The mortgage crisis

President Bush announced today that the fed wants to buy several hundred billion dollars of bad debt off investment firms to help clear their books and get money moving again.

I have been following this economic crisis trying to learn what the mess is and how we got into it in the first place.

So I am going to write what I know, and try to see how the pieces of the puzzle fit.

According to the government, the heart of the crisis is a collapse of the home mortgage industry.

This is my personal experience with mortgages:

About twenty years ago I had a little bit of cash saved up, and decided I was sick of paying 450 a month rent on an apartment and would rather put the cash down on a home. I was figuring that way, the monthly shelter cost would be applied to something I would end up owning.

I went through FHA-Federal Housing authority, or HUD (housing and Urban Development), a mortgage program for first time homeowners. My income was calculated into a payment, and I was told that I would qualify for about 45,000.

I think there were two homes for that price in a 20 mile radius, and I looked at both. One of them was owned by a couple, the wife of whom was wheelchair bound. The entire house reeked of urine. No getting that odor out -short of a match and a can of kerosene.

The second home was located about twenty feet from a major thoroughfare and was about the size of a crackerbox. A couple years after I passed on it, a car left the road at a high rate of speed and hit the house. Glad I wasn't there.

I was told that if I brought in my boyfriend's income and added him as a joint tenant, we could qualify for a larger loan. Although he already had a large payment, it still added more borrowing power. So we did that and bought a home.

We signed in on a fixed thirty-year mortgage. Our interest rate was about 6 percent. The sellers received 57,000. I put cash up front and the mortgage total was 63,000. What?!?!

Well, I discovered that there are things called "points" and "discount fees'-which is money that the lender just tacks on there for fun. The realtor suggested having the seller pay the points, and raising the selling price of the home so that went into the loan. I think the points and discount fee added up to around 5,000-money that went right to the mortgage company. Then there was mortgage insurance; in case we defaulted on the loan, the lender would get paid. I paid that up front. And title search and home appraisal, and inspection fees-to make sure the deed was good and the house was worth the money. All designed to protect the lender mostly, although us too, but of course that was paid up front by me.

So, right off the bat, the mortage company has made 5,000 and has an ironclad guarantee that they hold the title until the loan is paid. If it isn't paid, what they have is worth the money they lent, and they are insured through mortgage insurance, and also work the home owner's insurance into the monthly payment so the property is insured against lawsuit or damage.
Also included in the monthly payment was an estimated tax payment which went into escrow until property tax was due annually. That ensured the town wouldn't be putting a lien on the property for unpaid taxes.

I was then a proud home owner with a nice little monthly coupon book, and a huge folder of paperwork. Didn't I aggravate the attorney handling the closing, when I read through every line on every paper I signed. I wanted to make sure I understood everything as I signed it.

The biggest suprise was the long print-out of the amortization schedule. Mortgages are amortized. Using my example, a 63,000 mortgage for 30 years at about 6% fixed interest, including taxes and insurance, was 600 a month for thirty years. The suprise? The interest is calculated up front, and paid more or less up front. For the first year, about $3 a month goes on the principle (the 63,000). So out of the 500 going on the loan-about 100 was taxes and insurance-497 went to interest. In the first year on receiving payments, the mortgage made about 6,000 for the company -not counting the 5,000 up front. That is more like 10% interest, but that is how it goes in the mortgage industry. Amortization-grrrr.

So I was pretty suprised when every couple of years or so, we would get a letter saying that we would now send the check somewhere else. Mortgages sold as investments. Meaning, after making a nice little sum, the original company would bundle together a bunch of mortgages and sell them to another company.

After about nine years of 600 a month, 1986-1995, the original loan had been reduced by about two thousand dollars, and I wanted out of the relationship. The housing market had not budged in those 9 years. I estimated that by the time lawyers on both sides were paid to duke it out, and the house sold, and the realtors' commission paid, it would costs us both several thousand dollars and the house. That didn't make much sense, so I signed my share of the house over scot free to the ex so he could re-finance it in his name.

Sick of mortgage companies and their interest scams, I bought my own piece of land outright and started building on it. Ten years later, and it is not finished. LOL. But I refuse to borrow the money to finish it off. I figure I have saved-on paper-quite a nice chunk of change not paying rent, -or interest.

Back to the first house and the ex. After the ex refinanced our original loan, house prices took off. The next ten years saw the value of the house more than double. Ok, sometimes that annoyed me, I admit, but good for him for sticking with it. He has mentioned refinancing a couple of times-I play dumb and don't ask for details so I don't know the rate or the amount, or the monthly payment.

The example is just to point out what happened to the appraisal values on homes in the last ten years-they went through the roof. So, what happened?

A lot of the blame is placed on the mortgage companies. While mine had been scrupulous in matching income to loan repayment amounts, and requiring money up front, the word is that changed. More companies wanted in on that risk free mortgage investment, Anybody that could get a loan was given one. Higher demand meant higher home prices.

Higher risk folks were given variable rate loans. Don't EVER get a variable rate loan. Because the rate can change-and it is almost guaranteed to go up. So, it is no longer based on your income. That 600 a month payment might change to 800. Now, a lot of folks would cut out the extras and come up with that extra amount every month, but there is another something that no one on the news is discussing in relationship to the current economic crisis.

OIL. That's right, I'm back to oil. You see, in the last eight years, the price of a gallon of gas here has gone from 1.25 a gallon to the current 3.76 for regular. That is a three-fold increase. The cost doubled since Hurricane Katrina.

Now, it's not just gas for your car, it's gas that costs to ship the food you eat and the goods you buy. It's gas that's cost to harvest the crops to make your bread and feed your beef.

It's heating oil for your home-oops, add 300 amonth heat onto that 800 a month mortgage and your shelter costs nearly doubled in eight years. So did your food costs, and your transportation to your job, if you didn't happen to get laid off.

So people start defaulting on their mortgages. They can't afford to pay them. And most anyone that could get a mortgage in the last ten years got one, so who's going to buy those homes that the folks with better credit can't afford?

The value of property started to drop like a bullet because there is no one able to afford the payment on the home.

Take a couple steps back. While the economy is crashing around our ears, and the taxpayers are going to have to swallow half a trillion dollars in bad mortgage debt so those companies can start the wheel all over again...where did the money go?

In 2007, the top five oil companies had 123.3 BILLION dollars in PROFIT. That's Exxon Mobil leading the pack with 40.6 billion, Shell 31.3, Chevron 18.7, Conoco Philips 11.9, and BP 20.8.

I know, 123 Billion is not half a trillion, but if you figured in this year and the previous two or three years,and the fact that it is not just the one time sale that is coming out of your pocket. Meaning, not just that tank of gas, but the tank of gas to get your bread from the field to the factory to the shop owner, and the oil to heat the shop...that extra cost of gas becomes an huge gigantic mudslide aimed right at the Global economy.

Yeah, blame it all on the poor credit risk mortgage takers. I'm not buying it.