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Posted by on July 8, 2008, 8:35 am
IndyMac to Cut Work Force, Halt Most Loans Applications
By JAMES R. HAGERTY and DAMIAN PALETTA
Wall Street Journal, July 8, 2008
"IndyMac Bancorp Inc. said it has stopped taking most types of loan
applications and will cut more than half of its work force as it
struggles with losses from home-mortgage defaults.
The Pasadena, Calif., mortgage company and savings-bank operator is
one of the largest lenders yet to be forced by the credit crunch to
ditch the bulk of its business. IndyMac specialized during the housing
boom in Alt-A loans, a category between prime and subprime that
typically involves borrowers who don't fully document their incomes or
assets."
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I don't understand why such loans were ever made. Giving a lender a
few W-2 forms, tax returns, and bank/brokerage statements is not
difficult. The IRS offers free tax transcripts. A person who cannot
document income or assets should not be getting a loan.
There is no "magic" ratio of mortgage, home insurance, and property
tax payments to income above which a delinquency is impossible -- the
lower the better. In a free country, lenders ought to be able to make
riskier loans at higher interest rates and absorb the occasional
losses, as in the credit card industry. But why wouldn't lenders
gather information before handing over hundreds of thousands of
dollars?
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Posted by Elle on July 8, 2008, 11:28 am
> In a free country, lenders ought to be able to make
> riskier loans at higher interest rates and absorb the
> occasional
> losses, as in the credit card industry. But why wouldn't
> lenders
> gather information before handing over hundreds of
> thousands of
> dollars?
I honestly feel that even the upper ranks of lenders' staff
are abysmally educated. Thus they got caught up in the
housing bubble (you can't lose when houses only go up and by
lots! [not]). Then they fooled themselves into trusting that
high risk loans could be re-packaged into lower risk
vehicles. I think when one is making money hand over fist,
one gets blinded. (And but for the grace of god, there go I.
I got a tad too caught up in banks' high dividends.)
I know many here consider this a sound theory. Just
reiterating so maybe this will become a lesson to be
recorded in the annals of history. Like the causes of the
Great Depression.
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Posted by Douglas Johnson on July 8, 2008, 2:55 pm
beliavsky@aol.com wrote:
> But why wouldn't lenders
>gather information before handing over hundreds of thousands of
>dollars?
Because they could. The mortgage brokers got paid for making loans. As long as
they met the standards to sell the loan, they didn't care. The buyers of the
loans didn't care. They packaged them up, got some ratings agency to rate them
"AAA" and sold the CDO's to investors, who believed the "AAA" ratings.
It all worked as long as housing prices kept going up. If the homeowner
defaulted, the lender took the house and sold it for enough to be made whole.
-- Doug
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Posted by Dave Dodson on July 9, 2008, 2:28 am
On Jul 8, 7:35 am, beliav...@aol.com wrote:
> I don't understand why such loans were ever made. Giving a lender a
> few W-2 forms, tax returns, and bank/brokerage statements is not
> difficult. The IRS offers free tax transcripts. A person who cannot
> document income or assets should not be getting a loan.
>
> There is no "magic" ratio of mortgage, home insurance, and property
> tax payments to income above which a delinquency is impossible -- the
> lower the better. In a free country, lenders ought to be able to make
> riskier loans at higher interest rates and absorb the occasional
> losses, as in the credit card industry. But why wouldn't lenders
> gather information before handing over hundreds of thousands of
> dollars?
This is not a question about financial planning, but since the
moderator approved it, I suppose it deserves an answer that also
doesn't involve financial planning.
The subprime problem occurred because neither the mortgage brokers nor
the bankers had any "skin" in the game. The brokers were lending money
supplied by the bankers, securitized by investment bankers, and rated
by securities rating companies. The brokers made money on every loan,
but had no risk of loss if the loan failed. The bankers were selling
the mortgages as soon as they were written to replenish their money
supply. They were making money every loan they made, but were taking
no risk, either. The investment bankers packaged the loans, obtained
favorable ratings, and sold them to investors. They made money on
every loan, but also had no risk of loss. The rating companies were
paid by the investment bankers, who wanted high ratings to ease sales
to investors, and satisfied their customers. They made money on every
loan, but they also took no risk by overrating the packaged loans.
Loan qualification rules merely were impediments to the brokers,
bankers, investment bankers, and rating companies making more money,
so they found ways to relax the rules and finally to eliminate them
completely.
Dave
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
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Posted by Elizabeth Richardson on July 9, 2008, 1:25 pm
>
>The brokers were lending money
> supplied by the bankers, securitized by investment bankers, and rated
> by securities rating companies. The brokers made money on every loan,
> but had no risk of loss if the loan failed. The bankers were selling
> [etc.]
A Ponzi scheme?
Elizabeth Richardson
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
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