IndyMac goes under...

[tazman9r]

Here we go...

The housing/credit bubble (considering the stories I have heard about bankruptcy, student loans, and credit cards) has claimed the first of potentially 90 to 300 victims. Smaller banks that operate in a similar manner as the large lenders, and often act as intermediary for these larger corporations, are also impacted by a borrower's inability to pay, but with greater impact per borrower.

Housing is the tip of the iceberg. defaulting on a credit card has a similar effect, but at a smaller level. Whether it's a "government secured" loan or not, it's all money loaned in some definition of good faith that is then defaulted on. The rules for bankruptcy were made more difficult a couple of years ago. Is there a tie into the "housing bubble" we see now. How about student loans? My sister works in that industry and talks about student loan companies that are "predatory lenders". What does that mean, predatory lender, anyone who loans money would rather be repaid and repaid on the agreed upon schedule. Otherwise they DON'T MAKE MONEY.

Ok, obviously there is an amount of "shrink" even these companies anticipate. And I am certain that there is an amount that can be written off on their taxes, but unless someone has figured out a way to generate wealth from other people's debt (and I'm not kidding about that), I can't be convinced that these banks are deliberately lending money to people for the purpose of generating unpaid debt.

What are your thoughts?

[Aletheides]

Seeing all those people lined up to get out their deposits reminds me of photos of the great depression where people are doing the same thing.

[HarveyJ]

Businesses that deal in loans often sell the loans to each other in bulk with various security ratings. In this way, some companies get to offload loans they consider to risky, while others buy them up, cheaper than the pool of money to still be repaid and potentially make a long term investment of it off the interest. If there are a few that default, it's taken into consideration, but the default rates have been on a massive increase lately.

Predatory lenders are ones that lend money out at what seems to be reasonable rates to get people in, but the terms of the contract are often very unreasonable but also incomprehensible to people that don't understand finance, or they are outright lied to by the person offering the loan.
These loans, with a low security rating, are then sold en-masse to other companies that make their money buying up loans and soaking up the interest.

So you will find companies that are very much into predatory lending, because they know it doesn't really matter to them in the end if the person taking out the loan defaults, as the predatory lender is no longer the one that has to worry about collecting the money.

[tazman9r]

Predatory lenders are ones that lend money out at what seems to be reasonable rates to get people in, but the terms of the contract are often very unreasonable but also incomprehensible to people that don't understand finance, or they are outright lied to by the person offering the loan. These loans, with a low security rating, are then sold en-masse to other companies that make their money buying up loans and soaking up the interest.

So you will find companies that are very much into predatory lending, because they know it doesn't really matter to them in the end if the person taking out the loan defaults, as the predatory lender is no longer the one that has to worry about collecting the money.

Wow, I am amazed that a company like this would exist, or be allowed to exist. I have little sympathy for those who don't take the time to read the fine print. I took the time to read the fine print of my student loans. But outright lying to your borrower is unconscionable. It's got to be illegal, but I have no idea how one would prove it. I hope there is a way.

[jasaunders]

Wow, I am amazed that a company like this would exist, or be allowed to exist. I have little sympathy for those who don't take the time to read the fine print. I took the time to read the fine print of my student loans. But outright lying to your borrower is unconscionable. It's got to be illegal, but I have no idea how one would prove it. I hope there is a way.

It's not outright lying to the borrower. It's often times that the borrower doesn't understand the terms of the loan, and its not always the lenders obligation to explain the terms in full. Even if they do explain the terms in full, many people don't understand how it affects them, which is unfortunate. When people took out subprime ARM's, they didn't realize when the rate reset that their monthly payments were going to shoot up. Many people who take out private student loans don't realize that they are also adjustable and can be adjusted to whatever the lender decides usually without cause and the debt can never be discharged.

It's a two part problem. 1) People aren't financially literate and/or don't think about the future consequences of engaging in such a contract. It's great low-income people wanted a house, but they never considered how they were going to pay for it years down the road.
2) Some lenders are completely dishonest, but most are just trying to make a buck off the borrowers who don't know any better, or do know better but have such bad credit they have no other opportunities.

[byzantium]

It's a two part problem. 1) People aren't financially literate and/or don't think about the future consequences of engaging in such a contract. It's great low-income people wanted a house, but they never considered how they were going to pay for it years down the road.
2) Some lenders are completely dishonest, but most are just trying to make a buck off the borrowers who don't know any better, or do know better but have such bad credit they have no other opportunities.

The weird thing is, any attempt to increase people's financial literacy seems to quietly die. Especially if it has anything to do with teaching financial literacy in schools. Every high school student should take a year class in finance and business basics, yet it never happens. Private financial educators who ignore the bureaucracy, such as Robert Kiyosaki, usually find the buzzsaws waiting for them, many wielded by financial magazines and financial cable TV stations. I'm no Oliver Stone, but if it looks and talks and walks like a conspiracy it probably is. I think that there ARE predatory lenders out there, and they have a lot of power derived from our money, and they don't want a financially educated populace because it would slash their profits. They don't lie, they just don't tell you the whole truth.

[dtechm]

Don't worry it is just all politics, if you look there is only a few hundered people there. But the camera makes it look like there are thousands. It will probably help Barack Obama in some way in his next speech. By him saying, "look in Pasadena, our banks are going under. We need change!" What a joke, it is all politics.

[CascadeStar]

The Washington Mutual Option ARM portfolio is going to explode/implode by mid-2009 and WaMu will be in FDIC receivership by the end of this year.

[byzantium]

The Washington Mutual Option ARM portfolio is going to explode/implode by mid-2009 and WaMu will be in FDIC receivership by the end of this year.

WaMu is HUGE on predatory lending. Maybe even bigger than Citi. I've heard of them playing all sorts of games with their credit card customers. There are several big banks that have massive positions in subprime/Alt-A paper, the very stuff that's gone casters up. WaMu has a huge presence in California, so any failure would directly impact people right here in Sacramento. There were several big bank mergers here around 2000 or so and the FTC demanded a massive branch sale. WaMu was one of the banks that bought the branches. I think that if/when they fail, the branches will just be abandoned.

[tazman9r]

It's a two part problem. 1) People aren't financially literate and/or don't think about the future consequences of engaging in such a contract. It's great low-income people wanted a house, but they never considered how they were going to pay for it years down the road.
2) Some lenders are completely dishonest, but most are just trying to make a buck off the borrowers who don't know any better, or do know better but have such bad credit they have no other opportunities.

I'm on record saying that people who only make $25,000 a year should not be going for $500,000 homes in southern California, and that's cheap out there! The Adjustable Rate Mortage was designed for the "Flip That House" crowd who were making money off buying, fixing up, and reselling houses. They certainly were not designed to get low income people into homes. Why anyone would think these were good loans for those in low income jobs is beyond me. Whoever it was that didn't see this coming was just an idiot, or maybe they wanted it (speaking of conspiracies).

The weird thing is, any attempt to increase people's financial literacy seems to quietly die.

And that is why economics and business are so important, I agree with you. Yet we seem to be teaching students how to be ok employees (while not on some sort of assistance check). Nearly 10 years ago I worked with a guy who could not subtract 1 from 7 in his head. "How did this guy graduate from high school?" I thought to myself. Then I learned he was pretty good at football, that was all I needed to know. They got him through to keep him elegible so he could play ball and entertain boosters, alumni, parents, fans, and other students. They didn't do him any favors. It also didn't help that all the girls swooned when he walked by, so he'll just keep getting a pass because people like to look at him. He is exactly the type of "sucker" the unscrupulous young and ambitious mortgage lender would sell an ARM to.

Don't worry it is just all politics, if you look there is only a few hundered people there. But the camera makes it look like there are thousands. It will probably help Barack Obama in some way in his next speech. By him saying, "look in Pasadena, our banks are going under. We need change!" What a joke, it is all politics.

I have no doubt that there is an element of politics to this. We were told we were living in the greatest and most robust economy the world had ever seen under Clinton, I remember it well. My wife and I both had two jobs a piece to make ends meet. Yet now we seem to be on the verge of the greatest economic colapse the world has ever seen. My concern is the very real situation of the banks being under stress, but the real problem is a society living beyond it's meens on credit stretched to it's limit or beyond, in many cases. Put simply, if you have to break out a credit card to buy it, you can't afford it. Otherwise you just get yourself in trouble.

[StealYourDreams]

There's zero in the way of conspiracy. It's all very simple; the economy was going strong, banks became far too laxed in their lending requirements and people that had no business whatsoever buying homes qualified for loans they couldnt afford.

It really wasn't ARMs that caused the problem, specifically it was the subprime arms...the 2/28s and later the 2/38s. 3/1s, 5/1s, etc were mainly going to people in either the alt A category, people who took 50 to 75 bps off the 30 yr fixed rate, or people for whatever reason didnt fit in the conventional box.

The problem lies with what people in the industry call "roaches." People went into 2/28s because they couldnt qualify for anything else. The loan was really designed to give the person enough time to repair their credit (two years) and refinance. It was never meant to go into the adjsutable period.

What happened was these people would refi and pay off their debt and be in the same spot six months later. Well, guess what they did? They refinanced again because it was so easy to get a loan. Hell a guy with a 550 FICO could get ~80-85 LTV. Fast forward and now the economy isn't doing so hot. The habitual refinace crowd now sees a drop in their home values...uh oh! Now that they cant refi anymore because they have no equity. Default rates begin to climb and as a result lenders tighten their criteria.

Now all the people who lived beyond their means and constantly refinanced as a way to stay afloat are S.O.L. It's not the end of the world, it's not a conspiracy theory, but perhaps there's something to "natural selection."

Oh yeah and it didnt help that every degenerate in the country was now a "broker" Some kid who couldn't balance his checkbook if he tried was advising people on one of the most important decisions they'll ever make. It didnt help that subprime loans would eat away at about 10-15k in equity in fees, but all said and done it was the borrowers buying shit they couldnt afford.

[byzantium]

And that is why economics and business are so important, I agree with you. Yet we seem to be teaching students how to be ok employees (while not on some sort of assistance check). Nearly 10 years ago I worked with a guy who could not subtract 1 from 7 in his head. "How did this guy graduate from high school?" I thought to myself. Then I learned he was pretty good at football, that was all I needed to know. They got him through to keep him elegible so he could play ball and entertain boosters, alumni, parents, fans, and other students. They didn't do him any favors. It also didn't help that all the girls swooned when he walked by, so he'll just keep getting a pass because people like to look at him. He is exactly the type of "sucker" the unscrupulous young and ambitious mortgage lender would sell an ARM to.

Let me say this: all I learned about business I learned on my own, via internet forums and books. I am developmentally disabled, so my high school basically abandoned me when they weren't treating me as a disciplinary problem. (I have a high functioning form of autism.) My college education was largely useless, I don't remember most of what they "taught". I also have a computer technician's certification, but it was all taught on XP machines, and Vista has rearranged everything. So I'm largely self-educated. If somebody doesn't take the time to educate themselves, they're SOL, and they end up flipping burgers or working in an office where the main duties are playing politics with the workers and surfing the internet. And then people whine about all our jobs going to Asia, well duh, they take education seriously over there while our system wants to produce bobblehead drones! Either we fix this or end up like Somalia.