quote: WASHINGTON (Reuters) - Homeowners with subprime mortgages struggling under payments need federal government help to ease them through the crisis, a leading consumer advocacy group said on Wednesday.
Fresh data on increased mortgage delinquencies and the collapse of several mortgage lenders have increased attention on subprime loans offered to borrowers with damaged or sketchy credit histories.
As many as 1.5 million Americans could lose their homes as the subprime market shakes out, the National Community Reinvestment Coalition (NCRC) said, and so Congress should step in to protect those troubled homeowners.
The group, which represents hundreds of low-income housing advocates across the country, said Congress should immediately step in to aid subprime borrowers.
This is insane to me. I didn't buy a house until I knew I could afford a fixed 30 year loan. Why should my tax dollars be spent on bailing people out who took these sub prime loans? I could MAYBE understand suing the mortgage companies and brokers that recommended such loans, but I don't think a single federal penny should be spent.
Posted by Dagonee (Member # 5818) on :
quote:Should the government aid those with rising mortgage rates?
Absolutely not, outside the normal bankruptcy protection and standard social safety net.
Posted by katharina (Member # 827) on :
No. Should we also use federal money to repay people who gamble at casinos?
Posted by Belle (Member # 2314) on :
I'll make it unanimous so far - no, don't bail them out. Whatever happened to personal financial responsibility? Like Dag said, we already have bankruptcy available for those who need relief from their creditors, if things become truly desperate.
Posted by Jon Boy (Member # 4284) on :
I just read this article on CNN Money. Call me heartless, but I felt no sympathy for the family. They knew beforehand that if their rates went up, they wouldn't be able to afford their mortgage. Guess what happened? Maybe the government should enact regulations on subprime mortgage companies to decrease the chance that this sort of thing will happen, but I also think that when you're making the biggest purchase of your life, you need to be absolutely certain you can afford it. Just because a mortgage company—or anyone else—gives you credit doesn't mean you should use it. After all, you should know your own finances, including your ability to repay a loan, better than anyone else.
Posted by mr_porteiro_head (Member # 4644) on :
The governmentalready aids everybody with a mortgage on their primary residence by giving tax deductions on all interest payments.
Posted by erosomniac (Member # 6834) on :
I'm having trouble imagining how anyone could answer "Yes" to that question.
Posted by Amanecer (Member # 4068) on :
I'll add in another "no". That said, I would love to see a basic financial literacy class become a high school requisite. Things like this happen more often because of ignorance than because of stupidity.
Posted by erosomniac (Member # 6834) on :
quote:Originally posted by Amanecer: I'll add in another "no". That said, I would love to see a basic financial literacy class become a high school requisite. Things like this happen more often because of ignorance than because of stupidity.
Isn't allowing oneself to make one of, if not the biggest financial decision of one's life in ignorance a big, neon sign of stupidity?
Posted by Stephan (Member # 7549) on :
quote:Originally posted by Amanecer: I'll add in another "no". That said, I would love to see a basic financial literacy class become a high school requisite.
AMEN! I took a personal finance course by choice in high school, and it was the most valuable course I have ever taken. He taught me everything from doing my own taxes to balancing my check book.
Posted by Amanecer (Member # 4068) on :
quote:Isn't allowing oneself to make one of, if not the biggest financial decision of one's life in ignorance a big, neon sign of stupidity?
Not if you don't know any better.
Posted by ricree101 (Member # 7749) on :
In general, I'm very much a no. However, if the number of people who have to sell is sufficient, I could see this having problems for the economy as a whole if it hurts the housing market too much. If that is so (which, IMO, doesn't seem to be the case for this). If it did seem like it would be bad enough for the economy, then I could see arguing that the government should step in, even though I am against it in principle.
Posted by Stephan (Member # 7549) on :
If anything in my opnion, if too many homes go on the market it just means prices could go down, making them more affordable for the middle and lower classes.
Posted by Scott R (Member # 567) on :
I'll answer YES to that question.
I don't think that turning up our noses at these folks and telling them to lie in the bed they made is exactly helping anyone. The government has the resources and responsibility to aid them-- and it should do so.
That aid should include educational resources for new home buyers; it may also include financial assistance. Federal support for lenders who specialize in refi's for this category of homeowner is also a good step.
Aid doesn't necessarily mean handing over taxpayer money directly to people who have demonstrated a capacicty for not using money wisely, you know.
Posted by Stephan (Member # 7549) on :
I agree about the educational resources, or maybe go so far as to offer tax benefits to mortgage companies who refinance these people into better loans. But not direct financial assitance to the homeowners.
Posted by mr_porteiro_head (Member # 4644) on :
It means a lot more than "just" that.
Many people would be stuck with high mortgages on houses with deflated values, unable to sell because they couldn't get enough from the sale to pay off the mortgage. They'd be stuck where they are, unable to take better jobs in another state, unable to move to help out family members...
Posted by Storm Saxon (Member # 3101) on :
I think whether or not I would support bailing someone out would depend on the circumstances of the person and the rules surrounding the help. The magnitude of the problem would probably also weigh into my decision of support.
Someone got into a bad patch and just needs uncle sugar to step in until they get back on their feet with strict accountability of need and whatnot? Fine.
Just letting the cash cow run rampant? No.
There are also social factors that influence my decision in this. I think security is important to the functioning of people and societies. I think it's axiomatic that the more security there is for children, the better off they are.
That said, I recognize that there are other issues at stake. While I am not exactly for or against it outright, I do lean towards being open to having it happen.
And now, here's an ingenious squirrel trap.
Posted by Dagonee (Member # 5818) on :
quote:I don't think that turning up our noses at these folks and telling them to lie in the bed they made is exactly helping anyone. The government has the resources and responsibility to aid them-- and it should do so.
It's highly debatable whether the government has the resources to help them.
quote:Many people would be stuck with high mortgages on houses with deflated values, unable to sell because they couldn't get enough from the sale to pay off the mortgage. They'd be stuck where they are, unable to take better jobs in another state, unable to move to help out family members...
Not true. They allow the lender to foreclose and declare bankruptcy.
My whole contention here is that no special aid is needed. If the social net is adequate for someone who is evicted from their apartment, then it's adequate for someone in over their head with a mortgage. If it's not, then the problem to examine is our social net.
What I object to is using government money to assist them in keeping the house. That horribly penalizes those who didn't buy because the prices were too high - prices that got that high, at least in part, because of the lax credit standards that allowed people to bid them up.
Any aid that's not aimed at them keeping them house is not what I consider "aid to those with rising mortgage rates" but rather "aid to those who have, whatever the reason, hit upon hard economic times."
Posted by mr_porteiro_head (Member # 4644) on :
quote:Not true. They allow the lender to foreclose and declare bankruptcy.
OK. Thanks.
Posted by dkw (Member # 3264) on :
Helping people stay in their current housing situation (rental or owned) is a heck of a lot easier than helping them once they're homeless.
I would support incentives or insurance to banks that are willing to re-fianance these loans. I'd also make those new loans contingent on the homeowner completing a basic personal finance course that covered these types of senarios.
1.5 million people is at least partially a systemic failure, not a collection of personal failures.
Posted by Belle (Member # 2314) on :
See I'm right with you Dag. When my mother left her marriage to my step-dad, two months later the house was terribly damaged in a storm. Turns out my step-dad had taken the money supposed to go toward homeowner's insurance and spent it on other things, and they were uninsured.
My mother's name was still on the mortgage, of course, because the divorce had not been finalized, and while she had been planning on letting him have the house, now she was stuck paying for a house that was uninhabitable. She declared bankruptcy, allowed the lender to foreclose and walked away.
Now she didn't do it glibly, or anything, it really upset her to have to do it, but she was grateful that safety net was there for her. That safety net is also there for people who cannot pay their mortgages for any reason, including rising interest rates. Do I like that my mom had to declare bankruptcy? Of course not, but I'm glad she had the chance.
I took the article in the OP as saying we should give people money to help them keep their homes that they cannot afford. I do not agree with that. They can downsize and move to more affordable housing. If that's not possible, if they cannot stay in the house and cannot sell it, then the bankruptcy option is available for them.
Posted by Rotar Mode (Member # 9898) on :
quote:Originally posted by dkw: Helping people stay in their current housing situation (rental or owned) is a heck of a lot easier than helping them once they're homeless.
I would support incentives or insurance to banks that are willing to re-fianance these loans. I'd also make those new loans contingent on the homeowner completing a basic personal finance course that covered these types of senarios.
1.5 million people is at least partially a systemic failure, not a collection of personal failures.
I agree with you.
Posted by Rotar Mode (Member # 9898) on :
And that squirrel trap was kind of cruel.
Posted by Dagonee (Member # 5818) on :
quote:Helping people stay in their current housing situation (rental or owned) is a heck of a lot easier than helping them once they're homeless.
Then our safety net should have a way to make it easier to get people into alternative housing. The choice isn't "help them keep a home they can't afford or make them homeless." There's another choice: help them find housing they can afford and, for those who can't afford adequate (which is a LOT less than most of the homes being foreclosed on around here) housing, subsidizing their adequate housing.
quote:1.5 million people is at least partially a systemic failure, not a collection of personal failures.
A systemic failure which should not be perpetuated. Locking up 1.5 million homes by rewarding imprudent credit - and using taxpayer funds to do it - will keep 1.5 million people who could afford to buy a house and keep it from moving into those homes.
When the systemic problem was caused by people who can't afford their homes, fixing the problem requires making sure the people in those homes can afford them.
And there's little that can be done to ensure these people can afford their houses. At 6%, a $250k loan has a monthly payment of $1426 at 30 years, $1340 at 45 years, $1285 at 60 years, $1255 at 90 years, and $1250 at 215 years. In other words, past 60 years, they're essentially renting, not buying.
Without subsidies, very few of those in this mess will be actually be able to afford the time-value of the money in their house.
Posted by ClaudiaTherese (Member # 923) on :
quote:Originally posted by Rotar Mode: I agree with you.
Times two.
Although I'm perfectly happy to let this remain at the incentives level. I agree as well with Dagonee, in that if the current social net (with bankruptcy included) isn't up to the load that wouldn't be addressed by such incentives, then we need to focus the fix on that.
---
Edited to add: For what it's worth, my spouse and I haven't bought a home because teh numbers didn't crunch right within sufficient range of possible future changes. We may in the future, but we won't unless it's prudent. Nonetheless, I agree with dkw that it is a systemic problem that needs some systemic address, even though that does not preclude individual consequences.
Posted by King of Men (Member # 6684) on :
quote:1.5 million people is at least partially a systemic failure, not a collection of personal failures.
I don't see how you can conclude this. Sure, it's an impressive figure, but are you really saying that we cannot possibly have 1 in 200 people who don't think very far ahead? Come, now.
Posted by stihl1 (Member # 1562) on :
Yes, if it helps me.
Posted by Stephan (Member # 7549) on :
One thing is for certain, this has just begun. I am waiting for the first law suit against a mortgage broker, the first real estate investor suicide (corporation heads, not individual homeowners), or for candidates to make this a campaign issue next year. This is going to be big, potentially a history making economic crisis.
Posted by ClaudiaTherese (Member # 923) on :
quote:Originally posted by King of Men:
quote:1.5 million people is at least partially a systemic failure, not a collection of personal failures.
I don't see how you can conclude this. Sure, it's an impressive figure, but are you really saying that we cannot possibly have 1 in 200 people who don't think very far ahead? Come, now.
What's your denominator for that figure, KoM?
Posted by Jon Boy (Member # 4284) on :
As Dag said, the choice isn't between helping them stay in homes they can't afford and making them homeless. After all, the issue seems to be simply that mortgage rates are going up, not that people are losing their jobs and thus can't afford any housing.
Posted by Dagonee (Member # 5818) on :
quote:I agree with dkw that it is a systemic problem that needs some systemic address
To summarize my above post, I agree that it is a systemic problem that needs some systemic address, and I think most kinds of bailouts would tend to contribute to the systemic problem.
Edit: in fact, it's the systemic nature of the problem that speaks most loudly to me against helping keep people in the houses being foreclosed on. If it weren't systemic, we could help a few unlucky individuals.
Posted by fugu13 (Member # 2859) on :
Scott: given that you just advocated aid for the people giving out sub-prime loans, you just advocated the government "handing over taxpayer money directly to people who have demonstrated a capacicty for not using money wisely" .
In fact, you'd not even be doing what you aim for. Sub-prime lenders are only in danger now due to lack of new business; they're not the ones holding the loans. Mortgages are packaged into securities, which are then sold off, and frequently held by investment funds.
In particular, monetary aid provides an incentive to continue to provide loans to people who will not, in the long run, be able to service them.
With the value dropping out of securities backed by sub-prime loans, people will be purchasing them much more cheaply. As they purchase them more cheaply, they'll be able to continue to make money by relaxing conditions on the loans (ensuring that they receive some payment, as opposed to no payment). This will provide relief to those holding the loans who do not declare bankruptcy (and reduce the number of bankruptcy claimants).
Posted by fugu13 (Member # 2859) on :
KoM: you're thinking too much of the borrower side of the equation. That figure represents a large number of businesses, mostly incorporated, undertaking too risky business practices.
People can't take out too risky loans unless a lender allows them to; this will happen sometimes due to the nature of the thing, but happening at this rate likely hides a perverse incentive.
Posted by dkw (Member # 3264) on :
Dag, I think a large number of the people in trouble *could* afford their house at the regular market interest rate. They either didn't qualify for that rate because of bad credit history or they were tricked into a variable rate by predatory lending companies. (I'm not saying all lending companies are predatory, but there are some that use extremely deceptive advertising and try to get customers into sub-prime loans even if they would qualify for prime rates.) Those are the situations where I'd like to see incentives/insurance for reputable banks to refinance the loans. I'd also like to see penalties for pre-payment of sub-prime loans eliminated.
For people who truly can't afford the houses they're in, certainly they need to find more affordable housing. (The serious shortage of affordable housing in many areas of the country is another issue.)
Posted by BlueWizard (Member # 9389) on :
It seems pretty clear that the Mortgage companies that we engaged in these subprime adjustable rate mortgages were engage in what I consider fraud. They would loan people money if they had a pulse, that was the only requirement. In some cases, they refinanced homes to monthly payments that were double the monthly income of the person receiving the loan. So, I have absolutely no sympathy for the mortgage companies.
Second, these people with adjustable rate loans live the 'good times' when interest rates were low, why should the not have to endure the 'not so good times' now that interest rates are moving up?
They persumably knew what they were getting into when they took out the loan. They knew with absolute certainty that over 30 years the interest rates absolutely would fluctuate. So, in my view, no excuses.
Most, or many of these people bought houses far beyond what was reasonable to assume they could pay for, and far beyond what any responsible mortage company would loaned them.
Also note that even with the higher interest rates, their interest rates are substantially lower than the standard interest rate in the late 80's and very early 90's.
Both the lenders and borrowers made irresponsible choices and I see no reason why my tax dollar should bail them out beyond the system that is already in place to help them.
So, absolutely NO SPECIAL ACTION should be take to assist these people. I say let them learn to live within their means or suffer the consequences. I totally reject the idea that it is the governments job to protect it's citizens from their own clear stupidity. If the government will bail every idiot out of whatever mess he has gotten himself into, then what is the point of personal responsibility? Why should we all just run wild and leave the government to come in and clean up the mess?
Of course, the government isn't THEM as we would like to delude ourselves into believing. The government isn't some abstract magical entity endowed with an infinite supply of money. The government is US and that is OUR money they are spending and wasting.
Time for both the government and the individual citizens to take responsibility for their finances.
Steve/BlueWizard
Posted by Dagonee (Member # 5818) on :
quote:They either didn't qualify for that rate because of bad credit history or they were tricked into a variable rate by predatory lending companies.
I don't think those who can't qualify because of bad credit can afford the house at the "regular" rate, because the "regular" rate takes credit risk into account - and it should. And those who are in the second category now can refinance, unless they've let their problem go too long. Rates are still extremely low from a historical perspective.
quote:Those are the situations where I'd like to see incentives/insurance for reputable banks to refinance the loans.
Some form of subsidized PMI might be a good idea, but it's still extending the problem and will cover a very small number of the foreclosures.
quote:The serious shortage of affordable housing in many areas of the country is another issue.
Yes, indeed it is. The large number of these loans is a significant contributing factor to this in general, especially as regards middle class and upper middle class affordability.
Posted by katharina (Member # 827) on :
No kidding. If credit wasn't so easy to get, then housing prices wouldn't be driven so high. The solution is NOT to subsidize the false high prices with taxes.
ESPECIALLY since those who pay a mortgage actually pay LESS in taxes. So, those who rent because they will not make a foolish financial decision are made even less able to save for a home because of subsidizing those who did make a foolish decision.
Posted by dkw (Member # 3264) on :
quote:Originally posted by Dagonee:
quote:They either didn't qualify for that rate because of bad credit history or they were tricked into a variable rate by predatory lending companies.
And those who are in the second category now can refinance, unless they've let their problem go too long. Rates are still extremely low from a historical perspective.
The majority of sub-prime loans have massive pre-payment penalties.
Posted by Christine (Member # 8594) on :
One other area that lending agencies have misled people in the past: In how much house a person can afford. Go ahead, ask your bank to run the numbers for you. Find out what obscene percentage of your monthly income they say you can spend on a house and how big a house you can buy. Real estate agents are in on it too -- I was told in no uncertain terms that I should buy "as much house as I can afford." The trouble was, her idea of what I could afford and mine were two different things.
I don't see how it would help any of the current problems with the lending industry or the housing market to help bail these people out. I wouldn't mind some regulation on those misleading loans, especially the ones targeting people with bad credit, but that's about it.
Posted by Dagonee (Member # 5818) on :
quote:The majority of sub-prime loans have massive pre-payment penalties.
I'm not opposed to making the lender eat those on unconscionability grounds.
Posted by Belle (Member # 2314) on :
I'm just floored that anyone would buy a home with an adjustable rate and a pre-payment penalty. Honestly, who does this? It's so obvious why those are two very bad ideas.
Posted by Stephan (Member # 7549) on :
quote:Originally posted by Belle: I'm just floored that anyone would buy a home with an adjustable rate and a pre-payment penalty. Honestly, who does this? It's so obvious why those are two very bad ideas.
Ever heard the phrase, "keeping up with the jones'"?
Posted by littlemissattitude (Member # 4514) on :
Short answer: no, probably not
Long answer: There is, however, something terribly wrong with an economy that is so out of control that purchasing a house is out of the question for so many people without taking out a stupidly outrageous loan, especially in a culture that values owning over renting as ours does. And, there is a problem when companies are allowed to - and will - lend to people who clearly cannot afford the loans, or clearly won't be able to if interest rates rise.
But people are encouraged by the culture to buy rather than rent, and so far it isn't illegal to offer those kinds of loans (although I'd be willing to bet that not so many companies will be letting clearly unqualified people take them out in future, even if the regulations don't change, which I suspect they might). So, it comes down to the fact that those folks were stupid enough/too easily led by societal expectations and took out loans that they knew they couldn't repay, so it was their choice. I'm fairly sure that no one held a gun to their head and forced them to sign the loan papers.
Posted by Belle (Member # 2314) on :
I'm trying hard to be sympathetic, I really am. I used to be very anti-bankruptcy, but when my mother had her experience and we went through a catastrophic illness, I understood why we have such systems in place to help those who find themselves in desperate situations. But this is not about bailing out people who've had a cancer diagnosis and mounting medical bills and can't afford their house anymore. It's about people who made very poor decisions, when the information was out there. There's so many places you can get advice about lending, and I'm pretty sure none of them will advise you to take out an adjustable rate mortgage with a pre-payment penalty if you can only afford the payment if rates don't rise.
My father in-law used to get angry any time there was a hurricane (he lived on the Mississippi gulf coast) and they'd talk about all the government aid going out to help people who didn't have flood insurance. His opinion was that if you live in a hurricane-prone area and don't have flood insurance, then you shouldn't expect tax dollars to bail you out when your house floods. At some point, people have to be responsible. They bought those houses knowing they were at the limit of what they could afford. They shouldn't have bought them under those terms. While I certainly think they shouldn't be thrown in jail or treated badly - they should have access to bankruptcy options and other safety nets - I don't think taxpayer money should help them stay in their house.
Posted by Amanecer (Member # 4068) on :
quote:There is, however, something terribly wrong with an economy that is so out of control that purchasing a house is out of the question for so many people without taking out a stupidly outrageous loan, especially in a culture that values owning over renting as ours does.
I don't think that's really true. As DKW said, some unscrupulous companies tend to push the sub-prime mortgages even when people could qualify for a better one. Further it does not take much to qualify for owning a house- especially your first house. If you pay your bills and have a steady job for two years, you can get a mortgage.
Posted by dkw (Member # 3264) on :
The "general public" has an 8th grade reading level and probably lower than that in math skills. And there are people like this guy convincing them that the reason they'r in financial trouble is that "the system" is out to get them, but he's their buddy and will make it happen.
It's not a gun to the head, but it's not upright and honest either.
Posted by Jon Boy (Member # 4284) on :
quote:Originally posted by dkw: The "general public" has an 8th grade reading level . . .
Are you sure about that? I've heard that newspapers are generally written on an eighth-grade level, but I've never personally seen a reputable source that says that American adults have only an eighth-grade reading level.
Posted by rivka (Member # 4859) on :
quote:Originally posted by Dagonee:
quote:They either didn't qualify for that rate because of bad credit history or they were tricked into a variable rate by predatory lending companies.
I don't think those who can't qualify because of bad credit can afford the house at the "regular" rate, because the "regular" rate takes credit risk into account - and it should. And those who are in the second category now can refinance, unless they've let their problem go too long. Rates are still extremely low from a historical perspective.
quote:The serious shortage of affordable housing in many areas of the country is another issue.
Yes, indeed it is. The large number of these loans is a significant contributing factor to this in general, especially as regards middle class and upper middle class affordability.
I agree with this, and with almost everything else Dags has said in this thread. (But I still plan to continue to register as a Democrat, and you can't stop me.)
This has been coming for a while. I've been hearing predictions of something along these lines for at least 2 years, and I think longer. A tremendous part of why housing prices in Southern California (and other areas) have risen so obscenely high in the past decade is because people are taking out mortgages that they CANNOT pay long-term. Not just adjustable rates, but balloon payments and all kind of other big no-nos -- but people are taking out these loans anyway. And often paying 50% or more of their monthly income, which is part of why they're not qualifying for regular loans.
As Katie said, why should I be punished for the lack of foresight of those who didn't do their homework? I researched and realized that even though I might be able to get some lender to give me a mortgage, I really would not be able to afford it. And I hate, loathe, and detest dealing with large amounts of money (even theoretical money). It gives me panic attacks, quite literally. And yet I managed to use some of the hundreds of free online calculators, managed to consult with legitimate lenders (like my bank), managed to do research, both online and off-.
Maybe, just maybe, this crash will not only bring down housing prices, but drive home the point to those who so drastically overextended themselves, and drove up the market by doing so. Probably only for 20-25 years -- the last time we had this kind of crash was the early 80s.
Posted by Lisa (Member # 8384) on :
quote:Twenty-one to 23 percent -- or some 40 to 44 million of the 191 million adults in this country -- demonstrated skills in the lowest level of prose, document, and quantitative proficiencies (Level 1). Though all adults in this level displayed limited skills, their characteristics are diverse. Many adults in this level performed simple, routine tasks involving brief and uncomplicated texts and documents. For example, they were able to total an entry on a deposit slip, locate the time or place of a meeting on a form, and identify a piece of specific information in a brief news article. Others were unable to perform these types of tasks, and some had such limited skills that they were unable to respond to much of the survey.
Some 25 to 28 percent of the respondents, representing about 50 million adults nationwide, demonstrated skills in the next higher level of proficiency (Level 2) on each of the literacy scales. While their skills were more varied than those of individuals performing in Level 1, their repertoire was still quite limited. They were generally able to locate information in text, to make low-level inferences using printed materials, and to integrate easily identifiable pieces of information. Further, they demonstrated the ability to perform quantitative tasks that involve a single operation where the numbers are either stated or can be easily found in text. For example, adults in this level were able to calculate the total cost of a purchase or determine the difference in price between two items. They could also locate a particular intersection on a street map and enter background information on a simple form.
Individuals in Levels 1 and 2 were much less likely to respond correctly to the more challenging literacy tasks in the assessment -- those requiring higher level reading and problem-solving skills. In particular, they were apt to experience considerable difficulty in performing tasks that required them to integrate or synthesize information from complex or lengthy texts or to perform quantitative tasks that involved two or more sequential operations and in which the individual had to set up the problem.
Nearly one-third of the survey participants, or about 61 million adults nationwide, demonstrated performance in Level 3 on each of the literacy scales. Respondents performing in this level on the prose and document scales were able to integrate information from relatively long or dense text or from documents. Those in the third level on the quantitative scale were able to determine the appropriate arithmetic operation based on information contained in the directive, and to identify the quantities needed to perform that operation.
Eighteen to 21 percent of the respondents, or 34 to 40 million adults, performed in the two highest levels of prose, document, and quantitative literacy (Levels 4 and 5). These adults demonstrated proficiencies associated with the most challenging tasks in this assessment, many of which involved long and complex documents and text passages.
Judging by this study, only about 20% of adults in the US are capable of reading and understanding their mortgage agreements or researching things like variable interest rates, balloon payments, etc. for themselves.
It isn't lack of foresight, it's lack of knowledge and lack of understanding that's the problem. And unscrupulous lenders who take advantage of the same.
Posted by Jon Boy (Member # 4284) on :
Thanks, dkw. Posted by dkw (Member # 3264) on :
I was looking for the "8th grade average" figure, but found the more detailed study instead.
It's really rather frightening.
Posted by Dagonee (Member # 5818) on :
quote:I agree with this, and with almost everything else Dags has said in this thread. (But I still plan to continue to register as a Democrat, and you can't stop me.)
quote:It isn't lack of foresight, it's lack of knowledge and lack of understanding that's the problem. And unscrupulous lenders who take advantage of the same.
This is the main reason I don't mind voiding prepayment penalties. The ability to refinance if one can afford it is a large part of my reasoning in not wanting aid specifically aimed at helping people keep their houses. The prepayment penalties are specifically designed to lock someone into a finance instrument based on incomplete information and a temporary status (poor creditworthiness).
However, I know many people who got these loans, and all of them understood the crucial fact that their mortgage went up $500 a month after two years. I'm not saying everyone would know this - I hang out with a strange crowd. The scheduled increase is the piece of information that's crucial here, and there are lots of people in trouble now who knew about that.
Posted by rivka (Member # 4859) on :
quote:It isn't lack of foresight, it's lack of knowledge and lack of understanding that's the problem. And unscrupulous lenders who take advantage of the same.
I believe this is true of some. I don't believe that it is true of most, let alone all.
And look, we don't bail out people who believe snake-oil salesmen and invest their life savings in some get-rich-quick scheme. Nor am I convinced we should. How is this different?
Posted by rivka (Member # 4859) on :
I am still a liberal! I am, I am!
I believe in affirmative action . . . under some circumstances. I'm in favor of allowing in more immigrants, and lowering the bar to qualify for legal immigration!
No, really, I applied for membership in the cabal and everything!
Posted by Kwea (Member # 2199) on :
I worked for a mortgage company for a while....and there are some really good reasons for people to get into a house when they can, even if they pay more than prime.
I have bad credit. Not horrible, but not good. I will not qualify for a FHA loan. But I can qualify for a sub-prime loan...and doing so is a great idea for me, as long as I refinance in a year or two.
One year of making a mortgage payment, on time of course, will improve my credit score to the point where I will never have a problem qualifying for a reasonable loan again.
I won't take their word for how much house I can afford, and I won't accept heavy pre-payment penalties, but not all lenders are assholes.
Even if they sell sub-prime loans to people with borderline credit....
...like me.
Posted by mr_porteiro_head (Member # 4644) on :
quote:It isn't lack of foresight, it's lack of knowledge and lack of understanding that's the problem.
I think that taking out a mortgage without first acquiring the ability to understand the mortgage agreement, or getting help from someone who can, demonstrates a huge lack of foresight.
quote:I'm in favor of allowing in more immigrants, and lowering the bar to qualify for legal immigration!
Sorry, Rivka, but that doesn't make you a liberal, unless I qualify as one.
Posted by The Rabbit (Member # 671) on :
There is a very relevant issue that no one has mentioned yet. If 1.5 million people default on their mortgages, how will this influence the rest of the economy and the realestate market. That kind of mass default is likely to result in bankruptcy of alot of lending institutions. The combination of that with having all those houses suddenly on the market, could cause the value of houses to drop dramatically. Across much of the country, realestate prices are already dropping so this this additional stress could cause the bottom to fall out of the realestate market.
When home prices drop, lots of people find themselves in situations where instead of having equity in their home, they owe more on their mortgage than their house is worth. If these people then have to move because work, divorse or some other crisis, they are in serious trouble because they can't sell their home for what they owe on the mortgage. Not only have they lost the money they used for a down payment, but unless they can come up with tens of thousands to make up the difference at closing, they can't sell their homes. The end result is that even more people default on their mortgages which could cause an even bigger drop in home values.
Now I'm not an economic expert so I don't know if this situation is large enough to cause that kind of ripple effect but it is certainly worth considering in more detail. No matter how you feel about personal responsibility or federal aid, it might make good economic sense to bail this folks out.
Aid to keep these people from defaulting on their mortgages now could end up costing you and I alot less in the long run. How much is it worth to you to keep the value of your house from plummeting?
Posted by The Rabbit (Member # 671) on :
quote:Originally posted by Belle: I'm just floored that anyone would buy a home with an adjustable rate and a pre-payment penalty. Honestly, who does this? It's so obvious why those are two very bad ideas.
The answer to that question is pretty obvious.
Two years ago, the price of houses was skyrocketing. That had two important effects.
First: It made people desperate to get into the housing market. They figured that home prices were going up so fast that if they waited until they had a better down payment or credit rating, they might never be able to afford a house. They believe the that once they were in the market they'd become the benificiaries of the realestate boom instead of the loosers. I've known lots and lots of young people who bought their first house before they could easily afford it for just those reasons and for most of them it was a good choice.
Second, Skyrocketing realestate prices made buying a house a low risk proposition regardless of the terms. People got into these houses confident that within a couple of years they would have enough equity in the house (due simply to rising prices) that they would be able to either refinance with much better terms or sell the house at a sizable profit. Similarly, lenders figured that even if buyers defaulted on the mortgage, houses would be certain to sell for more than the mortage value.
If housing prices had continued to go up (as has been the overwhelming trend nation wide over the past 50 years), it would have all worked out OK. Ten years from now we'd be hearing these people say, "I'm sure glad we bought this house when we did, even though it was a big financial sacrifice at the time".
Posted by The Rabbit (Member # 671) on :
I guess I should also add that this was not and is not reflective of my own approach to debt or risk taking. When my husband and I bought our first house, we borrowed substantially less (and bought a smaller house) than banks were willing to loan us based on our income level and credit rating. We put every spare dime into it and paid off the mortgage in under 5 years. We bought the place where we live now with cash. We've been able to do this in part because we are very conservative with our money but mostly because we have been very very blessed.
Posted by mr_porteiro_head (Member # 4644) on :
quote:There is a very relevant issue that no one has mentioned yet. ... When home prices drop, lots of people find themselves in situations where instead of having equity in their home, they owe more on their mortgage than their house is worth. If these people then have to move because work, divorse or some other crisis, they are in serious trouble because they can't sell their home for what they owe on the mortgage.
Ahem:
quote:Originally posted by mr_porteiro_head: Many people would be stuck with high mortgages on houses with deflated values, unable to sell because they couldn't get enough from the sale to pay off the mortgage. They'd be stuck where they are, unable to take better jobs in another state, unable to move to help out family members...
Posted by rivka (Member # 4859) on :
quote:Originally posted by mr_porteiro_head:
quote:I'm in favor of allowing in more immigrants, and lowering the bar to qualify for legal immigration!
Sorry, Rivka, but that doesn't make you a liberal, unless I qualify as one.
Ah, but you're in favor of guns. You can't be a liberal. *smug*
Posted by The Rabbit (Member # 671) on :
quote:Originally posted by mr_porteiro_head: Originally posted by The Rabbit
quote:There is a very relevant issue that no one has mentioned yet
Ahem:
quote:Originally posted by mr_porteiro_head: Many people would be stuck with high mortgages on houses with deflated values, unable to sell because they couldn't get enough from the sale to pay off the mortgage. They'd be stuck where they are, unable to take better jobs in another state, unable to move to help out family members...
Yes, I'd read where you said that. What I was trying to emphasize was the ripple effect which isn't different from what your said, just more extreme. While some people will have to turn down better jobs or choose not to help family because they can't sell their house, many people who are faced with the need to relocate due to work, financial or family issues don't have the option of saying no. They have to sell their homes, period. If they can't sell them for what they owe, they default on their mortgages. These leads to a positive feedback loop that can ripple through the whole economy. Housing prices fall leaving many people with mortages that are worth more than their homes. => Alot of peoples mortgages fail => banks go bankrupt => mortgage rate go up and # houses on the market goes up =>Hhousing prices fall => More people default on their mortgage (repeat ad infinitum).
Posted by mr_porteiro_head (Member # 4644) on :
You don't know I'm in favor of guns. I might be a giant hypocrite instead.
Which doesn't bar me from being a liberal or a conservative.
Posted by mr_porteiro_head (Member # 4644) on :
quote:Yes, I'd read where you said that. What I was trying to emphasize was the ripple effect which isn't different from what your said, just more extreme.
That's actually a very important point you made. Nevermind.
Posted by rivka (Member # 4859) on :
quote:Originally posted by mr_porteiro_head: You don't know I'm in favor of guns. I might be a giant hypocrite instead.
Posted by Mrs.M (Member # 2943) on :
It so happens that we just bought a house. Like this weekend. During my househunt, I've learned a great deal about the Richmond real estate market and I'd have to answer the original question with a resounding heck no! My realtor told me that the average income for a family of 4 in Richmond is $60K per year. The median house price in Richmond is $285K. You should never buy a house that is more than 2.75 times your annual income, so it seems that some people in Richmond are buying more than $100K more than they can afford. The forclosures are already starting.
I think that part of the problem is that a lot of people have a warped idea of what they need. A family of 6 can share a 3-bedroom, 1.5-bathroom house. It might not be convenient or even pleasant, but they could get by just fine. No one needs hardwood floors or stainless appliances or luxurious master suites. Our new house is a 32-year-old French Colonial with great bones and many nice features. It needs a lot of work, though. Some we're going to do right away (having the layers of paint over wallpaper over paint over different wallpaper stripped and repainted) and some things we're going to wait until we can afford to pay cash (we don't believe in home equity loans). I'd love to extend my hardwoods into my kitchen and sunroom, but I don't need to. I'd love to reface my cabinets and move my range to a better spot and get range accessories and get marble countertops and a new front porch. I'd love to rebuild the deck and put in new bathrooms. These are things that I want, but I don't need them at all. I'd be curious to know how many of those 1.5 million people bought houses they couldn't afford because they were convinced that they needed them. Andrew and I qualified for financing for a much more expensive house than the one we bought because we balanced what we want with what we can comfortably afford.
BTW, that CNN Money article was outrageous! They struggled to save $5K and they bought a house for $290K?! They though it was okay to buy a house when they could barely afford the closing costs?! They have no excuses - they have student loans, which indicates that they're educated and they work at jobs that would require them to have the math skills to understand the mortgage and loan terms.
Posted by King of Men (Member # 6684) on :
quote:My realtor told me that the average income for a family of 4 in Richmond is $60K per year. The median house price in Richmond is $285K. You should never buy a house that is more than 2.75 times your annual income, so it seems that some people in Richmond are buying more than $100K more than they can afford.
Without doubting that people in Richmond are buying houses above their means, that does not follow from the statistics you give. The average income includes a lot of people who are renting and do not intend to buy any houses; the average house sale price (and at that, you are trying to compare average and median, a bad idea) includes only people wealthy enough to buy a house. The populations are highly incompatible. Worse, you have no idea of the shape of these distributions, a much more important characteristic than their average. The correct statistic to quote would be the average ratio of buyer income to house value.
Posted by Stephan (Member # 7549) on :
quote:Originally posted by rivka: I am still a liberal! I am, I am!
I believe in affirmative action . . . under some circumstances. I'm in favor of allowing in more immigrants, and lowering the bar to qualify for legal immigration!
No, really, I applied for membership in the cabal and everything!
I'm a republican, and agree with those topics...
Posted by Stephan (Member # 7549) on :
quote:Originally posted by The Rabbit: There is a very relevant issue that no one has mentioned yet. If 1.5 million people default on their mortgages, how will this influence the rest of the economy and the realestate market. That kind of mass default is likely to result in bankruptcy of alot of lending institutions. The combination of that with having all those houses suddenly on the market, could cause the value of houses to drop dramatically. Across much of the country, realestate prices are already dropping so this this additional stress could cause the bottom to fall out of the realestate market.
When home prices drop, lots of people find themselves in situations where instead of having equity in their home, they owe more on their mortgage than their house is worth. If these people then have to move because work, divorse or some other crisis, they are in serious trouble because they can't sell their home for what they owe on the mortgage. Not only have they lost the money they used for a down payment, but unless they can come up with tens of thousands to make up the difference at closing, they can't sell their homes. The end result is that even more people default on their mortgages which could cause an even bigger drop in home values.
Now I'm not an economic expert so I don't know if this situation is large enough to cause that kind of ripple effect but it is certainly worth considering in more detail. No matter how you feel about personal responsibility or federal aid, it might make good economic sense to bail this folks out.
Aid to keep these people from defaulting on their mortgages now could end up costing you and I alot less in the long run. How much is it worth to you to keep the value of your house from plummeting?
I think that the amount of people that might be able to afford a home with fixed 30 year regular mortgages due to falling prices will far outweigh those who lose equity.
I'm not an expert on economics, but more people being able to afford homes in the first place has got to be good for the economy.
Posted by Lisa (Member # 8384) on :
quote:Originally posted by rivka: No, really, I applied for membership in the cabal and everything!
There is no cabal.
Posted by Dagonee (Member # 5818) on :
I recommend reading the column linked at the top called "No Money Down Falls Flat" before reading the chat.
I don't agree with everything in either, but it's a good way to understand the economics and the mismatch of incentives.
The investors who risked their money don't deserve a bailout - the loans were risky and the risk was identifiable. In fact, the investors pushed for more risk.
Here are the basics of the instruments at issue:
quote:It began years ago when Lewis Ranieri, an investment banker at the old Salomon Brothers, dreamed up the idea of buying mortgages from bank lenders, bundling them and issuing bonds with the bundles as collateral. The monthly payments from homeowners were used to pay interest on the bonds, and principal was repaid once all the mortgages had been paid down or refinanced.
Thanks to Ranieri and his successors, almost anyone can originate a mortgage loan -- not just banks and big mortgage lenders, but any mortgage broker with a Web site and a phone. Some banks still keep the mortgages they write. But most other originators sell them to investment banks that package and "securitize" them. And because the originators make their money from fees and from selling the loans, they don't have much at risk if borrowers can't keep up with their payments.
And therein lies the problem: an incentive structure that encourages originators to write risky loans, collect the big fees and let someone else suffer the consequences.
This "moral hazard," as economists call it, has been magnified by another innovation in the capital markets. Instead of packaging entire mortgages, Wall Street came up with the idea of dividing them into "tranches." The safest tranche, which offers investors a relatively low interest rate, will be the first to be paid off if too many borrowers default and their houses are sold at foreclosure auction. The owners of the riskiest tranche, in contrast, will be the last to be paid, and thus have the biggest risk if too many houses are auctioned for less than the value of their loans. In return for this risk, their bonds offer the highest yield.
It was this ability to chop packages of mortgages into different risk tranches that really enabled the mortgage industry to rush headlong into all those new products and new markets -- in particular, the subprime market for borrowers with sketchy credit histories. Selling the safe tranches was easy, while the riskiest tranches appealed to the booming hedge-fund industry and other investors like pension funds desperate for anything offering a higher yield. So eager were global investors for these securities that when the housing market began to slow, they practically invited the mortgage bankers to keep generating new loans even if it meant they were riskier. The mortgage bankers were only too happy to oblige.
By the spring of 2005, the deterioration of lending standards was pretty clear. They were the subject of numerous eye-popping articles in The Post by my colleague Kirstin Downey. Regulators began to warn publicly of the problem, among them Fed Chairman Alan Greenspan. Several members of Congress called for a clampdown. Mortgage insurers and numerous independent analysts warned of a gathering crisis.
Posted by ClaudiaTherese (Member # 923) on :
Glad I didn't buy, glad I didn't buy, glad I didn't buy ... (*rinse and repeat)
We could have. Just didn't make sense for us, although people said otherwise.
Posted by katharina (Member # 827) on :
If people went into bad loans because of the market, then they were betting the market would continue. They were speculating. We don't repay people who have lost money in the stock market - why should we do it for people who lost money in the housing market? Where was the massive bailout for the people who lost their pensions when Enron collapsed?
It sucked to go from owning a house to renting again, but that's how investing goes. They took on a lot of risk in hopes of winning big, and they didn't. They lost. Welcome to the world everyone else lives in.
Posted by TomDavidson (Member # 124) on :
You know, it's still possible to get a mortgage that isn't evil. Posted by ClaudiaTherese (Member # 923) on :
Well, yes, if it is offered.
Posted by Katarain (Member # 6659) on :
Is it wrong that I'm hoping that this results in sane house prices, so that we can finally afford a house? I don't want something big. I want something in my budget, but the houses that SHOULD be in my price-range are practically double in price.
Posted by Christine (Member # 8594) on :
Dag -- I think you are absolutely right about the lower cost of houses helping at least as much as hurting. I've thought for a long time that houses are overpriced, and not just because people think they need more house than maybe they do. Housing costs have skyrocketed above inflation for decades now. That was something that my husband and I were very aware of when we bought our house -- we did not plan for it to go up in value and we were not playing the real estate game (although many tried to convince us to do just that when all we wanted was a place to call home).
If the value of my house goes down, I can live with that. I know it will be a rough situation for many, but any significant economic change hurts some and helps others. In this case, I'm not sure it's an economic change we can fend off forever, either. If it's not this, it'll be something else bringing down those housing prices.
And actually, I'm not even convinced that housing prices will go down so much as stop going up for a while. That seems like a more realistic market correction.
Posted by Stephan (Member # 7549) on :
quote:Originally posted by Katarain: Is it wrong that I'm hoping that this results in sane house prices, so that we can finally afford a house? I don't want something big. I want something in my budget, but the houses that SHOULD be in my price-range are practically double in price.
Nothing wrong about that at all. I even bought last year, and I am hoping prices plummet. I might lose a few thousand on this place, but we are already saving for the next house. I would happily lose movey on my overpriced duplex, if it meant getting a decent sized single family.
Posted by Stephan (Member # 7549) on :
By the way, in the secondary housing market it is already happening. My dad is a realtor in Ocean City, MD and there are a couple thousand properties on the market in that town alone. People are not buying, and the sellers are finally getting desperate and coming down in price. There is even one entire condo building bought by investors when it was first built hoping to flip the units, the entire bulding is still empty after 6 months.
Posted by fugu13 (Member # 2859) on :
Rabbit: as I pointed out earlier, and Dag reiterated, mortgage lenders are only in danger due to the loss of new business, and that will mostly pan out as cheap buyouts (as has already started happening). They don't hold the mortgages, those are spread out around a large number of investment institutions.
The investment institutions will certainly take a hit, but the sums involved are paltry in comparison to their total holdings. This will also cause them to take fewer risks in that sector, which will help keep home prices low (which is a very good thing for precisely the people this is hitting hardest; those who have a hard time affording a home).
Most home prices aren't likely to see a dramatic drop; I predict a pretty big dip in newly constructed, tightly packed neighborhoods, but that will recover fairly quickly as the rate of home construction drops.
Keeping those people from defaulting on their mortgages by giving them money (in whatever manner) will only provide an incentive to provide more such loans, which keeps the problem going.
Posted by ClaudiaTherese (Member # 923) on :
quote:Originally posted by Katarain: Is it wrong that I'm hoping that this results in sane house prices, so that we can finally afford a house?
Mindreader.
I don't want other people to bottom out. I just want the market to return to sanity. I suppose what we're doing here is discuss how to best let that happen.
Posted by Lupus (Member # 6516) on :
The thing is, the prepayment penalties are there because early in the variable rate loan people were getting a house for payments far below what they should have been paying. They are designed for people who thing they will be making far more than they are now in a couple of years. I think these types of loans are right for certain types of people. You are able to get into a house that you can't really afford now, but think you will be able to afford in the future. If you are wrong, then you are in over your head...but it is not the government's job to fix your mistake. Let the bank foreclose, and rent until you really can afford a house.
I had a hard time feeling sorry for the couple in the CNN article. They bought a house that was just under 300,000 when they only had 5,000 to put forward. That is just a terrible idea unless they were sure that they would be coming into a lot more money in the next few years. Even then, it would be a dangerous loan because if you are wrong you are in trouble.
I do think they government should work to educate people about the different types of loans, and the risks that come with some of these variable rate loans...and the risk of financing the down payment. However, it is not the job of the government to pay people to make bad decisions. As other people have said, all this will do is to continue to push up the price of housing.
Posted by BaoQingTian (Member # 8775) on :
quote:Originally posted by katharina: If people went into bad loans because of the market, then they were betting the market would continue. They were speculating. We don't repay people who have lost money in the stock market - why should we do it for people who lost money in the housing market? Where was the massive bailout for the people who lost their pensions when Enron collapsed?
It sucked to go from owning a house to renting again, but that's how investing goes. They took on a lot of risk in hopes of winning big, and they didn't. They lost. Welcome to the world everyone else lives in.
I wonder how many of those 1.5 million people actually live in the place they're in trouble with. My wife and I have held off buying a house for a few years now because the prices have been so crazy- despite everyone telling us that the time to get in was now. The average price of a home in our area has more than doubled in the last 5 years.
Prices have now been steadily falling for a year now. Where I work, there's a bulletin board, with a new listing of a house for sale almost every other day. So many people bought into a second house to make money off of. I feel zero pity for these people and mortgage companies that are going to be taking tens of thousands in losses (or more). If you gamble, you may lose. Also, both the investors and the mortgage were part of the problem by leveraging such small amounts of capital and artificially inflating the housing market here.
Posted by katharina (Member # 827) on :
This thread made me go and look. Despite a decent salary as a federal flunkie, the only thing I can afford to buy in the town I live in is a studio condominium fifteen miles from work. And there's only one listing.
The housing market wouldn't be so bad if people didn't inflate the costs with these stupid loans. There's no reason to keep it so artificially high.
Posted by Stephan (Member # 7549) on :
quote:Originally posted by Lupus:
I had a hard time feeling sorry for the couple in the CNN article. They bought a house that was just under 300,000 when they only had 5,000 to put forward. That is just a terrible idea unless they were sure that they would be coming into a lot more money in the next few years. Even then, it would be a dangerous loan because if you are wrong you are in trouble.
The funny thing? I was in the same boat. I bought a house for $280k, and only had about $7k. I guess our credit is a lot better though. I had a 1st mortgage for $224k at 6.2%, and a 2nd balloon fixed rate mortgage for the balance of 56k. 4 months later I refinanced with Wachovia, they gave me 100% of my loan balances in 1 loan, fixed at 5.99%. We knew we could afford the original loans though, even the balloon payment after 15 years.
(For those that don't know a balloon in my case is basically a fixed rate loan where the payment was based on a 30 year loan, but the balance is due at the end of 15).
Posted by ClaudiaTherese (Member # 923) on :
quote:Originally posted by BaoQingTian: I wonder how many of those 1.5 million people actually live in the place they're in trouble with. ... If you gamble, you may lose. Also, both the investors and the mortgage were part of the problem by leveraging such small amounts of capital and artificially inflating the housing market here.
Flip This House and other do-it-yourself renovation shows have been getting a lot of airplay. I wonder how much of this has fed into the general cultural climate of "this is a good thing to do."
Posted by Katarain (Member # 6659) on :
I refuse to watch Flip This House because of exactly that cultural climate. I don't know if the show is making it worse to afford a home or if it's simply feeding off of the greed already out there. It doesn't matter to me. Either way, it represents exactly what ticks me off so much.
Posted by mr_porteiro_head (Member # 4644) on :
You know, I flipped a house for quite a profit after only 4 years (assuming that everything closes as it should next week), but that was never my plan. I bought it to live in it, and sold it when we moved.
Posted by Mrs.M (Member # 2943) on :
quote:Without doubting that people in Richmond are buying houses above their means, that does not follow from the statistics you give. The average income includes a lot of people who are renting and do not intend to buy any houses; the average house sale price (and at that, you are trying to compare average and median, a bad idea) includes only people wealthy enough to buy a house. The populations are highly incompatible. Worse, you have no idea of the shape of these distributions, a much more important characteristic than their average. The correct statistic to quote would be the average ratio of buyer income to house value
KoM, you're right and I appreciate how gracious you were in pointing that out. It was 2 in the morning and I have bronchitis, so I probably should have held off on posting.
According to my realtor, most homeowners in Richmond are in houses they can't afford. When I told her Andrew's income for last year and asked her if she thought we would have any problems getting financing (I was pretty sure we wouldn't, but I'm insanely compulsive and anxious about money), she laughed. She told me that most people buying houses at our price level make more than $35K less than Andrew and have worse credit and more expenses. I was shocked. I am so afraid of living outside of our means that it's unthinkable to me to buy a house that we can't comfortably afford.
The housing market in Richmond is cooling considerably. Although a lot of people are relocating here, there's significantly more inventory than there has been.
Another thing to consider is that during the peak of the market, about 4 years ago, people were waving inspections to ensure that they got the houses they wanted. I could never, ever do that. I would walk away from my dream house if I couldn't get an inspection. So many of those people are having to pour huge sums of money into their houses to fix things that an inspection would have caught. We have friends that need a new roof on an 8-year-old house and who had to replace a lot of their ducts. They have water damage and I had to tell them that they're going to have to do a lot of work in their second bathroom (the tiles are falling in a way that indicates either improper installation or a structural problem). This is particularly true of new construction houses. We purposely looked for a house that was built before the '80s (and kept up well), because they weren't as concerned with getting the most houses into the smallest spaces as fast as they could.
Posted by Belle (Member # 2314) on :
Four years is not flipping. Flippers generally try to unload a property after mere weeks, months is a long time. they never intend to live in the house, it's bought and sold only as an investment.
My husband refuses to do contract work for house flippers. Generally, they want things cheap, dirty, and fast....and he doesn't work that way. They try to undercut material costs and avoid necessary inspections because it's all about cosmetics with them - does it look good so they can convince someone to buy it quickly? Never mind if it works six months down the road, they'll be long gone.
Moral of the story - don't buy a house from a flipper. Chances are the renovations done to sell the house were not very professional jobs.
Edit: And to follow up on what Mrs. M said - get a professional home inspection done on any property you are trying to buy and do NOT use the inspector recommended by the homeowner or the contractor. Find your own. I can't stress this enough. A home inspector certificate is not hard to get, so I would ask not only to see the certificate, but ask background questions like what type of construction they've done before, and what qualifies them to be an inspector. If their only qualifications are the course you need to take before you file for the certificate, run, don't walk to another inspector. Your best inspectors are those that are retired from a construction industry, and were licensed plumbers or electricians or carpenters before opening up their home inspection service.
Posted by Mrs.M (Member # 2943) on :
Speaking of failed flippers, check out this guy. I can never decided whether to laugh or cry or throw up when I read his blog.
I wholeheartedly second Belle's inspector advice. Ours is fantastic - he's a carpenter and a contractor. I wish we could hire him to do the work on our house, but he won't because it's unethical. Not even if you pay him under the table (I asked - I love him). He's already saved us thousands of dollars.
Posted by Stephan (Member # 7549) on :
quote: NEW YORK (Reuters) - Lawyers for investors hurt by the meltdown of mortgage lenders that cater to risky borrowers are likely to file a wave of class-action lawsuits against the lenders and possibly their auditors and bankers as well.
U.S. lawyers have already sued subprime lenders including New Century Financial Corp. and NovaStar Financial Inc. and their top executives for securities fraud, claiming they misled investors about the companies' finances and had lax guidelines for approving mortgages for borrowers with poor credit histories.
Prominent plaintiffs' firm Lerach Coughlin, which already has brought suits on behalf of investors in New Century and NovaStar, is looking at bringing cases against other subprime lenders, said David Walton, a partner at the San Diego-based firm.
Posted by Stephan (Member # 7549) on :
And Clinton makes it a campaign issue, now all we need is a suicide and my predictions have come true.
quote:Neighborhood Assistance Corporation of America, an 18-year-old housing advocacy group, yesterday announced it would commit $1 billion to refinancing the loans of lower-income people at risk of losing their homes.
The financing will come from CitiGroup and Bank of America, which have been lending money for years to borrowers screened by the nonprofit group. NACA, of Boston, said it had helped put 50,000 people in homes since its creation.
Beyond the cash involved, this will allow much better negotiation with the lenders. Foreclosure is expensive, and there's a lot of room between everything the lenders are contractually due and the amount they can recover in foreclosure - especially now. This amount is the potential surplus in such a negotiation. A national group is likely to be able to get more of it for the homeowners than homeowners could on their own.
If the refinances avoid foreclosure and result in less risky (by definition, more affordable) loans, then borrowers and lenders will both win.
It still results in propped up housing prices, but I have a lot less of a problem with private companies doing it. Beyond that, it's not clear that propped up prices are worse than the collapse that might (not definitely would) result from a foreclosure wave.
Posted by fugu13 (Member # 2859) on :
I read the blogs of some people heavily involved with the real estate industry, and a lot of the problem appears to be sellers following the prices by too much.
Also, at least one of them has remarked that that $1 billion is something that was already there, they're just re-spinning it.
And I also have absolutely no problem with private enterprise offering new, safer loans as a means of gaining profit; that's how markets work, and it improves the situation rather than creating perverse incentives.
I don't think we'll see it prop up housing prices, either. A billion dollars is comparatively small change, and the people they're targeting aren't likely in recent homes anyways.
Posted by Pat (Member # 879) on :
quote:Originally posted by Belle: I'm just floored that anyone would buy a home with an adjustable rate and a pre-payment penalty. Honestly, who does this? It's so obvious why those are two very bad ideas.
Real Estate Investors do it all the time. Of course, they should have a sure-fire exit strategy in place before they sign on that dotted line.
But you're right Belle, no one in their right mind should have an ARM on their personal residence. You just never know what the future will hold.
Posted by Zalmoxis (Member # 2327) on :
I read a recent Wall St. Journal special report on renting vs. buying, and it cleared up quite a few misconceptions I had. I'm glad that I didn't do anything stupid in the overheated Bay Area market.
The real estate market is in the process of correcting itself right now. It's purging itself of those who took advantage of a very liberal underwriting processes that overlooked all kinds of fraud, deceit and outright lies of those loan officers and their clients who were willing to do anything to get their loan closed.
The unsavory loan officers, appraisers and mortgage companies who were looking to make a quick buck are being taken down and put out of business.
I feel that if someone was led into signing a loan that was obtained through fraudulent maneuvers, then that person should be assisted. Of course, the only way to prove this would be through a court of law. I'm not sure that rewarding them with tax dollars is the way to go about this.
In about 6-9 months, the subprime market will still be there, but it will more akin to a primary loan market and will serve the noble cause it's there for -- to help those who have bad credit, but are otherwise a good risk to get a loan for a house.
Posted by Vadon (Member # 4561) on :
quote:Originally posted by Stephan:
quote:Originally posted by Amanecer: I'll add in another "no". That said, I would love to see a basic financial literacy class become a high school requisite.
AMEN! I took a personal finance course by choice in high school, and it was the most valuable course I have ever taken. He taught me everything from doing my own taxes to balancing my check book.
We have that required at my high school. It was a mostly useless class to me because the teachers that taught it don't have a real degree in finance. They're all either business teachers or history teachers.
I actually transfered out of it into another because how my teacher taught it was "What morals do we hold in society? We need to have values and weigh our savings into account with that."
There was no direction and I got into a better class with a teacher that was able to explain things a bit better, but still...
Do I know anything on taxes, loans, equity, or anything like that from my class? Nope. I just learned to avoid high interest rates when you pay out, seek them when you're investing.
Posted by Jutsa Notha Name (Member # 4485) on :
quote:Originally posted by katharina: No kidding. If credit wasn't so easy to get, then housing prices wouldn't be driven so high. The solution is NOT to subsidize the false high prices with taxes.
ESPECIALLY since those who pay a mortgage actually pay LESS in taxes.
Do you really believe that homeowners pay less in taxes overall? That is, in urban and suburban areas in the country, patently false. They get tax incentives on income, and pay those incentives right back in property taxes and taxes on equity at the time of sale, among other things. It levels off, especially with homeowners that have children or other dependants. It is not unfair in the same way those property taxes going toward school budgets in localities is not unfair to homeowners without children. There are other factors that level off the loss / gain ratio.
Sub-prime lending on its own should be heavily regulated. The problems we are facing today with the housing bubble and sub-prime lending are based on two main things: the general lack of education for most people how to manage long-term finances, and the lending institutions who are quick to take advantage of that lack of knowledge. Even if the government wanted to aid those who have gotten themselves mired in a sub-prime mortgage debt, there are too many cases with too much money at stake for the government to be able to change much. The only assistance the government could give as a whole is to either provide partial help that will still not get the people who are troubled in the black.
Perhaps if the lenders were required to hang on to those liens for longer before subsidizing them at a profit, perhaps the trend will slow down and prevent a huge crash in the market. As it stands now, the largest danger isn't the people suffering individually from the sub-prime market, it is the economic implications as a whole on the housing market in general. Further fallout could prompt a spike of inflation or, even worse, a period of heavy deflation. Both create a risk of more recession and, if the problem continues long enough, depression.
I don't feel that it is the government's responsibility to bail out people in financial trouble, but the problem exists and the damage it could cause if the floor falls out could extend to those of us who have gone far to establishing financial stability and responsibility. For those of you with homes, this can affect your home's value depending on what happens. It can affect your ability to sell the home in the future. It can eventually affect your own interest rates. It is already a problem for more than just the financially irresponsible.
Posted by Jutsa Notha Name (Member # 4485) on :
quote:You should never buy a house that is more than 2.75 times your annual income. . .
In a vacuum. Tell that to someone living in southern California, in or around New York City, or the San Francisco Bay Area, and they will laugh at you to your face. 2.75 the average annual income in those areas would barely buy enough space to park an automobile.
Posted by Zalmoxis (Member # 2327) on :
JNN:
Which is why it may make a lot more sense to rent in those markets -- esp. in the current climate.
Posted by Jutsa Notha Name (Member # 4485) on :
I disagree. In those markets, supposing someone can make the payments or at least manage the initial costs until refinancing brings down the amount of payments, the long term advantage to actually owning property in those areas is immense. Space is limited in those markets, and as the demand grows (and it is almost always going upward) the profitability is higher for owners of property in those areas compared to lower cost regions. There is also the added benefit of living closer to a region where there is a higher chance for greater income. It is not an easy investment, but it is a smart investment if someone is able to cover the monthly and yearly costs. There is risk, and if the risk seems too high, then certainly rent instead of buying. But if deciding to finance, then make sure to be aware of the risks and your ability to cover those risks. The people in those areas who hold on to those homes for 15-20 years may be paying more than seems sensible during the time they have the properties, but the benefits they reap later are a much higher guarantee of financial stability after retirement. It isn't a guarantee, but nothing is, not even a low priced market.
Posted by scholar (Member # 9232) on :
quote:Originally posted by Belle: I'm just floored that anyone would buy a home with an adjustable rate and a pre-payment penalty. Honestly, who does this? It's so obvious why those are two very bad ideas.
No prepayment penalty, but I did do an arm and I have no regrets. It is a 5 year arm though and I do not plan on being in the house that long (please, please, let me not be here that long). My loan company recently called trying to convince me to refinance to a fixed loan and we talked about my dream of graduation in a year and they were like, jeez, it would be stupid to do a fixed loan in that case. I easily qualified for a fixed loan (also qualified for 60,000 more than I used), but with the situation as it is, this was a better deal.
Posted by Zalmoxis (Member # 2327) on :
JNN:
Excellent points -- with the only caveat being that past returns are no guarantee of future results.
Posted by rivka (Member # 4859) on :
Very helpful. I was actually trying to decide whether to look further into the possibility of buying a specific condo today, and that calculator (especially if you adjust numbers in the Advanced section) was very useful.
Turns out the condo is 1.5 miles from the closest synagogue, so the point is moot. But it was an interesting exercise, and I will probably use the calculator again.
Posted by Dagonee (Member # 5818) on :
quote:President Bush will announce this afternoon an agreement with major mortgage firms to freeze interest rates for five years for financially troubled homeowners -- a plan advocates say will help forestall a major foreclosure crisis but some conservatives say amounts to a bailout of people who made bad financial decisions.
The plan would apply to homeowners who got adjustable-rate subprime mortgages between Jan. 1, 2005, and July 31 of this year and are facing a sharp jump in their rates before July 31, 2010. It would also offer to put them on a fast track to refinance their mortgages through lenders or through state and local housing authorities, according to several people briefed on the matter who spoke on condition of anonymity because the deal has not been officially announced.
Eligible homeowners are those with enough income to pay their mortgages at lower rates but not so wealthy that they could afford the increase in monthly payments. The plan would be offered only to people who live in their homes, an effort to exclude real estate investors and speculators.
...
it appears no tax dollars will be used to subsidize the freeze on interest rates. That cost would be borne primarily by lenders and investors, and by homeowners who may have to pay a fee to modify their loans. The details will be released today.
There are some interesting complaints about the program in the article.
The details are not released. I can't tell if this is an actual interest freeze or if there will be negative amortization of the interest rate increase that would have occurred absent the plan.
Posted by Mucus (Member # 9735) on :
quote: An analyst at the Competitive Enterprise Institute, a conservative think tank, said Bush's plan is bad policy.
"In some ways it's worse than a taxpayer bailout," said John Berlau, director of the Center for Entrepreneurship at the institute. "It pressures an industry to essentially alter the terms of millions of contracts, and it's going to make investors think twice about investing in America again."
It is really weird, but how do I end up agreeing with a conservative thinktank? However, the math does seem odd, mortgage lenders need to raise money somehow and if there is an agreement forcing them to reduce interest rates on the money that they loan out below "market rates" then it will be much harder for them to raise money in the first place. People would rather invest elsewhere in safer products with (now) higher yields.
Maybe you're right, maybe they will use a negative amortization to make up the money...
There is also:
quote: Others, including Sen. Hillary Rodham Clinton (D-N.Y.), criticized the plan for not going far enough. Yesterday, the Democratic presidential candidate called for a moratorium of at least 90 days on subprime mortgage borrowers facing foreclosure and a five-year rate freeze on all subprime loans.
I thought the US was supposed to be filled with fiscally conservative folks Posted by fugu13 (Member # 2859) on :
Mucus: this is an attempt to dissuade people from defaulting on their mortgages . . . and put them into what is essentially permanent indebtedness.
Posted by TomDavidson (Member # 124) on :
I have a 7/1 ARM right now that will adjust in two years. Why isn't the government freezing my mortgage at its current low rate?
Posted by Mucus (Member # 9735) on :
I know, it makes sense politically. It just doesn't seem to make sense for those mortgage lenders. This would seem to greatly hurt their ability to raise funds and since their whole business is entered on raising funds and loaning that to others, I'm not sure how they would continue functioning.
But I could be wrong, the US financial industry seriously confuses me. (and many people in the industry itself too, it would seem)
Posted by Dagonee (Member # 5818) on :
quote:It just doesn't seem to make sense for those mortgage lenders
It probably makes pretty good sense for them when the costs of foreclosure are factored in. Banks almost always lose principal on a foreclosure.
quote:their whole business is entered on raising funds and loaning that to others
At one level, this is true. However, the disconnect between the people loaning the money and the people providing the ultimate funds for that loan - that is, the people who buy the mortgage-backed securities - is one of the factors that led to the problem.
Posted by pooka (Member # 5003) on :
So a cascade of loan failures wouldn't make people think twice before investing in America again?
I had one of these loans several years ago and going from 7% to 9% to 11% on a $100,000 mortgage pretty much causes one to start to feel no remorse about contemplating various desperate measures. Fortunately we were able to find a private lender. But contemplating it on today's prices is really sobering.
Did they make bad decisions? Most people get these loans assuming housing values will increase enough with a two year period that they can get a favorable refinance. We've just come through two years without increase, and decrease in many areas. At some point they probably hoped they could sell and at least come out even after two years, but that isn't even possible in many cases.
Anyway, I'd be all for folks being less greedy to begin with, but the consequences of not providing relief are more grim. When it comes to changing millions of contracts, one has to take into account that most of those contracts were not intended to run past two or three years.
I hope the freeze is what they say it is and not any reverse amortization. By the time people are in the position of needing relief, they are paying plenty of interest.
Posted by Dagonee (Member # 5818) on :
quote:Did they make bad decisions?
Almost by definition, yes, and the reason is your next sentence: "Most people get these loans assuming housing values will increase enough with a two year period that they can get a favorable refinance."
That's a bad assumption, and an important financial decision based on that assumption is a bad decision.
In many cases it's excusable, because financial education in this country is pathetic. But even if it's not entirely the borrowers' fault, it's still a bad decision.
Posted by msquared (Member # 4484) on :
My brother is happy with the downfall of the sub prime market.
He owns an 86 unit apparmtment complex. The past 5 years have been tough keeping occupancy above 80% since every one was out buying houses, even those he knew could not afford it.
Now all those people who were renters before are coming back. He is at 95% occupancy.
msquared
Posted by Mucus (Member # 9735) on :
quote:Originally posted by Dagonee:
quote:It just doesn't seem to make sense for those mortgage lenders
It probably makes pretty good sense for them when the costs of foreclosure are factored in. Banks almost always lose principal on a foreclosure.
I don't follow. If it makes sense not to foreclose after government intervention then it still made sense for them not to foreclose even before government intervention. All this does is force the mortgage lender to not foreclose on loans that they "should" have. This money needs to be made up somewhere, there is no free lunch.
See (AFAIK, not in the financial industry and I could be wrong), the government through this agreement can force the mortgage lender to stay in place. However, it cannot force the investor in the lender to stay in place. The mortgage lender still needs to raise money on a constant basis to pay for the mortgages. Normally, this money is raised through short-term instruments such as money market funds and long term instruments such as corporate bonds.
Normally, since they are in a risky business, investors in the mortgage lenders have to be compensated for this with a higher yield. At a future point, when someone with a subprime loan stops paying higher interest, then the investor will stop getting that yield, then the investor can pull out. In money market funds, this can happen instantaneously. In corporate bonds, this will just mean a whole lot of mortgage lenders defaulting on their bonds, not being able to sell new ones, and then shutting down anyways.
It is kind of similar to what happens with price controls. Sometimes, you can fix the cost of the product at the distributor level (the mortgage lender), but then it just means the producer (the investor) won't produce since it is no longer worth it for them and the system fails anyways.
Posted by fugu13 (Member # 2859) on :
Ah, I see, you're misunderstanding the modern mortgage market, and the motivations behind pushing for this bill.
Mortgage lenders do not so much raise funds and loan them to others, but instead loan money to others and then sell the rights to the returns on the mortgage in securitized form (bonds) to others at a slight premium.
If a loan holder defaults, who is holding the bag varies. If not many default, only a few people who bought the highest risk portions of the mortgage are (mortgage bonds are organized into tranches, which basically works as follows: the one holding the first tranch gets the first $x paid on mortgages, the one holding the next tranch gets the next $x paid, and so on, so even with people defaulting, the people holding the less risky mortgage bonds aren't harmed) have problems, and they were the ones who invested in risk.
Now, if a good number default, theoretically the bond holders are insulated by the value of the property, since that will be taken and sold by the worst debtors, paying off the bond.
However, home sales are low, inventories are climbing, and prices are dropping. This means selling a house is no longer capable of covering the bonds the mortgage is involved in.
So, depending on the exact terms, when people default, the mortgage company is unable to liquidate for the sum they need to cover the bonds. Who is left holding the bag varies, but basically, both the mortgage lender and the bond holder are to varying degrees.
These holders are major investment banks, small towns in Norway, cities in the US, Florida schools, money market funds, all sorts of people.
Now, normally the situation would be stabilized by the financial markets, but there's a big credit crunch going on, related to the same situation. A large number of financial companies managing the bonds were keeping these bonds in off-book accounts (through a vehicle called an SIV), and thus were not accurately describing their risk to investors. As the true, lower value of the bonds being held becomes clear, firms are being forced to mark their value to market . . . and that value is currently very low.
This endangers a number of funds that were overexposed to SIVs, and is causing them to either be sold off at pennies on the dollar (and these aren't just subprime holdings), or infused with cash (which basically goes straight to payments, and so doesn't help the cash situation) -- and there isn't much cash to be had.
Posted by Dagonee (Member # 5818) on :
quote:All this does is force the mortgage lender to not foreclose on loans that they "should" have.
This is not a law, but a negotiated deal which lenders are entering into voluntarily.
Posted by Enigmatic (Member # 7785) on :
I approve of this rate freeze, or at least I approve of all of the parts of it I understand. (If there are some missing details we don't have from the news here, I reserve the right to not like them. )
From the analysis I heard on NPR before the deal was finalized, the main reason the lenders couldn't or wouldn't do this on their own is the competitive factor. Like, if 3 of the big 4 all did this they'd share the downside of it but the 4th one who didn't would still get some of the benefits. So with the government brokering the deal the big lenders can all agree to the same thing and none of them takes a disproportionate hit by being the first one to do it or the one to do it on a wider scale than the others. (To the best of my understanding. I'm not an economist.)
--Enigmatic
Posted by Mucus (Member # 9735) on :
Dagonee: I must admit, that is the other part I do not understand. I can only guess that this deal will put off the problems for now but possibly at the cost of further prolonging the credit crunch. (Or what Enigmatic said, that kind of makes sense)
quote:Originally posted by fugu13: Mortgage lenders do not so much raise funds and loan them to others, but instead loan money to others and then sell the rights to the returns on the mortgage in securitized form (bonds) to others at a slight premium.
I think you're helping, but I'm sot sure. So what you're saying is that they loan out money first, and then sell bonds in order to make up the money afterwards, rather than beforehand? Ok.
What stops people from just refusing to buy these bonds from this point onwards if either the yield goes down because people are paying less interest or because of the risk of default?
Posted by fugu13 (Member # 2859) on :
It isn't so much a do one thing then do the other situation; they're always in the process of making loans and issuing bonds (which are backed by specific loans, so the loans are first in a sense, of course).
Stops people? They've already stopped buying certain sorts of bonds; the mortgage lenders are thus being more conservative about mortgages. The problem is (partly) that people already have bonds. The bonds that are owned as investments, often highly leveraged investments, by various institutions are the issue, not whether or not new bonds can be sold.
New mortgages and new bonds are essentially not an issue (except that their numbers are declining). Mortgage brokers are finally doing the sorts of due diligence they should have been doing for years. There's nothing inherently wrong with the sort of bonds, just with how people were treating them (on both sides). Now that they're being backed by people who actually have the creditworthiness they are marked as having, new bonds are just fine.
Posted by fugu13 (Member # 2859) on :
Enigmatic: the big problem is, this is going to leave a lot of people in houses with loans they will never be able to pay off. Once this situation is over, those people will essentially be at the mercy of the mortgage lenders, under this deal. Right now they have a lot of leverage to gain actual readjustment of mortgage amounts, keeping them able to pay the loan off in the long run. By acting unilaterally 'in the interests of the loan holders' the mortgage brokers are able to do an end run around the borrowers' leverage. Anyone who tries to push for better terms that don't make them permanently indebted will be pilloried for trying to exploit the companies that have 'already made such a big concession'.
Posted by Mucus (Member # 9735) on :
fugu: I think you're somewhat missing the point of my question. I'm not asking about new bonds to cover new mortgages, I'm talking about new bonds to cover the existing subprime mortgages.
By extending the lengths of and lowering the interest rates on the mortgages, it means there will come a time when the existing bonds will expire before the mortgages expire and people will want their money back. The lender will need to sell new bonds to continue covering the mortgage and I kind of doubt that the investors will want to continue buying these risky bonds, especially if the interest rates are lower.
Posted by pooka (Member # 5003) on :
What, does the rate freeze carry with it some kind of pre-payment penalty? No, the opposite:
quote:. It would also offer to put them on a fast track to refinance their mortgages through lenders or through state and local housing authorities, according to several people briefed on the matter who spoke on condition of anonymity because the deal has not been officially announced.
As for all the worry about a free lunch, these loans are already at interest rates well in excess of market rates, because the sub-prime borrowers generally took inflated rates to begin with due to their poor credit and will have had 2, 4 or more percentage points increase.
No one makes these loans expecting people to stay in them, so I don't feel these investors are being robbed.
Granted, there are markets where people are going to wind up in indentured servitude, new construction where the house is valued $100k less at the completion of construction than when earth was broken. People who started out in a reverse amortization situation will continue in one. But not everyone is in reverse amortization.
Posted by Enigmatic (Member # 7785) on :
quote: Right now they have a lot of leverage to gain actual readjustment of mortgage amounts, keeping them able to pay the loan off in the long run.
How does that work? I understand that you can refinance to lock in a better rate. But short of paying down additional principal (which I assume the sub-prime borrowers don't have) how could someone get the actual amount of their mortgage adjusted?
I think the point of the rate freeze is more to give people time to refinance if they need to, for the market to improve a bit so that if somebody bought too much home maybe they can sell it in the next few years during the freeze. I think that stepping in to reduce everybody's mortgage amount does sound like too much of a giveaway, personally.
--Enigmatic
Posted by fugu13 (Member # 2859) on :
Mucus: what new bonds? Those mortgages are already securitized. Unless you're somehow going to get someone to refund or forgive the bonds, there're no new bonds to issue.
These bonds, effectively, are parts of the mortgage holder's obligation. As long as the mortgage holder has an obligation (which is as long as they're paying on the mortgage), the bonds exist.
And if it were possible, there would be no problems selling the bonds (beyond the short term cashflow issues). The problems with the bonds were the disconnect between asserted quality and real quality. Bonds backed by subprime mortgages are a perfectly reasonable thing, they just need to be treated with proper caution.
Posted by Javert Hugo (Member # 3980) on :
quote:I think that stepping in to reduce everybody's mortgage amount does sound like too much of a giveaway, personally.
No kidding. Where's the line to recieve a free down payment on a house?
Posted by theCrowsWife (Member # 8302) on :
quote:Originally posted by Katarain: I refuse to watch Flip This House because of exactly that cultural climate. I don't know if the show is making it worse to afford a home or if it's simply feeding off of the greed already out there. It doesn't matter to me. Either way, it represents exactly what ticks me off so much.
I know this is from several months ago, but I think the better show to watch is "Property Ladder." Most of the people on that show actually fail to sell their house for a profit (many fail to sell it at all.) I think this show gives a much more realistic look at flipping than Flip This House where every episode is a success.
We managed to buy in a buyer's market and sell at the tail end of a seller's market, so we took our profit and paid cash for a much cheaper house in a poorer part of the country. At this point, any sort of real estate bust is in our favor, since we aren't looking to sell our house but we would like to pick up some additional property.
--Mel
Posted by ketchupqueen (Member # 6877) on :
We could have got qualified for a house when we moved here (one of those Very Very Bad mortagages.) I know someone who did, and is losing her house.
I'm so glad we knew enough not to. We're betting that by the time we can pay off some more debt, save closing costs, taxes, and money for the initial lump payment on a VERY GOOD home insurance policy, and maybe a 1-3% down payment (because after all, this is CA), probably in 2-4 years, we'll be able to buy a fire-sale or foreclosed small house or large condo (forclosures are JUST starting in our area...) It's a different kind of betting, but still betting I guess. But the difference is, if we lose our bet, we will have savings and still have a place to live (albeit a rental.)
I'm thinking that's a better kind of bet.
Posted by The Rabbit (Member # 671) on :
I wish it were as simple as a few people making bad financial choices. This is a systemic problem that involves not only people making bad financial choices but dishonest morgage brokers who diliberately misrepresented the risks both to home buyers and investors and a loop whole in government regulations that allowed them to get away with it.
What really gets my goat is that because of this lending crisis, my home value is ikely to drop and my retirement plan is aso likely to take a big hit even though I made very good financial choices.
They are estimating that 1/3 of all American homes will loose value as a result of the subprime morgage defaults. Add to that all the losses in mutual funds that bought those morgages and the only Americans who won't be loosing anything in this debaucle are those who don't own either homes or pension plans.
Posted by Dagonee (Member # 5818) on :
quote:I wish it were as simple as a few people making bad financial choices.
I don't think anyone said it was as simple as a few people making bad financial choices. But many of the homeowners who will benefit from this new plan undeniably made bad financial choices. There are other contributing factors, certainly, but if we don't address the appalling lack of financial knowledge in this country this same type of problem will happen again, although probably in different form.
Posted by Mucus (Member # 9735) on :
quote:Originally posted by fugu13: Mucus: what new bonds? Those mortgages are already securitized. Unless you're somehow going to get someone to refund or forgive the bonds, there're no new bonds to issue.
These bonds, effectively, are parts of the mortgage holder's obligation. As long as the mortgage holder has an obligation (which is as long as they're paying on the mortgage), the bonds exist.
AFAIK, when the bonds are sold as part of a mortgage backed security they have a maximum date of maturity. The lender will enter a contract that says that the person that buys the bond will get their money back on that date.
Thus, if mortgage lender extends the period of the mortgage, the corresponding bonds will expire and the money returned to the investor before the borrower has finished paying off the mortgage. After all, they cannot just ignore the contract that they have with the person that bought the bond simply because they modified their contract with the borrower.
(Could you imagine the reverse? Would you ever loan money to someone without some guarantee as to when you'll get it back? )
At that point, the lender will need to sell a new bond to cover the difference in time periods.
Posted by erosomniac (Member # 6834) on :
I want the government to insure my bet the next time I double down my eleven against the dealer's six.
Posted by rivka (Member # 4859) on :
Rabbit, how much of the lost value was only created in the first place because of the ridiculous prices buyers were willing to pay, because they took out mortgages they couldn't afford?
House prices aren't so much going down as going back to normal. Posted by pooka (Member # 5003) on :
KQ, why would you need to make an initial lump payment on a homeowners insurance policy? I honestly don't know. I was pretty sure that was one part of my financial life where I am not abnormal. House insurance is like car insurance and not like whole life insurance. My mother used to say that when she worked in insurance, none of the insurance salesmen had whole life insurance, they all used term. Now that may be because they knew the products better than their customers, or it may be that salesmen are by nature optimistic people.
Posted by Lupus (Member # 6516) on :
I don't think that people should get bailed out of loans they can't afford...because they should not be in the houses in the first place.
When you buy the house, they tell you the rates...and that they could go up if you don't get a fixed mortgage.
If they government starts bailing people out, it will cause the market to stay artificially high for a longer amount of time...but I think it will cause more problems in the future. Sure, if there are a lot of houses that are foreclosed on, it will cause a drop in the market...but that is simply correcting the market to where it should be. The government can't keep it propped up forever.
That being said, I think the prepayment penalties should be voided. Yes they are in the contract, but I think many brokers who put them in where putting people into homes that they knew they couldn't afford...and helped cause the problem to start with.
Posted by fugu13 (Member # 2859) on :
If the lender chooses to issue a new bond, I foresee no problems. Particularly as anyone who is still making payments at that point has proven themselves fairly soundly, so it might not even be that highly discounted.
Rabbit: the issue for me is, homeowners are in a situation to negotiate far better deals than these (security holders are desperate for reasonable revenue streams in the near term). This aid keeps people in homes who can't afford to be in them in exchange for permanent indebtedness (retirement while making a mortgage payment is going to be fun), and makes it harder for those who can afford to be in homes in the general to leverage their ability to secure other finances to improve the terms of their mortgage.
Posted by Icarus (Member # 3162) on :
Let me join the trickle of people saying that not every ARM is an awful decision.
I bought my house six and a half years ago with a thirty year fixed mortgage (and a substantial down payment, so I had equity from the start). Then property values skyrocketed beyond all rational expectation, giving me tons of useless equity, but killing me with outrageous property tax increases. Suddenly, even though I had a fixed mortgage that I could afford when I bought the house, but I could no longer afford to keep up with. I had reason to believe that my income would eventually rise to the point where I could make those payments, so I got an ARM with a lower interest rate and a five year fixed period. This made it possible for me to make my monthly payments, and I did it fully expecting to refinance in less than five years. Three years later, I had repaired the damage to my credit caused by my inability to keep up with my rising mortgage payment, and I refinanced to another thirty year fixed loan. Okay, yes, I "lost" six years, when you consider that six years before I had a thirty year loan. But I was actually able to get a lower interest rate than my original one, even after the increases in mortgage rates. And my income did increase as I had reason to expect it to. The three years I spent with an ARM allowed me to keep my house, by basically freezing/lowering my payments until the rest of my situation stabilized--until my income caught up with my property taxes and insurance rates.
As for the topic here, I'm inclined to agree with Dag. I feel badly about it, like I'm being uncharitable. But I fell into a hole and worked my way out. I took a risk or two, and nobody promised to bail me out if it didn't work out. It doesn't seem right that taxpayers like me should pay to bankroll other people living in houses they couldn't really afford. When I got an ARM I knew the risks and I made sure I got out when the time was right.
I reckon I'm about as liberal as rivka is.
Posted by scholar (Member # 9232) on :
If people don't have a home when they retire, they will still be paying rent, which is in some ways unstable. I live in a location where rent is as high as my house, so perhaps my perspective is off. It seems like owning a home in the long term is a better thing financially for poor people. Of course, I am assuming you buy a house that is smaller.
Posted by Jhai (Member # 5633) on :
quote:Originally posted by The Rabbit: What really gets my goat is that because of this lending crisis, my home value is likely to drop and my retirement plan is also likely to take a big hit even though I made very good financial choices.
This is true, though, generally with all housing markets and all financial situations. If your neighbors don't keep their house looking nice, your home value goes down. If your city doesn't keep things running smoothly (low crime, nice neighborhoods, plenty of jobs), your house's value goes down. If the economy does badly because of widespread poor financial decisions(dotcom bubble, anyone?), your investment portfolio will go down.
I mean, isn't being affected by others' decisions, good or bad, a major part of living in a society?
Posted by Icarus (Member # 3162) on :
Unless you're planning on retiring in the next five years, I bet this doesn't make that big a difference (except possibly insofar as your retirement plan was artificially inflated before). Real estate prices don't really seem to be going down all that much. It seems like a slight dip before it returns to its usual pattern of rising gradually (instead of meteorically). Kind of like the stock market.
Posted by rivka (Member # 4859) on :
quote:Originally posted by Icarus: I reckon I'm about as liberal as rivka is.
Really? I think you're somewhat more liberal than I. Although maybe not fiscally.
Posted by Icarus (Member # 3162) on :
Who knows? I don't think of myself as all that liberal, but I guess it's in the eye of the beholder.
Posted by King of Men (Member # 6684) on :
quote:Originally posted by fugu13: These holders are major investment banks, small towns in Norway, cities in the US, Florida schools, money market funds, all sorts of people.
Correction: Small towns in Norway whose politicians are total and utter idiots, incapable of reading contracts before they are signed; but quite well able to blame everyone else for their incompetence and demand that the state bail 'em out. Pshah. I'm surprised nobody there has thought of asking the US government for a bailout yet.
Posted by ketchupqueen (Member # 6877) on :
pooka, just 'cause we have a broker who can get us really good rates if we pay once a year instead of spreading it out.
So if we save up the first year's payment, we can get really good coverage (more than required for home value) for a lower rate, then save the rest of the year toward the next year's payment, etc.
Posted by ketchupqueen (Member # 6877) on :
(And I would not buy whole life insurance, either. Muuuuch more beneficial to buy term.)
Posted by Dagonee (Member # 5818) on :
quote:Let me join the trickle of people saying that not every ARM is an awful decision.
Just to be clear, my statement was far less general.
It is an awful decision to buy a house on terms that require an increase in the home price within two years in order to be able to refinance, when the alternative to refinancing is not being able to make the payments.
That's a small subset of all ARMs.
Posted by fugu13 (Member # 2859) on :
Yep, the small towns were idiots. Though the risk exposure disclosure was insufficient in numerous cases, due to the ways SIVs are structured under disclosure laws.
Posted by Icarus (Member # 3162) on :
I know, Dag. I wasn't replying to you.
Posted by Dagonee (Member # 5818) on :
I know. It was more directed at readers of the thread than you.
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