Posted on 10/08/2008 5:38:00 AM PDT by Sub-Driver
Once the housing market bottoms out (no, it hasn’t happened yet), the number of mortgages “under water” will be closer to 40% (20 million homes). About 25% of those (5 million) will be upside down to the tune of 30%. Currently 6.4% of mortgages are past due. About 2.8% of mortgaged homes are in foreclosure. Only half of the adjustable rate (and balloon) mortgages have reset, so we have a long way to go yet. These default numbers are very likely to rise significantly. FYI, the 700B bailout will cover roughly 5% of all mortgages.
Those fannie mae geniuses (Rains, Johnson) and politicians (Dodd, Frank, and numerous others) who caused this need to return every penny they took on their way to jail.
Way back in the olden days, you'd go to your friendly local bank and get a mortgage for your home. The bank would collect the mortgage payments, escrow payments, and make your tax and insurance payments on the home for you out of the escrow account. Banks would occasionally buy and sell mortgages to each other, but generally if you took out a mortgage with Joe's Bank and Trust, the loan stayed with Joe.
Then some clever fellow (Roosvelt when he created FNMA) figured out that you can take a bunch of these mortgages, and create sort of a stock certificate called a "Mortgage Backed Security." In theory, you could sell the securities like stock or bonds, and the 'value' would be backed by the bundle of mortgages. Since the return rate of these MBSs were greater than a T-Bill, and since the mortgages were backed by real estate and 'guaranteed' by FNMA, they were considered safe investments with good returns.
Once the idea caught on, everybody wanted to buy MBSs, so there needed to be a bunch of new mortgages to bundle and sell. Since most people who could afford a home already had one, the only way to get more mortgages into the market was to open up the "sub-prime" market. Since FNMA (Fannie Mae) and FHLMC (Freddie Mac) would buy these mortgages, and congress 'encouraged' writing loans to disadvantaged people, banks started to issue questionable mortgages including no money down deals, then selling them to Fannie and Freddie the next day.
Now you've got MBSs that are backed up by mortgages that could be solid, could be shaky, or could default and leave behind real estate that is worth less than the value of the loan. All of this has brought about uncertanity in the value of MBSs, and uncertanity means nobody wants them anymore.
If nobody wants them, the price plummets. Uncle Sugar is now offering to buy up to $700 billion worth of these MBSs, thereby creating a market and shoring up prices.
That's my layman's understanding of the situation. If I'm wrong, I'm sure I'll hear about it by a helpful FReeper.
“The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults — “
No matter how many ways I see this stated, I still don’t get it. My house has lost 30% of its “value” but I am not planning on selling, so it is a “paper loss.” When I bought, and then refinanced, I made sure that my mortgage payment was very manageable. So, even though I may owe more than the value, I am still able to make the payment that hasn’t changed.
If we exclude ARM’s, where the payment would adjust up, why are people no longer able to make their payment just because they might be in a situation where they are experiencing “paper losses?”
We bought a house last August. We laughed at the amount the bank was willing to loan us (which was WAY over what we thought would make a comfortable house payment). We paid 20% down, got a fixed rate loan that was promised to stay at our home town bank and never be sold off. Right now our new house is worth less than what we owe, but hey, we plan on living here until its paid off anyway, and things change.
Of course we still own our old house too. But its paid off, and my brother in law is living in it instead of leaving it to sit empty. If things go completely crazy, at least we’ll never be homeless.
Too bad we’re in the minority when it comes to choosing what you can afford instead of getting what the bank said you can afford.
The subprime primer - financial meltdown explained with stick figures.
Slide show - use arrows at the bottom left of page to advance slides.
http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1
How are you today? Me, I’m doing better than I deserve!
;-)
No amount of bailouts or rate cuts can get us out of this one. It time to stop blaming homeowners. They were never much of the problem.
And for the record, I absolutely hold a lot of these folks to blame for their own mess, especially subprime, but not all home owners. Some people just bought at the peak and have since lost most or all of their equity. If they aren’t forced to refi, then they should keep their end of the contract by paying on a house they owe more on than it is worth. That’s life. Walking away is not acceptable. However, some folks have balloon mortgages that force a refi. In that case, having negative equity means you have to make up the difference in cash. Most folks don’t have 20-50k in cash on hand, so they will have to negotiate with their lender or walk away.
ah... the “secret handshake”! Here’s a $5 tip.
Actually, that list is from a Ron Blue talk that I attended.
He said that he spoke this truism before Congress, and some dem actually said - “hmmm... it appears that this would work at any income level...” - jackass.
Being under water does not automatically mean that someone is going to default. In fact, many mortgages are under water from time to time. The first question is .... are the owners making their payments?
NO, NO, NO. Anyone who buys a new car WITH LESS THAN 20% DOWN is upside down on their loan when they drive off the lot. Being upside down means owing more than the car is worth, not spending more than the car is worth. If your definition were the case, then every car, boat, motorcycle, and snowmobile purchase (with rare collector value execptions) are upside down, because the value decreases with time, but the amount you spent never changed.
Most people who put 10-15% down are upside down for the first year, but by the second year are above water. It's the NO MONEY DOWN buyers who stretch out payments to 6 years and have a high interest rate that remain upside down for a very long time. Sometimes they never recover, when 60 months into their 72 month loan the vehicle has 150,000 miles on it and is falling apart.
In any case, being upside down on a car loan only matters IF YOU HAVE TO SELL EARLY. Which was my point. Being "under water" on your home mortgage only matters if you have to sell immediately.
I’m not advocating it, but I think where gubmint would get involved here is in somehow financing or insuring the initial “forgiveness.”
Anyway, I know I would give up some of my future profits to “buy” a reduced mortgage payment now. There are lots of ways that would help the economy. I see that as a win-win for the economy (and, again, much different from buying the paper off deadbeats).
I must be the only person on the planet who bought a house with the intention of living and raising a family there. When I signed the 15 year note on my house that was technically way less than I could afford, I don’t remember there being an “oops the market tanked” opt out clause, and I read every word with a lawyer.
You sign a note, you pay your debt.
Yes. Your definition of ‘upside down’ vs ‘under water’ is more accurate. One can be under water (worth less than you paid for it) but not upside down (worth less than the mortgage owed.)
But if you’re upside down, by definition you’re under water.
Either condition is not good. Which is why I’ve never bought a new car in my entire life and I’m 58. I never intend to, either. It’s financial malpractice, in my opinion.
What a classic. Tells the whole story, doesn’t it?
Amen to that, FRiend. And with all of the great, clean, low mileage vehicles out there fresh off of a two year lease, there will never be a reason to buy new, IMHO.
I have a neighbor who bought a few years ago when the market was at it’s peak. $458K with a reasonable down payment. Today her house is worth maybe, $250K. She has not used her home as an ATM machine.
Essentially, her equity is gone and on top of that has a ~$150k net loss. A glance at the coming future suggests that she will not see that loss recovered for maybe 40-50 years. And she’ll be 95 years old by then. And here is the motivation to walk away from the houses and the losses. 7 years of bad credit, but save, after interest charges, over $250k in the same loan period. Essentially, while a casual observer might think this is poor money managemnt, or irresponsible, the decision to walk away could be one that determines her financial quality of life for the rest of her remaining life. She is one of the 1:6 mentioned in the article, by no irresponsible fault of her own and I can think of two more people I know of who are in her exact same situation.
And at the time when she bought, nobody was out there telling average poeple like her that the ecomony was gonna bust, that the RE market was gonna tank and that her house was gonna be worth half the value in three short years. If it had been known, she would not have bought that home.
Most homes are the same. If someone can afford their mortgage payments and they have no intention of leaving anytime soon, then the "book value" of their home is almost meaningless.
Be careful here, my understanding is that when a bank forgives loan and take it off the book, that is treated as a gain to the borrower for tax purposes, and now they are stuck with a tax liability, and that you don't just get to walk away from.
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