Do you want to pay for the Sub-Prime freeze?

[Retire Soon]

BofA is afraid that it's different this time:

Calculated Risk: BofA: Attitudes Changing Towards Default

There's been a change in social attitudes toward default

I think there is a lot of merit to this article. Yesterday, I went to get a haircut. Probably because subprime loans have been on my mind lately, the subject of our conversation turned to mortgages. Well, the barber mentioned that he'd refinanced his home some time back. He seemed to be upset with his lender because they did the appraisal by computer and never physically inspected his house. It turns out that they are now upside down on their first mortgage to the tune of $112,000 (based on what they now think their home is worth). He seemed to be very upset with the lender as he accused them of inflating the value of his appraisal. He said the home was very much in need of repair. In other words, it was their fault. There are probably hundreds of thousands of mortgage holders that now hold contempt for their mortgage lender because of similar circumstances. What will happen if many of these people do indeed walk away from their homes? By the way, this article says that home values could drop as much as 30%. Keep in mind that if home values dropped by that amount that it would take nearly a 43% increase in value to return to the original market price. If lenders tighten up loan qualifications more than they already have and interest rates rise due to current inflation, how long do you think that will take?

 

[Gumby]

..

 

[youbet]

I think there is a lot of merit to this article. Yesterday, I went to get a haircut. Probably because subprime loans have been on my mind lately, the subject of our conversation turned to mortgages. Well, the barber mentioned that he'd refinanced his home some time back. He seemed to be upset with his lender because they did the appraisal by computer and never physically inspected his house. It turns out that they are now upside down on their first mortgage to the tune of $112,000 (based on what they now think their home is worth). He seemed to be very upset with the lender as he accused them of inflating the value of his appraisal. He said the home was very much in need of repair. In other words, it was their fault. There are probably hundreds of thousands of mortgage holders that now hold contempt for their mortgage lender because of similar circumstances. What will happen if many of these people do indeed walk away from their homes? By the way, this article says that home values could drop as much as 30%. Keep in mind that if home values dropped by that amount that it would take nearly a 43% increase in value to return to the original market price. If lenders tighten up loan qualifications more than they already have and interest rates rise due to current inflation, how long do you think that will take?

I'm confused by this. Your barber refinanced his house. He looked at the new payment and decided that would be OK and went ahead with the deal. Now home prices have dropped and he's upside down in the house. But, he's still cutting hair. He can still make the payment, just as before his house dropped in value (On paper - unrealized capital loss). What's his problem? Why would he walk out on the house? What's changed other than the current appraisal for his house is less?

 

[Retire Soon]

My barber is now upside down on his first mortgage. He feels that when he refinanced the house that the lender never should have appraised his house so high and this is why he now has negative equity. This is only his perception and whether it fits reality or not is irrelevant. My point is that if push should ever come to shove, that he would be more willing to walk away from his mortgage because he has absolutely nothing to lose. Besides, in his mind he believes that the lender was negligent in not physically inspecting the poor condition of the property. I agree that this does not sound like a responsible adult. In the article that Twaddle pointed us to, it states that there will be between 10 and 20 million Americans in the next two years who will become upside down on their mortgage, and it may become socially acceptable for the middle class to simply walk away from their responsibility. Although my barber never said he planning on walking away from his mortgage, the fact that he feels that the lender was careless and negligent in granting him the loan, that this could give him ample justification to join the group described in this article who simply walk away from their mortgage obligation.

BofA is afraid that it's different this time:

Calculated Risk: BofA: Attitudes Changing Towards Default

There's been a change in social attitudes toward default

 

[youbet]

Although my barber never said he planning on walking away from his mortgage, the fact that he feels that the lender was careless and negligent in granting him the loan, that this could give him ample justification to join the group described in this article who simply walk away from their mortgage obligation.

Hopefully, the rules will remain so that his credit will be ruined for many years by this so-called "walking away."

 

[clifp]

Hopefully, the rules will remain so that his credit will be ruined for many years by this so-called "walking away."

Well if this ditty is representative of people's feeling things have changed.

Dashing through the bills, with a mortgage debt at bay,
Underwater we go, laughing all the way
Bells on defaults ring, making spirits light
What fun it is to walk away from a loan that just ain't right


Jingle mail, jingle mail, jingle all the way
Oh what fun it is to write off a mortgage debt away

 

[barbarus]

Even at ZERO% interest, a person who paid $500,000 for a $200,000 house has a rather tough financial row to hoe, no?

 

[youbet]

Even at ZERO% interest, a person who paid $500,000 for a $200,000 house has a rather tough financial row to hoe, no?

I know what ya mean. I paid $21/share for 100 shares of ISM. It's now down to $17.5! I hope my bailout comes soon! At least before DW finds out! If the government doesn't act, perhaps some of the folks here on the board will take up a collection and forward it to me?

 

[clifp]

I know what ya mean. I paid $21/share for 100 shares of ISM. It's now down to $17.5! I hope my bailout comes soon! At least before DW finds out! If the government doesn't act, perhaps some of the folks here on the board will take up a collection and forward it to me?

You have to share the collection, cause I have a heck of lot more than 100 shares....

It is isn't our fault that fast talking Brewer convinced us to buy the silly things. I thought Sallie Mae was the kid sister of Uncle Sam and so if the rich Uncle doesn't bail us out, I think it is everybody elses responsiblity.

If it wasn't for ISM, I'd have a wii system, 50" LCD TV, and complete collection of Tom Selleck Hawaii Five O Aloha Shitrs

 

[youbet]

You have to share the collection, cause I have a heck of lot more than 100 shares....

I was using 100 for illustrative purposes!

 

[jazz4cash]

My barber is now upside down on his first mortgage. He feels that when he refinanced the house that the lender never should have appraised his house so high and this is why he now has negative equity. This is only his perception and whether it fits reality or not is irrelevant. My point is that if push should ever come to shove, that he would be more willing to walk away from his mortgage because he has absolutely nothing to lose. Besides, in his mind he believes that the lender was negligent in not physically inspecting the poor condition of the property. I agree that this does not sound like a responsible adult. In the article that Twaddle pointed us to, it states that there will be between 10 and 20 million Americans in the next two years who will become upside down on their mortgage, and it may become socially acceptable for the middle class to simply walk away from their responsibility. Although my barber never said he planning on walking away from his mortgage, the fact that he feels that the lender was careless and negligent in granting him the loan, that this could give him ample justification to join the group described in this article who simply walk away from their mortgage obligation.

This depends alot on local housing market and what alternatives homeowner might have. More importantly, if homeowner has a significant down payment, the loss in value is shared with the bank. The CR article correctly pointed this out wrt to no 'money down mortgages'. The homeowner might also realize some value if the cashout was used for something durable (e.g. dependent tuition) vs. an SUV that's costing 100 bucks per week for gas.

 

[emilylynn]

It occurs to me to ask whether there is any provision in the bailout program that would require homeowners who benefit from the moratorium on interest rate increases to compensate investors for their corresponding losses from whatever gains in equity accrue in the meantime?

 

[ERD50]

It occurs to me to ask whether there is any provision in the bailout program that would require homeowners who benefit from the moratorium on interest rate increases to compensate investors for their corresponding losses from whatever gains in equity accrue in the meantime?

(fake serious voice) Ummmm, I mean, I don't know, I have not read through all the documents.

(satire voice) emilylynn, I don't think you understand. In fact you have it backwards. Don't you see, the people receiving the bailout are doing US a FAVOR. Yes, if they don't get this bailout, the economy suffers and you and I will be hurt by that. So, rather than ask them to recompense us when they get their feet back on the ground, we should be expected to provide them with additional benefits, probably for the rest of our lives. It's only right.

(honestly serious voice) There may actually be something to the numbers that says a bailout is best overall. I don't know, and I am skeptical, because I doubt those calculations take in the long term effect of people's attitude toward risk, and the follow up mistakes they will make. But I'll listen (and apologize if it's been posted already - I have not kept up with every post/link on this thread).

-ERD50

 

[Retire Soon]

An front page article that appeared in today's WSJ says that fraud may account for half of all foreclosures in some regions. A phone technician with an annual salary of 105K was able to obtain a mortgage of $1.8 Million from Bear Stearns on a vacant home in Atlanta worth far less than that amount. He was successful in diverting hundreds of thousands of dollars from the mortgage to himself. A link to the article, "Fraud Seen as a Driver In Wave of Foreclosures is below.

Fraud Seen as a Driver In Wave of Foreclosures - WSJ.com

 

[Jay_Gatsby]

Coming back late to this thread, but I just have to chime in and give my humble opinion.

I agree that homeownership is a privilege, not a right. To own a home is a substantial responsibility. Someone is trusting you with their money, under the expectation that you will pay it back with interest. If you don't pay it back, then you can't expect to keep the asset on which you spent such money. You can point all sorts of fingers, but that's really the bottom line.

What pisses me off even more are homeowners who spend money on various luxuries (vacations, new cars, etc...) on credit cards or at the expense of paying their mortgages. Put differently, they're spending the mortgage money on other things, thereby demonstrating they are not responsible enough to be homeowners.

Apologies for sounding so simplistic, but that's been the way lending and borrowing has operated for centuries, if not millennia. It isn't going to change, and shouldn't change. It is one of the foundations of a stable economy.

 

[Retire Soon]

What pisses me off even more are homeowners who spend money on various luxuries (vacations, new cars, etc...) on credit cards or at the expense of paying their mortgages. Put differently, they're spending the mortgage money on other things, thereby demonstrating they are not responsible enough to be homeowners.

This is absolutely correct, and this is what upsets me the most. Many of the borrowers that received the bailout already proved that they were not responsible borrowers, because they had already earned low FICO scores. Because of competition in the mortgage business, especially in 2005 and 2006, lenders chose to loan to them anyway, as they were the primary subgroup in the general population that could keep the real estate bubble from bursting. Perhaps they were also mainly composed of people who hadn't bought their first home yet. But, then that doesn't explain why many of them chose a McMansion as their starter home.

 

[audreyh1]

Life is just too short to waste energy on moral outrage at stupid borrowers and stupid lenders. If one is a shrewd investor, there may very well be an opportunity presented by all of this that could more than offset the negatives to one's personal bottom line.

Audrey

 

[Texas Proud]

Glad to have you back Texas Proud.

Actually, a case can be made that for someone who got a no money down, negative amortization loan, with a house that has dropped in value, the smartest financial move is simply to walk away and hand the lender the keys (on the premise that they are likely to be judgment proof with respect to a deficiency). They can go back to renting and try to buy again in a few years.

I'm sure you will agree with me that while profligate borrowers bear some of the blame, the lenders' failure to enforce any lending standards was a substantial contributing factor. The banks were essentially giving away money to consumers and companies alike -- in the business world, until very recently, companies with incredibly weak balance sheets were able to get "covenant lite" and PIK interest loans. In large measure, the problem was too much money chasing yield. The loan officers made loans, because that's how they get rewarded. Actually collecting on those loans is the responsibility of the workout department. And the widespread entry of non-bank lenders (who are less regulated and less prudent than banks) into these markets just exacerbated the problem.

And frankly, from what I have read so far, I don't see that the rescue plans (which are for the benefit of the banks as much as the borrowers) ever call for direct taxpayer funded subsidies to borrowers. Might there ultimately be some drain on the Treasury? Maybe, but the cost of doing nothing just to teach people a lesson is very high for the rest of us.

All I have been trying to say is that we should not let our moral indignation drive our public policy. Let's be rational about what is needed and what can be done.

I agree.... the banks and other institutions were stupid in making the loans... and the people were stupid in taking money out of their homes to go and buy other stuff... and investors were stupid to buy these loans as 'high quality'....

So, all of these should bear the brunt of their stupidity... and as you say the plan looks like it is nothing but wind trying to calm the market.... I had said all along that the banks and investors should negotiate with the borrowers and determine if they should get help or not.. I have never had a problem with this.. it is the market taking care of the problem...

However, the original talk was to help PAY for the people who made stupid decisions with our tax dollars (either directly or through some kind of tax break)... that is where I had a problem. As it is being proposed... I have no problem whatsoever.

 

[Texas Proud]

An front page article that appeared in today's WSJ says that fraud may account for half of all foreclosures in some regions. A phone technician with an annual salary of 105K was able to obtain a mortgage of $1.8 Million from Bear Stearns on a vacant home in Atlanta worth far less than that amount. He was successful in diverting hundreds of thousands of dollars from the mortgage to himself. A link to the article, "Fraud Seen as a Driver In Wave of Foreclosures is below.

Fraud Seen as a Driver In Wave of Foreclosures - WSJ.com

A phone technician making $105K I guess there are more problems than subprime....

 

[Jay_Gatsby]

A phone technician making $105K I guess there are more problems than subprime....

At least he wasn't a phone sanitizer. Then we might need him to save the planet.

 

[armor99]

Coming back late to this thread, but I just have to chime in and give my humble opinion.

I agree that homeownership is a privilege, not a right. To own a home is a substantial responsibility. Someone is trusting you with their money, under the expectation that you will pay it back with interest. If you don't pay it back, then you can't expect to keep the asset on which you spent such money. You can point all sorts of fingers, but that's really the bottom line.

What pisses me off even more are homeowners who spend money on various luxuries (vacations, new cars, etc...) on credit cards or at the expense of paying their mortgages. Put differently, they're spending the mortgage money on other things, thereby demonstrating they are not responsible enough to be homeowners.

Apologies for sounding so simplistic, but that's been the way lending and borrowing has operated for centuries, if not millennia. It isn't going to change, and shouldn't change. It is one of the foundations of a stable economy.

Well said Jay_Gatsby! This is not simplistic at all. This is a fair and accurate accounting of how things should be. There are no "do-overs" in life. If the govt or anyone else allows that sort of thing to happen, when why shouldn't people just get themselves in trouble again. IMHO, if there are no negative consequences for your negative actions, then more that likely you will just do it all over again. I do not believe in "kicking a man when he is down", but at the same time, I am under no obligation to help those that made their own bad decisions. No one has ever helped me when I have done something foolish with my finances... and there have been lots of things I would have liked to "do-over". But that is just not the way life is. Trying to artificially make it more "fair", you are making it more "unfair" for everyone. Saying that everone is special, is exactly the same as saying that no one is....

 

[barbarus]

Fraud Seen as a Driver In Wave of Foreclosures - WSJ.com[/URL]

A good article. Shows how crooked the entire system is, from the judiciary down to the little guy on the street. Now it's time for the honest suckers to pay for the sins of others.

 

[Gumby]

It occurs to me to ask whether there is any provision in the bailout program that would require homeowners who benefit from the moratorium on interest rate increases to compensate investors for their corresponding losses from whatever gains in equity accrue in the meantime?

One possibility would be to treat the freeze period as a negative amortization period. i.e. - the foregone interest gets tacked on to the principal and the loan term is extended as necessary. That way the payments stay low and the lender is made whole.

 

[ERD50]

One possibility would be to treat the freeze period as a negative amortization period. i.e. - the foregone interest gets tacked on to the principal and the loan term is extended as necessary. That way the payments stay low and the lender is made whole.

Seems reasonable. The lender does not get stuck with a house that can't be sold to cover the loan. The buyer gets to stay in the house. Each give a little, take a little.

Doesn't the lender have this option? To re-negotiate the terms with the borrower, if they both agree?

I wonder if they would get bad press though - some might say that they are just getting these poor people deeper in debt?

-ERD50

 

[Gumby]

This certainly can be done if both parties are willing. Representing a bank, I negotiated a similar outcome in a case many years ago. In that case, missed mortgage payments were added on to the principal and the loan was extended (ARM's with resets were not common at that time). But that was back in the days when most lenders kept the loans and did not securitize them. It might be harder today.