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Old 12-05-2007, 08:18 PM   #121
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Most of the folks in these homes will have moved within 5 years or refinanced, so only some will get the full five year benefit.

In the meanwhile, it sounds great that the politicos are giving the downtrodden a huge helping hand, what with that election year thing and all
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Old 12-05-2007, 08:30 PM   #122
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Well, yes, I expect some of these folks will refinance - they had better! But getting a 5 year teaser rate might significantly delay that refinancing.

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Old 12-05-2007, 08:42 PM   #123
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The teaser freezer only applies to those with FICOs under 660. So, we're talking about freezing their loans to a rate of 7% instead of letting them adjust to 10% or so.

Assuming these people could refinance, I don't think they'll be seeing a rate below 7% any time soon. FNM and FRE recently announced that any loan for somebody with a FICO below 660 will have a rate 1.25-2% over whatever the prevailing rate is.
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Old 12-05-2007, 08:43 PM   #124
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When these ARM rates are locked for five years as proposed, is the lender taking the hit of the difference between the teaser rate and the hypothetical higher rate, or is the taxpayer?
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Old 12-05-2007, 08:46 PM   #125
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The lender (or investor).
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Old 12-05-2007, 09:14 PM   #126
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That is, until they pass the cost on to the rest of us in the form of higher rates.
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Old 12-05-2007, 09:30 PM   #127
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Originally Posted by Retire Soon View Post
Eric Petroff of Investopedia wrote a very objective and concise article entitled, "Who is to Blame for the Subprime Crisis?" Below are some important points that he raised:

1) There is no single entity or person to point the blame at, as anytime something bad happens, blame starts to be assigned.
2) When the dot-com bubble burst in early 2000 and the terrorist attacks followed in 2001, there was a great risk of recession. Central banks around the world tried to stimulate the economy by creating capital liquidity with lower interest rates.
3) Investors wanted higher interest rates than what were available and began to seek higher returns. This demand for higher returns was met with lendors who on took greater risks by approving subprime loans for buyers with bad credit.
4) Fueled by subprime loans, consumers drove the housing bubble to its peak in the summer of 2005 until it began to burst in August, 2006.
5) Mortgage originators (lenders) should shoulder most of the blame, as they were the ones who loaned money to people with poor credit and high risk of default. Conversely, lenders probably saw subprime loans as less of a risk than what they were because rates were low, the economy was healthy and people were making their payments.
6) Home buyers purchased houses they could barely afford, often with no down payment in the form of 2/28 and interest only mortgages. They hoped that prices would continue appreciating and that they would refinance at a later date with lower interest rates and perhaps even take some money out with their new equity.
7) The housing bubble finally burst and prices dropped rapidly.
8) Some lenders may have given the impression that subprime loans presented no risk to the borrowers as the costs were low, however, home buyers simply took loans that they could not afford.
9) The secondary mortgage market added to the problem, as lendors simply sold their loans to these entities, collected their origination fees, which freed up more money to continue the cycle.
10) Much of the demand for these mortgages came from pooling these loans into security, know as "collateralized debt obligations" (CDO's), which were then sold to investors.
11) Rating agencies (such as Moody's) and the underwriters of CDO's can also take part of the blame. There could be a conflict of interest here, because the rating agencies collect fees from the security's creator for assigning a risk rating such as AAA. However, this is the process in which bonds are brought to market.
12) Investors in the CDO's can take blame as well, as they were the ones that bought these securities at "ridiculously low prices over treasury bonds." Investors did not do their homework and merely took the AAA rating at face value and did no further investigation.
13) Hedge funds made the problem even worse by purchasing CDO's on credit, which pushed subprime interest rates lower. As soon as investors recognized that subprime loans were of inferior quality, Many of these hedge funds went out of business.

14) Finally, as you can see there were many participants in the subprime crisis. But, when all is said and done, it was human greed that fueled the crisis, which is what fuels all bubbles.









Who Is To Blame For The Subprime Crisis?
This is an excellent summary. Thanks.
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Old 12-05-2007, 09:32 PM   #128
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[quote=Retire Soon;584783]Eric Petroff of Investopedia wrote a very objective and concise article entitled, "Who is to Blame for the Subprime Crisis?" Below are some important points that he raised:

1) There is no single entity or person to point the blame at, as anytime something bad happens, blame starts to be assigned.
2) When the dot-com bubble burst in early 2000 and the terrorist attacks followed in 2001, there was a great risk of recession. Central banks around the world tried to stimulate the economy by creating capital liquidity with lower interest rates.
3) Investors wanted higher interest rates than what were available and began to seek higher returns. This demand for higher returns was met with lendors who on took greater risks by approving subprime loans for buyers with bad credit.
4) Fueled by subprime loans, consumers drove the housing bubble to its peak in the summer of 2005 until it began to burst in August, 2006.
5) Mortgage originators (lenders) should shoulder most of the blame, as they were the ones who loaned money to people with poor credit and high risk of default. Conversely, lenders probably saw subprime loans as less of a risk than what they were because rates were low, the economy was healthy and people were making their payments.
6) Home buyers purchased houses they could barely afford, often with no down payment in the form of 2/28 and interest only mortgages. They hoped that prices would continue appreciating and that they would refinance at a later date with lower interest rates and perhaps even take some money out with their new equity.
7) The housing bubble finally burst and prices dropped rapidly.
8) Some lenders may have given the impression that subprime loans presented no risk to the borrowers as the costs were low, however, home buyers simply took loans that they could not afford.
9) The secondary mortgage market added to the problem, as lendors simply sold their loans to these entities, collected their origination fees, which freed up more money to continue the cycle.
10) Much of the demand for these mortgages came from pooling these loans into security, know as "collateralized debt obligations" (CDO's), which were then sold to investors.
11) Rating agencies (such as Moody's) and the underwriters of CDO's can also take part of the blame. There could be a conflict of interest here, because the rating agencies collect fees from the security's creator for assigning a risk rating such as AAA. However, this is the process in which bonds are brought to market.
12) Investors in the CDO's can take blame as well, as they were the ones that bought these securities at "ridiculously low prices over treasury bonds." Investors did not do their homework and merely took the AAA rating at face value and did no further investigation.
13) Hedge funds made the problem even worse by purchasing CDO's on credit, which pushed subprime interest rates lower. As soon as investors recognized that subprime loans were of inferior quality, Many of these hedge funds went out of business.

14) Finally, as you can see there were many participants in the subprime crisis. But, when all is said and done, it was human greed that fueled the crisis, which is what fuels all bubbles.



What this senario fails to address is the results of goverment intervention in the 2 previous recessions, and the psychological impact that intervention had on the public. In 1991 the Bush 1 administration intervened in the recession by lowering interest and fueling the speculation in the Tech bubble,many people who should have been wiped out financialy got off the hook and did not pay the price for their speculation. In 2001 the Bush 2 administration intervened in the recession that should have happened as a result of the wild speculation in the Dot Coms. The public took advantage of the low interest rates and simply re-financed, again dodging the bullit, and not really having to pay for their financial irresponsiblity. So now you have a public that has been convinced that borrowing is not only the way out of trouble but the road to getting rich. They lack the disipline that the prior 2 recession should have taught them. Their view of reallity is scewed, in the back of their minds, they believe somehow the Banks and the Goverment will once again bail them out. What they do not understand is this time is different. This time there is too much debt. Nothing will stop this recession. The Banks, the Fed, and the Goverment are in panic mode. Their smoke and mirrors economy is crumbling.They want to postpone the worst of this mess untill they are out of office and hopefully defer some of the blame. They just need to keep the deception going a little longer.
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Old 12-05-2007, 09:46 PM   #129
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They just need to keep the deception going a little longer.
It's hard to quantify, but slowing things down usually helps a lot. People adapt. It's much harder to adapt to a sudden shock than to a slow hissssss.
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Old 12-06-2007, 07:03 AM   #130
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The Banks, the Fed, and the Goverment are in panic mode. Their smoke and mirrors economy is crumbling.
Weeelll, here's a couple corrections. The president does not set monetary policy ... the federal reserve does. So replace any reference to "Bush" with "Greenspan". Yup, Alan caused the Dot Com bubble by not requiring tighter restrictions on trading margins. And Alan caused the housing bubble by dropping the interest rates nearly to nothing. Yup a recession is coming ... the economy is cyclical, but WHEN is anybody's guess.
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Old 12-06-2007, 08:10 AM   #131
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I believe Bush unveils his plan today, no?
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Old 12-06-2007, 09:23 AM   #132
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I believe Bush unveils his plan today, no?
Yes, Bush does unveil his plan today.

Bush to Unveil Aid to Homeowners - WSJ.com
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Old 12-06-2007, 11:34 AM   #133
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Well, yes, I expect some of these folks will refinance - they had better! But getting a 5 year teaser rate might significantly delay that refinancing. Audrey
I wouldn't hold out much hope for a significant amount of refinancing. After all, these were folks who were unable to qualify for conventional mortgage loans during a period of time that spawned what may have been the loosest lending standards the industry has ever seen. With the specter of governmental intererence amounting to nothing less than the large-scale abrogation of private contracts, you can bet that nobody in the private sector is going to be lining up to do business with them again. Lenders will be demanding a premium for not only the risk inherent in making loans to this class of borrower, but an additional premium to compensate them for the risk of entering into contracts with a protected class which may receive special legal protections at any time.

Furthermore, after the government gets through stripping the investment community of their legal rights, there will no longer be a private secondary market for mortgage loans. The availability of credit will be drastically reduced--meaning higher rates for everyone, and the standards imposed by lenders (who will be keeping more of these loans on their own balance sheets) will be much more stringent.

As much disdain as I have for the fraudulent practices of the lenders vis-a-vis the mom-and-pop investors who will ultimately take the hit, I do not believe that the subprime borrowers in this picture were the victims of any similar deception. Since the dawn of time it has been the case that a high risk borrower pays a commensurately high price for the extension of credit. And where an already high-risk borrower requires terms that defer the payment of interest. . . Well, there's nothing too surprising about the fact that there's going to be a day of reckoning. No sympathy here.
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Old 12-06-2007, 11:43 AM   #134
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I doubt they'll be refinancing much either. A lot of folks move within 3-5 years of buying a home due to job or family changes. I suspect a fair number of the folks stuck with this problem will lateral to a rental and we'll see a lot of inexpensive properties with a lot of deferred maintenance hitting the RE market over the next 5 years...
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Old 12-06-2007, 12:35 PM   #135
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I doubt they'll be refinancing much either. A lot of folks move within 3-5 years of buying a home due to job or family changes. I suspect a fair number of the folks stuck with this problem will lateral to a rental and we'll see a lot of inexpensive properties with a lot of deferred maintenance hitting the RE market over the next 5 years...
GREAT! A lot of US will be retiring or retired in five years, and some of us will have plenty of time to catch up on the maintenance of an ER home that we bought for a song!
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Old 12-06-2007, 12:46 PM   #136
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I hadn't thought about the deferred maintenance aspect of this. That's a good point. Can you imagine how the holders of the mortgages are feeling knowing that their hands may be tied for five years while the little security that they now have rots away?
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Old 12-06-2007, 12:47 PM   #137
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Last time I rode thru this turbulance it took 12 years for prices to recover (Boston 1987-1999). If anything, it appears we're just shifting the burden to the next administration ... 5 years is nothing.

Yeah, I did VERY LITTLE to maintain the upside down properties. Roof leak ... put a tarp in the attic! Why spend good $$ chasing bad $$.
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Old 12-06-2007, 12:49 PM   #138
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I wouldn't hold out much hope for a significant amount of refinancing.
That's what I suspect as well, in which case we are just kidding ourselves. But I suppose just slowing things down a bit has SOME benefit. But that's why I don't understand the long 5 year freeze.

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Old 12-06-2007, 12:55 PM   #139
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Just listened to Paulson's speech. The teaser freezer is toothless. Just guidelines for servicers. The idea was to make the work-out process targeted and consistent, but it sounds like there's still a ton of one-on-one work involved.
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Old 12-06-2007, 12:58 PM   #140
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Furthermore, after the government gets through stripping the investment community of their legal rights, there will no longer be a private secondary market for mortgage loans. The availability of credit will be drastically reduced--meaning higher rates for everyone, and the standards imposed by lenders (who will be keeping more of these loans on their own balance sheets) will be much more stringent.
I think this has in fact already occurred, without the government intervention. Just the fact that so many of the securities are now trading at such a severe discount is an indication that the contract is worth little (i.e. that the investors already expect the homeowner NOT to live up to their end of the contract). I don't think there won't be a private secondary market for mortgage loans, I just think it won't be anything like what it was, which was way out of control.

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