Posted on 12/08/2007 4:42:53 AM PST by Kaslin
Like obnoxious relatives, the mortgage mess won’t go away. Some two million adjustable-rate mortgages (ARMs) will reset over the next two years, and analysts say that within the coming year alone, $362 billion in subprime home mortgages will experience rising interest rates. This will lead to ever more payment defaults and foreclosures, a horrible state of affairs not only for the affected homeowners and lenders, but also for the financial markets in general.
As is their wont, officials from both parties are rushing to offer “solutions.” The Bush administration is urging lenders to maintain the low teaser rates on ARMs, while Hillary Clinton recently advocated a 90-day moratorium on home foreclosures. Although casting themselves as knights rescuing beleaguered citizens from greedy corporations, in truth these politicians will only make matters worse.
In his classic Economics in One Lesson, Henry Hazlitt said that the good economist looks not only at the obvious, immediate beneficiaries of a government policy, but also considers the long run, hidden costs. We should do the same with the latest mortgage proposals. Although particular homeowners may benefit in the short run, such government tinkering will ultimately harm average Americans by distorting the mortgage industry.
To understand the downside of the recent proposals, we need to step back and ask ourselves why ARMs and foreclosure clauses exist in the first place. They are obviously advantageous to the lender, so it’s no surprise that banks favor them. But why do the borrowers agree to these terms? Why doesn’t everybody simply take out a conventional fixed rate loan, and moreover one that is unsecured—so that the bank can’t seize one’s house in the event of default? Is every borrower just plain stupid for failing to insist on loans of this nature?
Of course not. The reason borrowers agree to adjustable rates (which have the possibility of skyrocketing) and to pledging their home or other assets as collateral, is that this allows them to receive concessions from the bank—in particular, it allows them to borrow a great deal more money than would otherwise be possible. Very few people would persuade a bank to lend them money to buy a house, if the bank didn’t ultimately have the right to take ownership of the house in the event that the borrower couldn’t make the mortgage payments. Yes, borrowers would prefer that they get a $300,000 mortgage with no strings attached, but lenders wouldn’t be too happy with this arrangement. The beauty of a capitalist system is that property owners must compromise to reach mutually beneficial arrangements, since private transactions are voluntary.
Now after individuals enter into these voluntary arrangements, what happens if the government swoops in and invalidates them? There will be short term winners and losers, naturally. And most Americans have no problem with this, because it seems fair to help struggling homeowners at the expense of Wall Street fat cats.
Yet this conclusion is very superficial. Lenders will learn the lesson that their contracts aren’t safe; contrary to popular belief, the government will not serve to enforce the law. (Or rather, the “law” can change on a dime, depending on the public’s mood.) Lenders won’t simply shrug their shoulders, say “aww shucks,” and continue with business as usual.
No, lenders will rationally respond to the new environment, by being much pickier in giving new loans. After all, it becomes much riskier to grant a mortgage to a young couple with little job experience, if the government will shield them from the consequences of default on the loan. Many people say that “the American dream” involves homeownership, yet this will be harder to achieve if the government introduces yet another uncertainty for lenders.
I am aware that the real world process of home buying and financing has its share of shysters and shady practices; every human enterprise does. But the recent proposals aren’t merely about prosecuting outright fraud; no, the politicians want to grant a mulligan to hundreds of thousands who bought homes they couldn’t afford.
The terms and intent of the document can be reinterpreted at will.
Some tenants feel the same way about the lease contracts. No dogs means they can have five dogs because they love dogs. Rent due on the first means a bouncing check on the first is A-OK because Juniors “travel team” costs big bucks. You have to pay for hotels every other weekend so junior can pretend he is Babe Ruth. It for the Children, rent must come last.
I think you assume wrong. People with piggy back loans don't pay PMI and my understanding is that subprime borrowers don't pay PMI either. That is why there is a problem.
Good point. It is Congress that writes laws not consumers or banks.
Okay, what percentage of subprime loans also had piggybacks? How would it be possible for a subprime loan NOT to have PMI when my wife and I, with very good credit, would have to get PMI?
Are you a mortgage broker or have you just heard these things?
Are you familiar with “The American Dream Downpayment Initiative (act) or The American Family Funds Down Payment Assistant Programs”. These programs gave away tax dollars to help make down payments and to pay the closing costs on homes to low income families. We are now having to try to bail them out because we never should have bailed some of them in to home ownership.
The feds made a deal, a contract with the bank, to take on failed savings and loans, with the benefit that the bank would not have to carry the required reserves for many years.
Long story short, the feds reneged AFTER the deal, then put the bank in the tank. Stock in the bank went from 20 dollars per share to 90 cents per share, and the Feds took it over.
The shareholders sued the Feds. It went to the SUPREME COURT. Shareholders WON!! The Feds had to pay back all shareholders.
This is why the supreme court picks are so damm important.
Please. Like you or I didn’t enjoy the last few years of prosperity. We ate well, have great homes. The Fed tinkered with the economy so we didn’t have a depression after 911, we had a short recession instead. The Bush tax cuts actually fueled a lot of this economic boom. That and low interest rates which are a good thing for consumers. I don’t like where we are headed because it means we will have to spend time making lots of financial choices as we tighten our belts. This is not as fun as eating out and having fun with friends on my platinum card.
One report I read said about 50% of subprime loans also had piggyback loans in 2006.
Your loan would be a conventional loan and not a subprime loan.
Are you a mortgage broker or have you just heard these things?
No. I am just trying to figure out what is going on like you are.
Really? Where's all the reinvestment in the country? Or, did Bush really create a false sense of economic security? What did people do with the money? They spent it, or, at least most did. Now we NEED lower taxes to pay for the rise in energy costs across the board. Did Bush fight for "nucyaler" power to ease some of the burden on utilities? Did he encourage companies to reinvest in American industry?
It's all a paper game. People in the mortgage business were giving away mortgages knowing they would be bought out. They made sure they got their fees and sold the notes as quick as they could. It's all paper. Even those people who think they "own" a home while paying high taxes and a mortgage were taken in regardless if it's sub prime.
Debt is the current industry of the U.S. Keep pushing numbers around in Excel till you come out ahead.
94% of people are paying their mortgages on time. This is NOT a “Crisis” anywhere outside the Junk Media and mega bank’s board rooms
If you want to define sub prime as 100% no-doc or stated income loans, then almost all of those loans written over the last three years are 80-20%. At least so far as I’ve seen, and at least five or six a week go through my office. I cannot recall seeing one of those that didn’t have PMI either.
But interest rate resets are the smaller part of the problem, it’s usually the principle that the borrowers cannot pay anymore. The houses they bought were just too expensive, having been bid-up by all the easy credit.They are tapped out; their credit cards are at their limit, and they can no longer use plastic to buy necessities, thus saving their wages for the mortgage payment. Their wages too are declining as part of the general economic slow-down, especially if they are in any business even remotely tied to real estate, hone improvement, or mortgage lending.
What’s going to happen? More easy credit; just watch. Banks can’t make any money if they don’t lend, so watch for mortgage interest rates to fall to maybe 5.5% soon.
As for Energy Policy, YOUR idols the Democrats filibustered the Bush Energy plan. Instead of screaming pure idiocy about Energy take a look at the facts. Despite over a decade of rising energy prices, the US Economy is posting the best sustained economic numbers EVER.
Why? Because contrary to the zero sum fallacy notions of the Freeper Doom and Gloom choir, the Economy actually is a living growing thing that changes and adapts to changing conditions. It call CAPITALISM. Try actually learning something about it before posting anymore ignorant rot.
Yes. All this bail out talk is designed to fix things for Bankers who made bad decisions. They had NO problem pocketing the profits, now they want to shovel the losses onto someone else. What we should be doing is exactly what you said. You bankers, you broke it, you fix it. We suggest you re negotiate the loans, take the loss up front and off your taxes and help these people stay in the homes. If you don't want to do that, foreclose and get in the property management business. What EVER happens, the LAST thing we should be doing in interfering in the Markets. Right now 94% of people are paying their mortgages. This is NOT a crisis anywhere outside some bank's board rooms.
Yes, they could.... if our elected officials had a collected economic IQ higher than a typical woman’s shoe size.
Trouble is, they don’t. I’ve watched most all the Congressional Humphry-Hawkings hearings over the past six years and have to say, the vast, vast majority of those firing questions at the Fed Chairman are... well, not interested in asking pointed questions. They’re asking questions to make themselves look good in front of the cameras, not solicit real monetary policy information.
And as for the press — their adoration is, IMO, the result of the Cult of Greenspan. Before Greenspan, the Fed Chair caught plenty of heat from the press, but by and large, most people didn’t know much about the Fed and the Fed chair didn’t jet around the world, shooting his mouth off at ever economic PR opportunity.
The Federal Reserve does not directly set mortgage interest rates although Fed policies can influence the rates. In the short run, mortgage interest rates do not seem related to Fed policies.
Perhaps if a few lenders and borrowers went bankrupt, a few lessons might be learned.
Right on the money! I'm in the banking world - nothing has happened to prompt that world to do anything, yet - except to continute to do what it does - attempt to avoid foreclosures - work with customers when loans become past due - trust me, banks do not want foreclosures - especially in this housing market - they can easily lose $100,000 on a $500,000 house - pricing adjustments and selling costs - if they can sell it at all.
As for funds to counsel homeowners - counselling is free from lenders - if a loan can be re-structured, lenders will find a way - no government money is needed in this area as well.
BTW - Seniors are already paying for this mess - lower rates on CD's and other fixed term investments. So, money has already changed hands.
I've read that the piggyback loans have dried up for obvious reasons. Is that what your seeing? The piggyback loan is tax deductable while PMI isn't and that was another reason the piggyback was popular.
You are a rabid, irrational idiot. I will never respond to your childishness again.
Someone already pointed me to CRA. Thanks.
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