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Pani
Aug 16, 2007, 01:56 PM
This article talks about the growing worries over the subprime mortgage situation and the effects it may have on the economy
http://www.informationclearinghouse.info/article18191.htm

Thoughts?

Raid
Aug 16, 2007, 03:08 PM
This article talks about the growing worries over the subprime mortgage situation and the effects it may have on the economy
http://www.informationclearinghouse.info/article18191.htm

Thoughts? Well I haven't read the full article; from my standpoint it seems to wander in and out of causal arguments. At the crux of this issue is the average american's ability to pay thier debts. When interest rates were low and the housing market was booming, a lot of people took advantage of these "subprime" variable mortgages and took on quite a large debt load becasue the lower interests made the payments manageable.

However having a variable mortgage means that when interest rates go up, so do your payments (to reflect the new ammortized interest rate). With each increase in interest rates you get a certain number of people (who maxed their Total Debt Service Ratio (aka TDS) (http://www.lendingmax.ca/artman/gross-debt-and-total-debt-service-ratio.php)) are not able to keep up with the payments. Without debt restructuing this can quickly turn into a loan default situation and the mortgage companies that made the deals quickly loose out on the cash flow that mortgage generates. Even with the sale of the asset (house), losses are incurred and nobody is happy with the situation.

Putting this on a national scale the losses are scary (kind of makes you think then about the profits these companies are pulling in eh?) and the market gets all jittery about other related bottom lines. However the amount of market panic makes me re-evaluate the assumption of rational market behavior, as concerns over the average american TDS were discussed at least 4 years ago. It didn't seem to matter then because companies continued to approve mortgages to people who were likely to run into a loan default situation.

Really the lenders are partially to blame for being so agressive and ignoring certain risk factors, but the home owner should share part of the blame for over-extending their debt and not fully understanding the impact of likely interest rate hikes.

<edit> I should note that the linked article talks an awful lot about the value of the asset... that really only comes into play if the home owner decides to get out before a default in the loan occurs. The defaults arrising from being unable to handle the increases in payments has a much higher impact on the current situation as the housing market hasn't really burst yet</edit>

CorvusCamenarum
Aug 16, 2007, 03:54 PM
Well I haven't read the full article; from my standpoint it seems to wander in and out of causal arguments. At the crux of this issue is the average american's ability to pay thier debts. When interest rates were low and the housing market was booming, a lot of people took advantage of these "subprime" variable mortgages and took on quite a large debt load becasue the lower interests made the payments manageable.

However having a variable mortgage means that when interest rates go up, so do your payments (to reflect the new ammortized interest rate). With each increase in interest rates you get a certain number of people (who maxed their Total Debt Service Ratio (aka TDS) (http://www.lendingmax.ca/artman/gross-debt-and-total-debt-service-ratio.php)) are not able to keep up with the payments. Without debt restructuing this can quickly turn into a loan default situation and the mortgage companies that made the deals quickly loose out on the cash flow that mortgage generates. Even with the sale of the asset (house), losses are incurred and nobody is happy with the situation.

Putting this on a national scale the losses are scary (kind of makes you think then about the profits these companies are pulling in eh?) and the market gets all jittery about other related bottom lines. However the amount of market panic makes me re-evaluate the assumption of rational market behavior, as concerns over the average american TDS were discussed at least 4 years ago. It didn't seem to matter then because companies continued to approve mortgages to people who were likely to run into a loan default situation.

Really the lenders are partially to blame for being so agressive and ignoring certain risk factors, but the home owner should share part of the blame for over-extending their debt and not fully understanding the impact of likely interest rate hikes.

<edit> I should note that the linked article talks an awful lot about the value of the asset... that really only comes into play if the home owner decides to get out before a default in the loan occurs. The defaults arrising from being unable to handle the increases in payments has a much higher impact on the current situation as the housing market hasn't really burst yet</edit>

This is why variable-interest loans are a really bad idea from the consumer standpoint. With a fixed rate you don't have to worry about the market pricing you out of your home should rates rise, and if rates fall you can always refinance.

On the other hand, I find it hard to find sympathy for those who got one of those exotic mortgages (ARM, interest-only, etc) so they could get more house than they knew they could afford, and then were all suprised to find out it was coming to bite them on the hiney.

There was a piece on NPR yesterday(?) about how the housing bubble is just the second verse to the dot-com bubble song a few years back.

Sun Baked
Aug 16, 2007, 04:03 PM
Don't worry the teacher living in an apartment down the street socking the maximum into retirement may find themselves the biggest loser.

Raid
Aug 17, 2007, 01:47 PM
This is why variable-interest loans are a really bad idea from the consumer standpoint. With a fixed rate you don't have to worry about the market pricing you out of your home should rates rise, and if rates fall you can always refinance. Well that's partialy correct, in times of increaseing interest rates (aside from the US Fed bank lowering interest rates today, but that can't last or the US dollar will tank) a variable mortagage is a bad idea. However if you take a look at the mid 1980's a fixed mortgage was a bad idea because rates were insanely high and the pressures pointed to an interest rate decrease. When it comes down to it the decision to go fixed or to go variable depends on the interest rate difference between those to products and the expected change in the interest rate over the term of the mortgage. I bought a place almost 2 years ago now and I'm really glad I got a fixed mortgage!

Don't worry the teacher living in an apartment down the street socking the maximum into retirement may find themselves the biggest loser. Unfortunately you might be right :( I remember a book that came out around 2001 that was based on the idea that the only way to come out on top after Baby boomers start selling for retierment funding was to short the entire market... meaning basically the market was going to take a long slide down as baby boomer start selling off market assets with a lack of buyers to prop up the price on the other end.

evilgEEk
Aug 18, 2007, 04:04 PM
This is why variable-interest loans are a really bad idea from the consumer standpoint.

This is a generalized statement. ARM's, Pay Option ARM's and Interest Only programs do have their place, but they're not for your average consumer. If you know for certain you're only going to be in a place for three years or less then get a 3/1 ARM (adjusts after 3 years) without a pre-pay penalty and reap the rewards of a lower interest rate.

Pay Option ARMs were created for those of us that get paid on commission only. It's an adjustable rate mortgage with four payment options every month. From lowest to highest, these payments are: 3% payment, Interest Only payment, 15 year amortization payment, 30 year amortization payment.

These options give you the ability to switch between what you pay monthly based on what your month-to-month income is. The only problem with this is that people that weren't commission employees started taking out these loans, perhaps not fully understanding the impact.

The Pay Option is also good for some investors who are planning on turning the property for a profit and only plan on having them for a few months and want the lowest possible payment.

Interest Only loans are good for those that either won't have the property for very long and want a minimum payment that isn't a Pay Option or planning on increasing their income (promotion, marriage..etc..) and want to only pay a minimum payment until that event happens.

On the other hand, I find it hard to find sympathy for those who got one of those exotic mortgages (ARM, interest-only, etc) so they could get more house than they knew they could afford, and then were all suprised to find out it was coming to bite them on the hiney.

I completely agree, but it's also the responsibility of the mortgage officer to educate the consumer and help them make an informed decision. Unfortunately greed rules most people, and being as though there is SO much money to be made in this business, I think most mortgage officers didn't care what they were doing to the consumer as long as they got their share.

But ultimately it is the fault of the consumer for not doing their homework, and most of them just got all goo-goo eyed over this incredibly low payment for their dream home that they really couldn't afford to begin with.

This article talks about the growing worries over the subprime mortgage situation and the effects it may have on the economy
http://www.informationclearinghouse.info/article18191.htm

Thoughts?

Over all I found this article to be rubbish. There is fact mixed in of course, and the sub-prime mess has had an impact on our economy, but all the talk of "the next depression" is rubbish.

Of course my opinion is also swayed by these "not on CNN" type of websites. It's all very conspiracy theory to me, and I don't particularly respect what they have to say because of it.

n-abounds
Aug 18, 2007, 05:53 PM
Unfortunately you might be right :( I remember a book that came out around 2001 that was based on the idea that the only way to come out on top after Baby boomers start selling for retierment funding was to short the entire market... meaning basically the market was going to take a long slide down as baby boomer start selling off market assets with a lack of buyers to prop up the price on the other end.

I don't think this makes sense. Yes, the baby boomers was a generation that was much larger than the previous generation. However, since there has been population growth ever since the baby boomers..there are still more Gen X'ers than baby boomers. There will always be more people coming behind the boomer's generation.

epiphany
Aug 19, 2007, 10:48 PM
I don't think this makes sense. Yes, the baby boomers was a generation that was much larger than the previous generation. However, since there has been population growth ever since the baby boomers..there are still more Gen X'ers than baby boomers. There will always be more people coming behind the boomer's generation.

I think he's talking about Harry Dent. His theory is/was that there is a correlation between the market and the number of 47-year-olds in the population. There hasn't been an even population growth since the baby boomers, at all. There's a boomlet when the boomers had babies. The '47' deal is because that is presumed to be the peak of income earning. So, after the first boomers start retiring, he projected the market would start to sag, with an uptick a decade or so later, than another decline. The initial sag starts...this year.

Google Harry Dent 47 stock, etc. You'll find charts. I thought he was a kook, especially because of the years after 2001, but perhaps, he's right.

If you want to see what the Big Money thinks about what's going to happen, go to Credit Suisse's report from Mar 07. www.recharts.com/reports/CSHB031207/CSHB031207.pdf
Look at page 47 (month 12 is this December), and if you want to see where the next 'run on the bank' is after CountryWide, look at page 57. (Hint: W___ F____, which has far greater exposure than Countrywide to subprime mortgages.)

I think by December, we'll be praying for a silent night.

Pani
Sep 3, 2007, 04:11 PM
One of the biggies in the subprime market just closed its doors, apparently without much media attention:

http://finance.myway.com/jsp/nw/nwdt_rt_top.jsp?cat=TOPBIZ&feed=bus&src=202&section=news&news_id=ap-d8rcek3o0&date=20070901&alias=/alias/money/cm/nw

Iscariot
Sep 3, 2007, 10:08 PM
A surfeit of availability makes for a deficit of responsibility. In this case we're seeing people vastly overestimate a market in their favour at a great personal risk, and a market vastly overestimating the populous at great financial cost.

Aggressive selling of goods, services (or ideas) to an ill-informed consumer base is a bad idea for all involved.

edit: clarity

GoCubsGo
Sep 3, 2007, 10:56 PM
Here's my take....
Consumers buy homes with piss poor credit. They get approved and in their total amazement of getting approved for a piss poor loan they forget their interest rate will adjust 2 years later. Good news though, due to this so-called crisis lenders are forced to modify the terms of the loan so that people don't lose their homes.

People = Stupid and so lenders suffer. While brokers and lenders alike spent over two years making ****ed up loans to stupid ****ing people with bad ****ing credit, lenders are now suffering for people's pure stupidity.

There's more to it, but hey...at least lenders let stupid people with piss poor credit realize their dreams of home ownership and they all keep me employed...at least for now!!!

Thank you to the people who make bad loans, who fund bad loans, and who sign on the dotted line for bad loans!


In all seriousness, lenders and brokers didn't bother approving people for loans after they adjust. These people have 50% debt ratios and when their interest adjusts it is clear that those poor people cannot actually afford those loans. I mean really, they did not get piss poor credit for no reason. I think the crisis can be blamed on both the uneducated un-caring consumer and the un-caring lender.

CorvusCamenarum
Sep 4, 2007, 12:33 AM
Here's my take....
Consumers buy homes with piss poor credit. They get approved and in their total amazement of getting approved for a piss poor loan they forget their interest rate will adjust 2 years later. Good news though, due to this so-called crisis lenders are forced to modify the terms of the loan so that people don't lose their homes.

People = Stupid and so lenders suffer. While brokers and lenders alike spent over two years making ****ed up loans to stupid ****ing people with bad ****ing credit, lenders are now suffering for people's pure stupidity.

There's more to it, but hey...at least lenders let stupid people with piss poor credit realize their dreams of home ownership and they all keep me employed...at least for now!!!

Thank you to the people who make bad loans, who fund bad loans, and who sign on the dotted line for bad loans!


In all seriousness, lenders and brokers didn't bother approving people for loans after they adjust. These people have 50% debt ratios and when their interest adjusts it is clear that those poor people cannot actually afford those loans. I mean really, they did not get piss poor credit for no reason. I think the crisis can be blamed on both the uneducated un-caring consumer and the un-caring lender.

That can't be all of it. On the one hand you have Carlton Sheets and his many clones touting ways to get rich quick in the real estate market - all that speculating had to have played a part in driving up prices. On the other hand you have every Tom, Dick, and Harry taking out loans they had little hope of being truly able to afford, acting on the rationale that a $300k loan at X-5% (albeit for the first few years) is just as doable as a $200k loan at X%. We're conditioned by and large to look at the monthly payment over the actual price, which is exactly what a lender wants.

evilgEEk
Sep 4, 2007, 12:52 AM
What's funny is that apparently we never learn.

The market will stabilize and then begin to once again gain momentum, and then in five to seven years it will explode again. And all these companies you see falling by the way-side (http://ml-implode.com/) will start popping up once again, only to go back under after a couple of years of insane profits.


And round -n- round we go. ;)

mahashel
Sep 4, 2007, 12:07 PM
Naturally the lending biz just *had* to explode when I finally decide to sell my house. I ended up with an I/O loan (10 year I/O), but a fixed interest rate.
Those of us who foresaw the rising rates and made the prudent decision to opt for a fixed interest rate still seem to take it in the shorts. I'm not going to default, but it certainly doesn't help when I'm paying a mortgage on a house I can't get out of.
I'd postpone the sale of the house, but the timetable has been set by an exploding relationship rather than financial pressure. :(

Moof1904
Sep 4, 2007, 03:22 PM
I have to agree with Ben Stein:

Partial quote:

A Minor Major Mess

Subprime is a mess. But it's a small mess. Subprime mortgages account for roughly 20 percent of mortgages even in the most heavily exposed states. About 20 percent of them are delinquent in some way. That's 4 percent of mortgages.

Of these, maybe half, or 2 percent, will go into foreclosure. There will be roughly 50 percent recovery on sale of these. This is a loss of 1 percent in the mortgage market -- a sum the lenders have already made many times over because of the hefty fees on those deals. In the context of the size of the U.S. financial sector, it's nothing.

And why should a crisis in subprime drive down stocks in Mexico and Thailand? Again, because the speculators seek to create panic to make money by selling short, and they sell short everything.

There's simply no connection between subprime and developed or developing nations' stocks. This by itself shows the thin context of the selling wave late last month.


Link:

http://finance.yahoo.com/expert/article/yourlife/41148

savar
Sep 5, 2007, 01:48 PM
I have to agree with Ben Stein:

Partial quote:

A Minor Major Mess

Subprime is a mess. But it's a small mess. Subprime mortgages account for roughly 20 percent of mortgages even in the most heavily exposed states. About 20 percent of them are delinquent in some way. That's 4 percent of mortgages.

It's minor to us, the general public. But just a few weeks ago Bear Stearns had one of the largest bailouts in history to save several of its funds that had made risky bets on subprimes that panned.

Because all of the banks are inter-related, it could have been a giant disaster, but all the other firms came together and agreed not to do anything hasty. Had they started to sell immediately, however, it would have wreaked havoc on our economy.

At the very least, don't invest your 401k in any residential real estate funds...

Music_Producer
Sep 5, 2007, 08:20 PM
There is much more to this than just the subprime crisis. These loans have been re-packaged and sold off to banks worldwide as different products. Massive borrowing from Japan (at 0.5% interest) .. sold off as 6% loans to consumers.. and so on.

Then we have the typical retarded consumer who wants to buy the biggest SUV, or the biggest house without knowing how much he can really afford. I've seen people who make barely enough a month .. get ridiculous homes (priced 300 k or more) and then apply for home equity! What?! They seriously assume it's easy and free money.

Yes, international governments, the Feds, etc can bail out banks and hedge funds from this crisis but there is a serious correction before everything can recover. Right now everything looks seriously downhill. Most of the banks haven't even calculated their losses yet.. so we've barely seen the tip of the iceberg.

Mantat
Sep 6, 2007, 11:02 AM
Variable rates have proven time and again that they are the most economic way to pay your morgage IF you put the cash you save (compared to the fixed rate) directly back toward paying back the morgage. I dont remember the numbers but using this strategy with historical data allowed people to save over 5% of the total cost of the house. But you need to have discipline, which most people dont.

imac/cheese
Sep 6, 2007, 12:19 PM
Variable rates have proven time and again that they are the most economic way to pay your morgage IF you put the cash you save (compared to the fixed rate) directly back toward paying back the morgage. I dont remember the numbers but using this strategy with historical data allowed people to save over 5% of the total cost of the house. But you need to have discipline, which most people dont.

I might agree with this if you compare all the fixed rates over time, but for each person buying a house they have to consider what rates are going to do in the future. Each situation is different and though the average variable rate might have saved someone 5% there are a lot of people who lose money because of variable rates (still assuming they put their monthly savings back into their house) because their rates go up.

With variable rates you are always gambling on what the rates will do. Some gamblers win, others lose.

CorvusCamenarum
Sep 6, 2007, 02:35 PM
Variable rates have proven time and again that they are the most economic way to pay your morgage IF you put the cash you save (compared to the fixed rate) directly back toward paying back the morgage. I dont remember the numbers but using this strategy with historical data allowed people to save over 5% of the total cost of the house. But you need to have discipline, which most people dont.

You can do just as well with a bimonthly mortgage. I remember a demonstration given by a professor who taught one of my finance classes back when I was an undergrad. Long story short, you structure the loan to make payments every two weeks instead of once a month, and you can pay off a 30 year mortgage roughly 8 years faster.

gkarris
Sep 6, 2007, 02:41 PM
Maybe this whole thing has to do with all of us loosing our jobs overseas and not being able to find work, or only another job at about 1/2 our previous pay.

Me and my friends are in the above situation.

If we don't have jobs, how can we afford a home?

Just something to think about...

Funny how out of all the news I've heard about the mortgage crisis, it's been about "giving people mortgages who don't deserve it" - how about giving people WORK?

Music_Producer
Sep 7, 2007, 08:03 AM
Maybe this whole thing has to do with all of us loosing our jobs overseas and not being able to find work, or only another job at about 1/2 our previous pay.

Me and my friends are in the above situation.

If we don't have jobs, how can we afford a home?

Just something to think about...

Funny how out of all the news I've heard about the mortgage crisis, it's been about "giving people mortgages who don't deserve it" - how about giving people WORK?

Your thoughts have been converted to reality today - the US economy lost 4000 jobs.. it was supposed to add 110,000 jobs. Crazy right?

Look for the stock markets crashing today - gonna be one Black Friday.

Blue Velvet
Sep 16, 2007, 02:10 PM
This could be potentially very serious; all this dubious debt parcelled off everywhere in the global economy.

I'm not sure how many Americans know what has happened over here in the UK in the last few days... a run on Northern Rock (http://observer.guardian.co.uk/business/story/0,,2169917,00.html) as savers queued to withdraw £2billion over Thursday and Friday with the Bank of England committing itself to bail the mortgage-lender out.

This could take many years to play out. It's clear that 'self-regulation' of the financial industry isn't working.

epiphany
Sep 16, 2007, 03:51 PM
I have to agree with Ben Stein:

Partial quote:

A Minor Major Mess

Subprime is a mess. But it's a small mess. Subprime mortgages account for roughly 20 percent of mortgages even in the most heavily exposed states. About 20 percent of them are delinquent in some way. That's 4 percent of mortgages.

Of these, maybe half, or 2 percent, will go into foreclosure. There will be roughly 50 percent recovery on sale of these. This is a loss of 1 percent in the mortgage market -- a sum the lenders have already made many times over because of the hefty fees on those deals. In the context of the size of the U.S. financial sector, it's nothing.

And why should a crisis in subprime drive down stocks in Mexico and Thailand? Again, because the speculators seek to create panic to make money by selling short, and they sell short everything.

There's simply no connection between subprime and developed or developing nations' stocks. This by itself shows the thin context of the selling wave late last month.


Well, Ben Stein seems to be unaware then that Deutsche Bank and English Banks are in severe trouble specifically because they invested in CDOs and bad tranches. Same with Bear Stearns,etc. Many banks and hedge funds were leveraged 50-to-1, some 80-to-1 on these hedge bets. Thus, it is not a 2% problem, because of these multipliers, and because the funds have to sell perfectly good stocks in order to pay out on bad debts.
In addition, Countrywide is in trouble not so much because of subprime or Alt-A loan defaults, but because even prime loans are going into default as a result of job losses.

By Ben's analysis, dot-coms wouldn't have been a major factor in the post-2000 stock market collapse, because they were not a major part of the economy, but all cycles are driven by greed and fear.

BoyBach
Sep 16, 2007, 04:01 PM
I'm not sure how many Americans know what has happened over here in the UK in the last few days... a run on Northern Rock (http://observer.guardian.co.uk/business/story/0,,2169917,00.html) as savers queued to withdraw £2billion over Thursday and Friday with the Bank of England committing itself to bail the mortgage-lender out.


If Northern Rock's share price continues to dive tomorrow I expect them to taken over very quickly by one of the 'Big Four' or to bought by a Private Equity fund for a very quick and substantial profit, a la the Bank of America and Countrywide in the US.

The current 'Credit Crunch' is the perfect time for those with Big Balls™ to make a financial killing.

Pani
Sep 17, 2007, 06:57 PM
The US press really isn't really covering the U.K. situation. One of my students did mention it was on the front page of one major newspaper. She didn't know which one. When I turned on one of the major evening news networks (don't have cable, don't want it) the headline was O.J. being arrested again. Unbelievable! Most of the alternative sites I visit on the web did cover it though!