, not all subprime borrowers defaulted. Only a minority of borrowers abruptly ceased to make payments, as someone choosing to default would.
I think the ones who defaulted early are the ones who had superior math skills. The math does not favor staying in an underwater home when rents are much cheaper than payments.
More typically, payments went from being regular to being erratic: borrowers fell behind, then became current again, only to fall behind once more. Those patterns are indicative of people trying, but struggling, to keep up with their payments.
I am amazed at how many subprime borrowers even tried to keep up. All subprime borrowers were screwed by their lenders with the primary culprit being the 2/28 loan. Subprime borrowers were qualified under a teaser interest rate for two years with an interest-only payment, and once the two years were up, the payment became fully amortized over the remaining 28 years with a market interest rate which was generally 2% or 3% higher than the teaser rate. Basically, there was no way the subprime borrowers were ever going to survive the payment shock.
Subprime borrowers have been maligned and punished far in excess of their wrongdoing. First, since their loans were set to blow up after only two years, they defaulted first. And since the housing bust began with their defaults, lenders followed their pre-bubble loan loss mitigation procedures and foreclosed on them. Subprime borrowers got kicked to the curb. Contrast that to what has happened to the alt-A and prime borrowers whose loans were just as toxic as subprime loans; they have been allowed to squat. More than a third of all delinquent homeowners have been squatting for more than a year.
What's worse is that the entire housing bust has been erroneously blamed on subprime borrowers because their defaults and foreclosures came first. The narrative being spun today is that the alt-A and prime borrowers would have been fine if not for the subprime fiasco. That is nonsense. The only difference between the groups was the timing of their loan resets and the response of the lenders. Subprime loans reset first, and lenders foreclosed. Alt-A and prime loans reset last, and they are being allowed to squat.
A trio of economists set out to find out what differentiated those borrowers who did not keep up with their payments from the rest. Their answer, according to a new working paper from the Federal Reserve Bank of Atlanta, is simple: numeracy.
This is the worst kind of elitist bullshit. What about the math skills of the brilliant bankers who underwrote loans designed to implode? Perhaps their math is better, but their financial literacy is certainly lacking. The Federal Reserve Bank of Atlanta is trying to blame borrowers bad math skills for the failure of banker's. The banks failed because they underwrote stupid loans. It had nothing to do with their borrower's math skills.
Think of the nerve it takes to conceive and undertake this study. Imagine the conversation:
Bank President, "Why did subprime borrowers default in such large numbers."
Research Head, "Because we gave them loans nobody could repay under the terms as written. Subprime was always supposed to be fee-laden bridge financing that made us rich and screwed the borrower."
Bank President, "I can't tell people that. The truth implicates us. Isn't there something we can identify that blames the borrowers?"
Research Head, "I need something tangible that separates subprime borrowers from others besides their FICO scores."
Bank President, "These borrowers were generally poor minorities, right?"
Research Head, "That might get us off the hook, but it would be too racist and inflammatory."
Bank President, "They were all stupid enough to believe we knew what we were doing." [laughs out loud]
Research Head, "Perhaps we could correlate defaults with their lack of education."
Bank President, "That is too general. Can we be more specific?"
Research Head, "Well, they obviously didn't understand the math, or they would have realized how bad we were screwing them." [giggles at the harsh truth]
Bank President, "That's true. Go collect data on their poor math skills. That should exonerate us."
Research Head, "Great idea! We can make them look stupid, make us look smart, and reflect blame for this disaster on our victims. The subprime borrowers will look like the people who caused all this. Brilliant!"
Bank President, "That's why they pay me the big bucks." [laughs at the gullible masses]
The cynic in me wonders if the bankers truly believe that they are blameless and stupid subprime borrowers sunk the ship. I suspect they know the truth and are looking for a scapegoat, but you can never be sure with these guys.
The economists tracked down a large number of subprime borrowers in New England on whom they already had detailed information, including the terms of their mortgages and their repayment histories. These borrowers were then subjected to a series of questions that required simple calculations about percentages and interest rates*.
Even accounting for a host of differences between people—including attitudes to risk, income levels and credit scores—those who fell behind on their mortgages were noticeably less numerate than those who kept up with their payments in the same overall circumstances. The least numerate fell behind about 25% of the time. For those who did best on the test, the number of payments they missed was almost 12%. A fifth of the least numerate group had been in foreclosure, but only 7% of those who were more numerically adept had.
Surprisingly, the least numerate were not making loan choices that differed much from their peers. They were about as likely to have a fixed-rate mortgage as the more numerically able. They did not borrow a larger share of their income. And loans were about the same fraction of the house’s value.
Why would that be surprising? Everyone involved relied on the supposed experts who were selling them snake oil.
Stephan Meier, one of the study’s authors, reckons that the innumerate may be worse at managing their daily finances, leaving them with little room for manoeuvre when things get difficult. Those better at sums might, for instance, have put a bit more aside in more plentiful times. Normally, such differences might not matter much. But in bleaker circumstances, a small pot of savings may be all that stands between homeownership and foreclosure.
I love the leap the author made without any data: better math equals more savings? Bullshit. Nothing in this study measured or correlated savings with default, or savings with math skills. In fact, only in these dubious conclusions is savings mentioned at all. And why is that? Because this study was never intended to find the answer to anything. It is merely a public relations ploy to deflect the blame for the subprime meltdown away from lenders.
This study is offensive. It provides no useful or actionable information. What are we supposed to do, start giving borrowers math tests? It was clearly undertaken to support an agenda and disguise the truth — the opposite of what academic pursuits are supposed to do. Everyone involved should be embarrassed.
Duetsche Bank kicks them to the curb
These borrowers purchased a big loser, but they were smart enough to refinance out $43,100 while there was still a few dollars in the equity piggy bank.
- The property was purchased on 7/12/2004 for $370,000. The owners used a $296,000 first mortgage, a $74,000 second mortgage, and a $0 down payment.
- On 2/28/2007 they refinanced with a $413,100 Option ARM with a 1.47% teaser rate.
Recording Date: 07/02/2009
Document Type: Notice of Sale
Recording Date: 03/31/2009
Document Type: Notice of Default
Deutsche Bank National Trust bought the property at auction on 10/6/2009 for $372,182.
Now tell me, where did the kitchen go? The owners probably salvaged $3,000 to $5,000 in used materials and appliances from this kitchen, but it will ultimately cost the bank an extra $20,000 to $50,000 depending on repair costs or loss of real estate value. Since this is a recourse loan, the bank can sue the previous owners for the losses — not that they can collect — but the owner are liable for the loss on the property.
Stripping out the kitchen was theft. It created what the owners know will be an uncollectible debt.
This creates an interesting question: If these people strategically defaulted in the best interest of their families, isn't stealing a few thousand extra by stripping the property also acceptable since they needed the money?
Of course not. Theft is theft. The permanently attached cabinets and counters were part of the real property. Taking personal property like appliances is expected, but dismantling real property is destruction of collateral, and this is not a contractual right of the borrower without paying damages. Just because a defaulting owner has the right to default, it doesn't give them the right to deliberately reduce the value of the real property held as collateral. That contingency is not part of the contract.
Irvine Home Address … 4 MONTGOMERY Irvine, CA 92604
Resale Home Price … $280,000
Home Purchase Price … $370,000
Home Purchase Date …. 6/12/2004
Net Gain (Loss) ………. $(106,800)
Percent Change ………. -24.3%
Annual Appreciation … -4.5%
Cost of Ownership
$280,000 ………. Asking Price
$9,800 ………. 3.5% Down FHA Financing
5.01% …………… Mortgage Interest Rate
$270,200 ………. 30-Year Mortgage
$58,043 ………. Income Requirement
$1,452 ………. Monthly Mortgage Payment
$243 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$23 ………. Homeowners Insurance
$175 ………. Homeowners Association Fees
$1,893 ………. Monthly Cash Outlays
-$137 ………. Tax Savings (% of Interest and Property Tax)
-$324 ………. Equity Hidden in Payment
$19 ………. Lost Income to Down Payment (net of taxes)
$35 ………. Maintenance and Replacement Reserves
$1,486 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$2,800 ………. Furnishing and Move In @1%
$2,800 ………. Closing Costs @1%
$2,702 ………… Interest Points @1% of Loan
$9,800 ………. Down Payment
$18,102 ………. Total Cash Costs
$22,700 ………… Emergency Cash Reserves
$40,802 ………. Total Savings Needed
Baths: 1 full 1 part baths
Home size: 1,011 sq ft
($277 / sq ft)
Lot Size: n/a
Year Built: 1977
Days on Market: 38
Listing Updated: 40278
MLS Number: P730030
Property Type: Condominium, Townhouse, Residential
According to the listing agent, this listing is a bank owned (foreclosed) property.
Spacious two story condo (Townhome Style) in the popular Heritage Park development. No Kitchen in this unit so no financing unless it is a 203K loan. Nice tile flooring, spacious patio, great location. Hurry on this one!