Mortage Crisis?

[eudaimoniac]

If anyone knows how to ---- Please explain (in the simplest terms possible) what this "sub-prime Mortgage crisis" is all about.
Trying to follow the media is confusing me even more. I don't know how it turned into a crisis.
Does it have something to do with variable interest rates that shot up and people ended up foreclosing all at once?
Were lenders naive enough to think that when rates went up people would still pay?
Was the rush to re-finance for the last few years partly to blame?

I'm in the dark.......

 

[FinanceDude]

If anyone knows how to ---- Please explain (in the simplest terms possible) what this "sub-prime Mortgage crisis" is all about.
Trying to follow the media is confusing me even more. I don't know how it turned into a crisis.
Does it have something to do with variable interest rates that shot up and people ended up foreclosing all at once?
Were lenders naive enough to think that when rates went up people would still pay?
Was the rush to re-finance for the last few years partly to blame?

I'm in the dark.......

Interest rates were cut dramatically when the tech bubble burst, and as a result of 9/11 to stimulate the economy. A TON of people refinanced, took out HELOCs to fix up their houses, etc. However, they was only so much business the lenders could do, and lenders are a greedy bunch, so they got a great idea:

Let's give money to folks that are deadbeats who want a house.

Along the way, we'll scrap our lending and appraisal practices and give everyone a loan. After they pay an artificially low rate on a house they can't afford, we'll count on the equity in the house being built up enough so they can refinance into a fixed rate (with us), pay the higher rate on their ARM, or if they do default, the increased equity in their homes will mean we can get rid of the foreclosure home quickly, and not carry it on our books and book big losses.

That didn't end well.........but we will pay the piper in about 4 years..........

 

[frayne]

http://www.youtube.com/watch?v=SJ_qK4g6ntM

 

[semtex]

some percent of population, 5%?, could not afford to own a house, sad, but that's the reality. Lenders lent them money anyway. Now both side got trapped.

My understanding.

 

[Rustic23]

Disclosure: I don't have a clue what I am talking about on this subject! So don't get mad, just correct anything that is wrong. Most of this comes from the news.

I understand there are about 500,000 sub-prime loans in trouble. The average home sells for $200,000. So there is $100B at risk if all of them go to $0. A number I doubt could happen. Now if each home lost 25% of their values, we would have $25B loss. Seems to me that is still high as it would require all 500,000 homes to be returned to the banks, and all of them to drop 25%.

There is a figure on the web that in 2001 there was $3.48 trillion dollars in single family mortgage debt out there. So a $25B loss would be .0072% loss rate if the total mortgage debt stayed the same, which I doubt it did. Also stated is that the for closure rate is up 33% from last year, yet, it does not say if last year was average, high, or an all time low.

So, I guess what I am getting at, is just like the OP, why? Not long ago there was a news story 'Sharks in the Water' and every news room was doing stories on how bloody the east coast was. Turns out there were less shark attacks that year than usual. Just a slow news week, but everyone was afraid to go in the water.

So is the sub-prime the current 'Sharks in the water'?

 

[VaCollector]

Loved the video....thanks!

My take on the meaning of the "sub-prime mortgage crisis" is that my bank stock will continue to be "sub-prime" for a while longer

 

[IBWino]

That video is great! Best explaination I've seen yet!

 

[armor99]

This is my take on it.... some may agree... others may differ. A sub-prime mortgage is a class of mortgage that the banks would lend to people with less than stellar credit. Sort of like those car loan guys you see on late night TV all the time... "No credit, bad credit, we can still get you that car". This was the housing equivalent.
The reason the banks took the added risk, was because at the time the housing market was increasing very well. They figured that even if these more "risky" borrowers did default on their loans, the market would be good enough, that they could still sell those properties at a profit. The banks forgot the very first rule of the housing market, is that is is cyclical. So suddenly when the price of homes started to get too high, the value of the homes started to level off. And in other cases started to go down in value. So now as people are defaulting on their loans, the banks are winding up with all of these properties that they cannot sell for a profit, and in some cases cannot even break even, because the value of homes are too high and people are not willing to pay the prices.
The subprime borrowers in this case are equally to blame for the situation. Like all contracts in America, a loan is a voluntary agreement between two parties, as to what is being sold, and how much is agreed to pay for it. Even though the bank was willing to give money to folks who in no way could hope to pay the loan back, it is certainly the borrowers fault for taking on a debt that is above their capacity re-pay. Some claim that all these folks did not "know" any better, but that sort of thinking just does not wash with me.
So there is the sub-prime mess in a nutshell.... banks that allowed too many risky loans, and borrowers that were irrisponsible to take out loans they could not repay.

 

[Rustic23]

I thought I read early in this 'crisis' that overall the banks were not that effected because of the federal regulators, and that a larger problem is where the packages of loans were sold. i.e. money market accounts.

 

[Goonie]

http://www.youtube.com/watch?v=SJ_qK4g6ntM

Those guys were great! Thanks!

 

[jazz4cash]

I thought I read early in this 'crisis' that overall the banks were not that effected because of the federal regulators, and that a larger problem is where the packages of loans were sold. i.e. money market accounts.

That's what I don't understand. I thought the banks had bundled the mortgages and sold them off to 'wall street', but now it seems it is the banks that are writing down the debt.

Have they been required to repurchase the debt?
Is the writedown against debt that was 'in the pipeline' but not yet sold?

Its as if a drug dealer got hooked on the junk he was peddling.

 

[mathjak107]

not all those subprime loans were able to be sold. some were held on too as well as some were actually guaranteed by the banks that sold them.

the big buyers of mortgages werent allowed to buy these depending on the funds stated policy so banks got caught holding quite a bit.

 

[TromboneAl]

I've also thought about these ignorant people who bought houses they couldn't afford, but I have to admit that when we bought our first house, we had to stretch. The real estate agent talked us into it. We didn't have quite enough for the down payment, so the seller lent us money under the table (so called "hidden second mortgage"). Plus we had an adjustable rate mortgage.

OTOH, we carefully read the loan docs, and considered all the interest rate possibilities. We both had good jobs, although I was laid off soon after buying the house. The house appreciated, and every rate adjustment on the mortgage was downward.

 

[Zoocat]

Much of this was discussed under the thread "Do you want to pay for the subprime freeze?" But I would urge everyone to look at this crisis with a much wider perspective. The very low interest rates encouraged a lot of speculation in mortgages and those investors who bought mortgages from brokers and banks also speculated and kept the bubble inflating. They also are now paying the price. This crisis has lots of blame to go around and it should not all be laid at the feet of mortgage holders.

Here's an interesting point of view that you won't read in the mass media--
charles hugh smith-Weblog and wEssays

 

[steve88]

Subprime was also utilized by people who moved up to a bigger homes. Flip this house was also using subprime.

 

[jazz4cash]

not all those subprime loans were able to be sold. some were held on too as well as some were actually guaranteed by the banks that sold them.

the big buyers of mortgages werent allowed to buy these depending on the funds stated policy so banks got caught holding quite a bit.

Well that sounds exactly like a drug dealer getting hooked on his own dope. They knew some of the debt was not eligible for placement, but tried to slice and dice in such a way as to offset the risk...works for awhile and then wham!

 

[jazz4cash]

I've also thought about these ignorant people who bought houses they couldn't afford, but I have to admit that when we bought our first house, we had to stretch. The real estate agent talked us into it. We didn't have quite enough for the down payment, so the seller lent us money under the table (so called "hidden second mortgage"). Plus we had an adjustable rate mortgage.

OTOH, we carefully read the loan docs, and considered all the interest rate possibilities. We both had good jobs, although I was laid off soon after buying the house. The house appreciated, and every rate adjustment on the mortgage was downward.

Granted many folks were ignorant, greedy, etc........but most just don't understand finance like folks on this board. Two co-workers revealed thier stories to me....neither would I consider 'ignorant'. They read thier docs too....but didn't understand what they were reading and relied on the wrong people for answers. Were they responsible for thier own problems...yes! Was the deck stacked against them....probably! I was shocked. Now Im wondering how many others that I know made similar mistakes and don't even know it yet.

 

[barbarus]

Subprime is only the overture.
The main part of the finantial firestorm is yet to begin in earnest.