Mortgage Bailout Insanity
General Contractor · Midland, TX · Member since 2008 · 160 posts · 24 votes
Seeking to provide more aid to troubled borrowers, House lawmakers on Wednesday advanced legislation that would enable homeowners to shrink their mortgages in bankruptcy court.
http://www.fool.com/news/associated-press/2007/12/12/house-committee-approves-mortgage-bankruptcy-measu.aspx
This would push mortgage rates up and make home ownership more difficult for most Americans. How is this a good idea?
Well, the good news is that the the rest of us honest citizens that pay our bills on-time will get to pay higher interest rates to make up for this bailout. How exactly is that good news again?
Mike
I edited my original post for clarity. "How is this a good idea?" was suppose to be a retorical question.
I'm with you Adam. I think this bailout is ridiculous also. My post was supposed to be sarcastic, although sometimes it's hard to see that in written form.
Mike
In most areas the average starter home is still $200k. With less people getting married and college tuition pretty high, I honestly don't know how some afford a house now. with stricter credit rules, are there any home buyers out there that could afford or even qualify for a home? oh well. I think the Feds are putting a band aid on this house thing. Of course the normal educated people have to pay the bill for uneducated people. :cry:
Um, no. Your legislation will not "fix the problem", Bush, Bernanke and Paulson cannot "fix the problem". A bubble was created. A bubble is now deflating. Hundreds of Billions of dollars of asset "value" is disappearing before our eyes. And beyond that we have a global credit crisis that has just begun to rear its ugly head.
Empowering BK judges to cram down several thousand sub prime mortgages will be inconsequential to all concerned.
It is just another feeble effort put forth by bureaucrats attempting to control the uncontrollable.
that those bureaucrats think they are going to do any good with their proposed regulations. Until they find a way to legislate away the ability to take advantage of others, society will continue to have problems like this. Since that is the last thing they'd ever think to do, I ignore them. All that I do is try to write good loans for everyone I encounter and I read the news as infrequently as possible. I earn my customers one at a time and they stay and they send me others.
I don't think anyone should be bailed out...I read article after article in which some "poor, misled" home owner says, " I didn't understand the terms and conditions of my loan (or refi), I was tricked blahh, blah blah....." Why would you sign documents without understanding your financial committments? You used your house like an ATM and now you want to be bailed out?
Most of this is political- of course. I believe only 250K homeowners would be helped by this, which is only about 10% of the people that need to be helped- over this past 6 months and the next 12.
So this is not a complete bailout, but any bailout- administered by the feds- is a bad idea in general. Sometimes you just have to get it over with- and if its a further housing correction in this next 8 months, then so be it- and let's be done with it and move forward. Overall, housing usually appreciates between 4%-5% per year over the past 40+ years on average. Let's just get back to that hopefully.
-Ken
Have you been smoking anything? Where does this come from?
Banks take a HUGE loss on foreclosures!!
Have you been smoking anything? Where does this come from?
Banks take a HUGE loss on foreclosures!!
YSP, when quoting in a reply, be sure to put your comments outside the quote /quote delimiters. Otherwise, your comments disappear into the quoted text.
I do not for a minute believe the banks are making any money on these foreclosures. You analogy with a car lease is flawed. The resale prices is calculated into the lease. If you fail to return the car in acceptable condition (too many miles, damage), the lessor will make you pay the difference.
A better comparison is when a car is repo'ed for non-payment. Most car loans, especially new car loans, leave you underwater for a long time. If you buy a new car, and finance 100% (and usually taxes and other fees), and it gets repoed a year later, there is no way the lender will make up the amount they are owed when they sell the car.
If a lender takes back a house where the loan balance is $500K, but its now only worth $350K due to a declining market and the property condition, do you seriously think they're making any money when they sell it? No way. The person or company that sold it for $500K is the one with the money in their pocket. The lender paid that cash out to this seller, and has a $500K debt. They're going to get back much less than that when they manage to sell the property.
Maybe true in the future, but we're talking about the past, not the future. 100% loans WERE made routinely a few years ago. At best, there were structured as 80/20, and the first only loses a little. But, the second loses everything. At worst they were 100% option ARMs where the $500K original loan is now $550K and the property is worth $350K.
The investors in these loans made a few years ago are taking it in the shorts. The value of these loans, and the CMOs, CDOs, and SIVs that were constructed using them are much less than their face value. For the lower rated tranches of these vehicles, the value may be nearly zero. If you don't believe that, how do you explain Bear Stearns collapsing over a weekend?
Mortgages have been around a long time wy couldnt they see this coming, but you never know values may sky rocket tomarrow there stupid not to have more reserves to weather the storm it sounds like greed to me and now it has back fired for them how did they get there jobs all that education for this they deserve to fall but its not them they have quotas to meet and look were it got them slow down turbo i hope this message finds you well.
Punctuation and capitalization are your friend.
Why this happened is a very complex question, and I would never claim to have the answers. I don't think anyone does. At best, I have some thoughts on what contributed to the problem.
After the dot com crash, the economy was headed into the toilet. The fed lowered interest rates dramatically. People's purchasing ability is directly related to interest rates. Lowered rates effectively reduced the cost of housing.
There was a lot of investor money looking for somewhere to go. People had been burned by stocks. Real estate became a popular investment.
Banks started packing mortgages into bundles, and selling them to investors. Not really a new idea, but it was taken to a whole new level in the early '00s. I believe the idea of slicing and dicing these came into vogue about this time. There you take, say, 100 mortgages of supposedly similar risk. Maybe those are altogether worth 50 million. You create five instruments, bond really, from those 100 mortgages. You put them in order from worst to best. You say any defaults will hit the worst piece (aka tranche) first. You don't tie specific mortgages to each tranche. Instead, it would depend on which, if any default. Because there is more risk on the lower tranches, they pay a higher rate. The better tranches pay a lower rate because they are (supposedly) more secure.
The bond rating agencies get into the game by applying ratings to these instruments. They give the higher tranches high ratings. They collect a fee for the ratings. Investors feel confident because of the ratings.
Investors like the high returns. Lenders like being able to sell these investments because that generates more money for new loans. Brokers like originating loans because they get paid to originate loans. Credit ratings and "documents" become how the risk for a loan is evaluated. Nobody involved really knows the borrower. By the time an investor plunks down money for one of these instruments, they're separated from the borrower by four or five different layers. All the investor sees is the rating and the return.
Now, it becomes a feeding frenzy. There's a market for these investments. So, there's more demand for new loans. The fed is keeping rates low. More and more people get put into riskier and riskier loans in order to have more loans to package. Documents get fudged or out and out forged or faked in order to close the loans.
Demand for housing is growing as more investors buy houses and more owner occupants are able to buy more and more expensive houses. Real estate is appreciating 10% or more a year. Everybody is taking HELOCs to turn their equity into cash.
Its a classic bubble, just like dot-com stock in the 90's, railroad stocks in the 1800's or tulip bulbs way back when. This has happened over and over, and will happen again in the future. Its just that real estate is the current bubble.
As long as values were rising and credit was easy, people were able to refinance when their adjustable rate mortgage jumped to a higher rate and payment. Then, the merry-go-round stops turning. People find their house is now worth less than than they thought, and they can not refinance. They're stuck with a payment they can't afford. After a few months, the lender forecloses. By then, the house has a couple of years of deferred maintenance. In a bad case (I've bought one like this), the owner wrecks the place on the way out.
So, just like everything bubbled on the way up, it all collapses on the way down. Anyone who bought at the peak, about 2004-2006 finds their house is worth much less. Thanks to the mess, then house becomes worth even less by the time the bank gets it. Those bottom tranches in those structured investment vehicles have to take all the initial hits. So, what looked like a $10million investment turns out to be nearly worthless.
Bear Stearns was holding lots of this paper. Suddenly, what looked like a significant asset based turned out to be worth very little.
ka-boom
It sounds like a robin hood story, Give the poor cash out,and when values go down the investers take a hit but i think values will come back eventualy and then they will score if they can weather the storm or it might be a long wait nobody seems to know if were at our bottom i think its a good time to buy and get in on some of these forclosures/short sales etc.thanks for the info you have alot of knowledge.
Wheatie explained to me about them bundleing up groups of 100+ or so loans and blending the rate/spred on all of them as a package deal for investors/banks I didnt understand that they could do that because when loans are done they have to meet guidlines and how could so many people be in this situation,there must have been more risky loans than not so risky i would hate to have my good loan in with all of them riskyer loans but i still think that there is an angle some where maybe some banks and lenders will merge together to straigthen the situation and have most loans underwriten at one location or go thru a loan review so that they can get back on track the banks need more supervision these are big assets were talking about this kind of thing probably wont happen for a long time to come after this is in the past in 2009 or 2010 or so many people will need to come in with closing costs to refi if they want to save there homes cant they just raise the value to absorb this or is it that sombody has to lose i guess thats life hopefully many have learned from this if they realy wont this to end then they should educate the young people so that they dont get into a situation like this but they wont by the time they buy this will have already past,mortgages take along time to pay off for the average joe and people keep homes for a long time so its hard to avoid times like these if you own for along time eventualy your going to refi and you dont know if this will happen to you at that time my advice to them is dont put to much money into the house home improvment etc and keep your reserves in case you have to bail out that means no spending of any kind what a way to live a life it sounds like a constant struggel to save and never realy nowing if its goin to happen to you at the last moment if values drop good topic and thanks everyone.