Ask an Economist (Post #1005 and counting)

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Thx - so it's actually pretty basic then...

Scenario: A person borrows $100.000 from a bank to buy a house at subprime terms (low interest rate to be swapped with high interest rate etc.). The person cannot pay anymore when the high interest rate kicks in and is forced to sell or the bank takes the house. So, the bank looses a future income from the interest rate that will not be payed anymore from the borrower. Furthermore, the house which the bank now owns is only worth, say $90.000, if they are able to sell it at all.

So, the assets the bank holds from this transaction is worth less than the loan the bank has from a thirdparty to obtain the $ amount given to the borrower in the first place. So, the bank suffered a real loss.

Is this a plausable scenario - times 1000s or millions of homeowners at risk?
 
its a model for fools, its pretty insane to have such loans designed to bankcrupt poor people. Here there are no such loans
 
A further problem can be that a home that the bank has foreclosed on, depending on the contract terms and the local laws, could be something they have to spend quite a lot on in terms of time and lawyers fees before they are free to auction it off. So assuming there are buyers, the bank still looses at least something in the transaction costs and time lost of going through the process of foreclosure.

That's why when the bank which made the loan still owned it instead of selling it off to mortgage backed securities, it often made sense for the bank to renegotiate terms to keep the buyer paying. The reason this is important is because the company many pay their mortgage to is not the company they took the mortgage from, and so many people have defaulted through not having anyone to work with to try and find an alternate resolution.
 
crabapple said:
its a model for fools, its pretty insane to have such loans designed to bankcrupt poor people. Here there are no such loans
Click to expand...

I disagree. I got an ARM doesn't reset for roughly 3 to 4 years from today. I HAVE good credit and our house is less than 25% of our income. THATS the solution...dont buy more house than you can afford. Now in 3 years or less ( probably this summer) I will refinance into a 15 yr loan. I have saved roughly 250 bucks a month in payments for the last 2 years. While that may not seam like much...it allowed me to pay off 2 student loans early. Realized income after that is 150 extra a month total now is...400 extra saved.

Is not designed to bankrupt poor people only those who live beyond there means and don't understand whats coming. Oh if my loan reset today, it would only go up 1% since the interest rates tanked. BUT I can lock in for 15 and get this paid off in no time.

ARMs aren't scary, stupid people with big houses are scary.
 
This article can give you all some historical perspective on history's five major housing bubbles since WWII (including Finland btw).

http://www.economics.harvard.edu/faculty/rogoff/files/Is_The_US_Subprime_Crisis_So_Different.pdf

The subprime borrower was not new in the U.S. What changed is their traditional means of getting a loan. It went from FHA conforming loans to mortgage bankers and the esoteric nature of their loans. The view was always real estate doesn't go down in value so worst case the loan could eventually be refinanced. Investors get screwed because their search for yield and duration comes to a screeching halt as these tranches started failing for the same reasons.

That works until it doesn't work and it stopped working in 2005-2007.
 
robboo said:
I disagree. I got an ARM doesn't reset for roughly 3 to 4 years from today. I HAVE good credit and our house is less than 25% of our income. THATS the solution...dont buy more house than you can afford. Now in 3 years or less ( probably this summer) I will refinance into a 15 yr loan. I have saved roughly 250 bucks a month in payments for the last 2 years. While that may not seam like much...it allowed me to pay off 2 student loans early. Realized income after that is 150 extra a month total now is...400 extra saved.

Is not designed to bankrupt poor people only those who live beyond there means and don't understand whats coming. Oh if my loan reset today, it would only go up 1% since the interest rates tanked. BUT I can lock in for 15 and get this paid off in no time.

ARMs aren't scary, stupid people with big houses are scary.
Click to expand...

You made many assumptions there with an ARM, and Im puzzled. If you are on a 30 year payoff with a ARM reset, and then you want to go to a 15 year fixed, that will more than double your payment, and youre not going to get an interest rate lower than your current rate.
 
crabapple said:
its a model for fools, its pretty insane to have such loans designed to bankcrupt poor people. Here there are no such loans
Click to expand...

huh? how does it work by you?
 
Whomp said:
This article can give you all some historical perspective on history's five major housing bubbles since WWII (including Finland btw).

http://www.economics.harvard.edu/faculty/rogoff/files/Is_The_US_Subprime_Crisis_So_Different.pdf

The subprime borrower was not new in the U.S. What changed is their traditional means of getting a loan. It went from FHA conforming loans to mortgage bankers and the esoteric nature of their loans. The view was always real estate doesn't go down in value so worst case the loan could eventually be refinanced. Investors get screwed because their search for yield and duration comes to a screeching halt as these tranches started failing for the same reasons.

That works until it doesn't work and it stopped working in 2005-2007.
Click to expand...

Wow, nice link. So as long as house prices go up forever the system would not have broken.
 
woody60707 said:
huh? how does it work by you?
Click to expand...

well i am no loan expert but i assume such loans for poor people have a fixed rate that doesnt increse after a while. it might be higher then normal loans but none gets a false impression with that system atleast
 
In Denmark we have installment-free loans where you pay the interest rate alone for the first 10 years, and the interest rate plus the loan the remaining 20 years. The standard installment period for a house loan is 30 years. But that's where the slight similarities with the US subprime loans end:

To obtain this type of loan you have to be creditworthy for a standard loan, meaning full installments for 30 years, be it a fixed or flexible interest rate. So people who obtain installment-free loans, usually save up the money not spended decreasing the debt or use it to improve their house (new kitchen, bathroom etc.) or just other consumer goods.

The real estate marked has slowed down considerably here as in the US and other places, but there is no credit crisis as such or meltdown in the real estate business - business is just... well slow at the moment. Danish banks are pretty much not involved at all in the subprime mess.

So, installment-free loans (or variants of them) are not bad in themselves I think - it's how they are implemented and to whom they are approved that seems to be the problem. If you cannot afford the standard installment/mortuage, you have no business getting a loan in the first place.

A bigger question here would be how the generation of teenagers today will finance their homes when we look some 10 years ahead. There just seems to be quite a difference in how their and my (and my parents for that matter) generation view the benefits/downsides of savings, loans, debt, consumption etc. A bloke working at my girlfriends former employer, borrowed close to $20.000 buying computer hardware - he is 18 years old! When you add that to his car loan I guees he's in the red with $45.000. I just don't get that mentality.... lol
 
crabapple said:
well i am no loan expert but i assume such loans for poor people have a fixed rate that doesnt increse after a while. it might be higher then normal loans but none gets a false impression with that system atleast
Click to expand...

No, that's not how it is at all. Most poor people got an ARM loan and they were not understanding or didn't want to understand that they couldn't afford it after the reset
 
JerichoHill said:
You made many assumptions there with an ARM, and Im puzzled. If you are on a 30 year payoff with a ARM reset, and then you want to go to a 15 year fixed, that will more than double your payment, and youre not going to get an interest rate lower than your current rate.
Click to expand...

What assumptions JH? I know my reset rates, can tell you the max rate rest the first year(only 2% change the first year 5% for life of loan up or down follows Libor rate). All of which if it occurred right now would be affordable.

Long story why I need to wait till summer. I can afford the 15 at my present interest rate so its not an issue of it doubling. Waiting to see about where a road is going to be build..through my house or no where near. So wait to see if I have a house to refi for...(yeah this sucks)

I will say it again. This mess wasnt created by people who could afford the house they are in. It was caused by people trying to live in too much house. I am shocked if you believe otherwise. Sure the banks put out products that were going to make them money, isnt that what all businesses are supposed to do.
 
Robboo,

Now that you explain the full detail, it makes sense. However, if a road was built through your home you'd get eminent domain payment. I think my main shock was in that you were going from a 30 yr ARM to 15 year fixed. Since we know that's at least a doubling of your monthly payment, and you stated you paid about 25% of your paycheck to your mortgage, thats what I was getting at
 
JerichoHill said:
Robboo,

Now that you explain the full detail, it makes sense. However, if a road was built through your home you'd get eminent domain payment. I think my main shock was in that you were going from a 30 yr ARM to 15 year fixed. Since we know that's at least a doubling of your monthly payment, and you stated you paid about 25% of your paycheck to your mortgage, thats what I was getting at
Click to expand...


I said less than not about. :) Thats the trick..as most people say 25% is all you can afford. Less than that or alot less than that gives you some wiggle room.

Yeah I know about the payment but I rather not "waste" the closing costs.
 
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