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Mortgages in the US
[Tycho?]![[Tycho?]](https://us.v-cdn.net/5018289/uploads/userpics/934/nHG8VEMRTY5QM.gif)
As elusive as doubtRegistered User regular
As elusive as doubtRegistered User regular
Perhaps I'm blind, but I didn't see a thread on this...
http://www.stuff.co.nz/stuff/4159827a6026.html
[/quote] American International Group, one of the biggest US mortgage lenders, has warned that mortgage defaults are spreading[/quote]
http://www.iht.com/articles/2007/08/09/business/subprime.php
So, could someone explain what the hell is going on here? I have virtually zero knowledge of economics, but so far my understanding is:
1) Banks have been giving large loans to people who really couldn't afford it in the long run
2) People are borrowing more, and taking out loans that are very risky or depend on continuing economic situations (ie interest rates)
3) This is causing problems now
The first two dont make sense, but I can understand them in an abstract sort of way. But I dont have a good idea on the effect that this is having on the US housing market, insurance and banking institutions in the US, the US economy as a whole and the economy of other nations. I'm reading about it a lot now that it seems to be an issue, but I'm essentially going in cold and have little knowledge of this sort of thing. I'd love it if someone could point me towards some sort of introduction on the topic so I can understand the economics behind this. And of course this thread will be for discussion about possible effects and solutions to this problem.
http://www.stuff.co.nz/stuff/4159827a6026.html
[/quote] American International Group, one of the biggest US mortgage lenders, has warned that mortgage defaults are spreading[/quote]
http://www.iht.com/articles/2007/08/09/business/subprime.php
FRANKFURT: Fears of a credit crisis in Europe deepened Thursday, as a big French bank announced it would close three investment funds, and the European Central Bank injected emergency funds into the market for the first time since the aftermath of the Sept. 11, 2001 terrorist attacks.
So, could someone explain what the hell is going on here? I have virtually zero knowledge of economics, but so far my understanding is:
1) Banks have been giving large loans to people who really couldn't afford it in the long run
2) People are borrowing more, and taking out loans that are very risky or depend on continuing economic situations (ie interest rates)
3) This is causing problems now
The first two dont make sense, but I can understand them in an abstract sort of way. But I dont have a good idea on the effect that this is having on the US housing market, insurance and banking institutions in the US, the US economy as a whole and the economy of other nations. I'm reading about it a lot now that it seems to be an issue, but I'm essentially going in cold and have little knowledge of this sort of thing. I'd love it if someone could point me towards some sort of introduction on the topic so I can understand the economics behind this. And of course this thread will be for discussion about possible effects and solutions to this problem.
[Tycho?] on
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The hedge fund group at my job got a call today from the Investment Bank, they wanted to know if the hedge funds were pulling all their money. So, it is bad.
Also, Bear Stearns got so fucked by sub-prime.
http://www.youtube.com/watch?v=SWksEJQEYVU
BUY BUY BUY!!!
SELL SELL SELL!!
Is he credible?
The problem with this situation is that I know I'm not getting nearly enough information from the media, all I get is a dumbed down basic summary by crappy analysts. I want to know what people in the field are saying about this, not what some press release says. This guy strikes me as knowing what he's talking about, but I don't really know, he could just be a drama queen or something.
― Marcus Aurelius
Path of Exile: themightypuck
Didn't this kind of 'attitude' cause the stock market to crash in 1929? Like loans for shit you couldn't afford and buying on margin, which I kind of see as a type of deficit spending.
We have controls and shit to stop that from happening again, but today the market dropped over 300 points.
300 points. Shit that's worse than the crash of 1929. Seriously: US Banks lost more money in the S&L shenanigans in the 80s than they made in the previous 200 years. We're probably good. But you never know. Like earthquakes, stock market crashes are inevitable. They are also unpredictable.
― Marcus Aurelius
Path of Exile: themightypuck
Economics also tends to assume people won't make costlier decisions, like fallling into the trap of taking out horribly structured mortgages, which is exactly what has happened here. It's hard to implement information distribution into an economics formula.
I assumed irony. In any case there is a (dust covered, mouldy) thread of Economics that suspects irrationality. Google "Thorstein Veblen".
― Marcus Aurelius
Path of Exile: themightypuck
Basically a lot of people took out really stupid loans, such as interest only or negative amortization loans. Basically people borrow the money to buy a house and then make payments. In a typical loan these payments include interest and part of the amount you borrowed. A negative amortization loan means you pay below interest every month, giving you a very low monthly payment. The problem is every month your going further into debt. This can't go on forever, after a certain amount of time, usually 5 years, these loans revert to being regular loans. This of course results in a huge increase in monthly payment, usually to more than the person can afford(otherwise why take this kind of loan).
Now you could actually make money doing this in a housing market like SoCal. Houses increase in value so fast thanks to the bubble that if you bought and sold at the right time you'd reap pretty large rewards. Like any bubble though eventually it breaks. People become unwilling to pay $800,000 for a 2 bedroom 2 bathroom house, and the last owner gets fucked. The bank also gets fucked, because while they get the house they can't sell it for nearly as much as they loaned out to let the buyer purchase it.
A Smart bank doesn't give out more risky loans than regular stable loans, but thanks to some shady dealings banks convinced themselves that risky loans were less risky than they actually were and now reality is catching up.
-Terry Pratchett
Yeah, it is a bit more complicated than this, as mentioned just previously. There were a lot of risky loans given out with dubious payment structures which you would expect to fall apart in droves in a normal housing market. But the housing market wasn't normal, it was experiencing rapid (irrational) growth in part due to the availability of that credit. So with the houses continually going up and up in price, it didn't matter if the borrower didn't have the money to pay off the no money down shady mortgage once the higher rates kicked in, they could simply refinance or sell the house and reap the benefits of the change in price giving them equity.
This sort of thing works until it doesn't, because both the lenders and the borrowers are pretty safe when you have some guarantee that the price is going to go up, but it won't always go up and that irrational growth makes the system unstable to the point where a minor setback or shock can cause the whole thing to collapse on itself. It's like the tech bubble, but the housing one is collapsing under its own weight without much of a shock.
Add into this a bunch of financial voodoo where the risk was shifted around a lot and brushed under the mat with things like CDOs, and you have got a lot of people sitting on bad debt and a lot of people who can't afford to keep their house and will have a hard time selling it. And since a lot of the economy was being further fueled by easy to get money from home equity loans, and you got yourself a potential for a shitstorm.
Cheap is a relative term. The current situation suggests there will be some "motivated sellers" in certain markets (where relatively poor people live--don't count on flipping real estate in Mountain View).
― Marcus Aurelius
Path of Exile: themightypuck
He's fairly credible, this has a potential to rock the economy pretty heavily and cause economic and social disaster if you have to deal with a large class of squatters. However, whether or not that is going to happen and what the exact fallout of this is going to be is rather hard to say, and it depends a lot upon what the fed and key market players do about it.
The billion dollar question wasn't whether or not there was a housing bubble and there was going to be a reversal though. I knew that was going to happen eventually starting a couple years back, and my financial economics professor openly warned about housing then. His words were something a long the lines of 'it's always a good idea to get into real estate, except for now'. No, the billion dollar question is/was when the thing was going to collapse, and how bad it was going to be.
Cramer's rant is a good thing because he brought public awareness to just how much of a problem this is. However, it may not end up as 'armageddon' and crisis could very well be averted. Figuring out exactly what the case will be requires a working crystal ball though.
Good luck finding a loan for awhile though.
I don't see them losing money on that...
I host a podcast about movies.
Except when the house depreciates an huge amount and no one is going to buy it anyway so you have to depreciate it further, and you really didn't get much out of the guy in the first place....
It came out almost like a housing pyramid scheme. Everyone makes money except for that last guy. :P
Exactly. You get enough monkeys throwing darts some are going to compile impressive records. Smart marketers are going to be able to sell those impressive records to investors hoping that the past is a good predictor of the future. Which it is. Except (like with your professor and real estate) when it isn't. I doubt Cramer is any better at throwing darts than monkeys but he might be worth paying attention to because the monkeys might be paying attention to what he's telling them to aim at.
― Marcus Aurelius
Path of Exile: themightypuck
But after reading all those articles that that guy posted and some of the back material, I'm lfet wondering how things ever reached this point? As for how things are affecting banks worldwide, I assume banks all over the world would be playing a part in the subprime market in the US to boost returns. If some got greedy or didn't research enough... That's no good.
At the same time if you have a down payment now and are willing to buy, it can still be a good idea can't it? In Canada at least so long as you buy a house in a city the chances of a decline seem to be neglible, and even then rental vacancies are extremely low so that's always an option.
[/uneducated on topic]
What enabled this to happen in the US but not elsewhere?
Yeah, but you can pursue him pretty much indefinitely for collection while reselling it. Then if the new buyer defaults as well, you can sell it a third time while collecting from two people.
Bad for America? Sure. but lenders seem to always end up with buttered bread.
I think it's a problem, don't get me wrong (hell I'm saving to buy during the crash)
But I think unsecured signature debt (ie credit cards) is probably a bigger priority.
I host a podcast about movies.
This would be awesome if it were true and it is a myth that helps perpetuate pyramid schemes. Everyone thinks that, worst case, they can find one guy to be the last guy. A mental picture of a pyramid tells the real story. There are a whole bunch of "last guys" funding a very few "smart guys".
― Marcus Aurelius
Path of Exile: themightypuck
I mean the conditions that allowed the USA to have these kind of risky loans being passed around like candy on Halloween but nowhere else in the world seems to have them.
Because people in the US are too stupid to realize that it's potentially a bad idea?
I always remember the Quicken "Smart Loan." It's interest only, and I think they mention that once outside of the small print. They main thing they point out is how smart you would be if you use it, how you can have more money to spend on other things, and how small your monthly payment can be. It's all designed to get you to think that you'd be crazy not to pass this up, and there are never any negative ramifications.
Now, the average person may read the fine print and avoid it, but there are people out there who would go for it.
Also, have you seen the Gary Coleman commercials for Cash Call? Did you read the fine print at the end? Average APR for a $2000 loan is 99.25%. I weep for anyone who thinks they are desparate enough for cash to resort to Cash Call.
At the moment, interest rates are high and in many areas, sellers are still desperately trying to hold the line on their prices so they don't take a bath on reselling the house. That is, there's a lag between rate hikes and price cuts. Also, there's a large but uncertain number of homes facing foreclosure over the next year or two.
Basically, it's a terrible time to buy property. You're going to get screwed on your rate and your property is going to lose value unless you're in an ironclad market.
There used to be strict laws against this. I guess they've found loopholes or paid off the Republicans to rescind the laws.
Also, Christianity used to take a strong, hard, and dogged line against usury. I guess Christians don't much give a shit about it anymore.
I think they only consider usury if it's over a certain rate these days. I wish I was joking.
I don't know about the rest of the world but the conditions in the USA were pretty simple. Loose fed policy. Rising housing prices. Banks rolling the dice. Boom. Bust. This is like the oldest story there is. Also, in this "boom. bust" the banks have been very smart about managing risk. They package the loans into financial instruments which they sell to a broad range of investors. There will be pain but this isn't going to cause the dominoes to start falling.
― Marcus Aurelius
Path of Exile: themightypuck
There are usury laws here in California but financial institutions like banks are exempted from them ;-) You might be breaking the law lending money to your neighbor at 10% (I haven't checked but I think usury is somewhere around that) but a bank can hit you up for 30% no problem.
― Marcus Aurelius
Path of Exile: themightypuck
I had thought the max apr was 22.9 for some reason.
I host a podcast about movies.
http://www.irvinehousingblog.com/wp-content/uploads/2007/03t/FinanciallyConservativeHomeFinancing_7C6A/map_of_misery6.jpg
Taken in context with the article this graphic seems to say this is limited to Blue states... or that's what my quick look and assessment tells me.
I don't see why, if you could afford a conservative 25 or 30 year mortgage on a house you really did want, it's a bad time to buy other than the fact you'll probably overpay if you do buy in the next year. I don't know, I've never owned a house.
You'll pay interest at a high rate and buy the house at a higher price than it will likely have in two years. This is to say, you're not unlikely to be in a position of holding a loan larger than the value of your house, and paying ridiculous interest on it to boot.
I mean, besides that, it's a great idea.
are you going to get boned on that to the tune of 12 * your rent * x where x is the number of years till the market's swell?
I host a podcast about movies.