Can someone explain what the deal is with the "mortgage crisis" (USA)?

[MsRobyn]

@Balthisar

But remember I said “There’s a real cost save to avoiding them if you have the means. ‘Have the means’ being key.” I bought my first house with zero down payment, financed 102%, seller paid all closing costs, and I walked away with a refund check at closing. Luckily 2% of the value of that house was relatively little, even given what I earned at the time! That was a VA-backed loan, as I’m a proud veteran having served during a time of war.

The current house, though, would have cost me 2% for nothing. I still had the motivated seller pay all the closing costs, throw in some of goodies in the garage (like the tractor), and I walked away from closing with a check. Rather than paying PMI, wasting savings on a down payment, or paying the VA 2% of the sale price, I did an 80/20 split loan. Closing costs were all fully disclosed on the exact, same FHA form that you use for FHA and VA loans, and nothing was out of bounds, and the interest was good. The true closing costs were less than 2% of the price of the home. No way would VA have been a good idea for me.

By the way, the checks are result of refunds from pre-pays, like insurance and such, which are rolled into the closing costs, paid 100% by the sellers.

So, like I implied, the VA is a valid option, but like I said, if you have the means, there’s a cost-save in not using them.

Having considered this further, I think it’s safe to say that there are more mortgage choices available, and some people have gotten more sophisticated about them. YMMV.

Robin

[berff]

@Uncommon Sense

Related question;

What happens if you can’t make your full payment? Is it automatic foreclosure?
If your mortgage goes from $1,100/mo to $1,700 and you can only afford, say, $1,400 and you make (and are willing to continue to make) that payment what will the banks likely do?
Isn’t it better to get most of the money than (presumably) none?

Banks do not want to be in the real estate business and generally prefer not to foreclose, especially if the net recovery amount is much less than the amount required to pay off the loan.

If you cannot afford the full payment, banks may work with you to reduce your monthly payment by modifying the original agreement, sometimes by increasing the term or by reducing the interest rate. In some cases, banks may also accept less than the payoff amount if you decide to sell your home.

[Measure_for_Measure]

@Exapno Mapcase

The ratings agencies provide the hinge for all this to turn on. AAA-rated securities are the best there are. For most of history they were as safe as U.S. treasury bonds. You’ve have to be an idiot to pass up an opportunity to invest in a high return AAA loan. It’s like ignoring hundred dollar bills wafting through the air. So if many of the re-re-re-sold loans were given AAA ratings it’s because somebody fell down along the way.

Well, there may also be systemic agency problems, but…

Here’s an anecdote. Adams Square Funding liquidated within the past month. Some of the “Super Senior” debt paid off in part. But some investors in plain vanilla “Senior Debt” received nothing. Some of that now-worthless Senior Debt was rated AAA earlier this year. Remarkable.

[msmith537]

1. I have a mortgage. I pay it as scheduled each month (plus a little bit extra toward principal). It is not now, nor has it ever been, late (furiously knocking on wood). Does the mortgage crisis affect me?

Not directly, no. It may affect you in indirect ways which I will get to later.
2) Why are mortgage lenders so eager to make bad loans? If they don’t get paid back, how do the banks earn money?

The lenders earn a commission on the amount of loans the issue. Those loans are then packaged and securitized and sold off to investment banks. So the person who made the loan doesn’t really care so much about whether it gets paid or not.
3) Even if these lenders go under, why is that a crisis? Shouldn’t poorly run businesses falter and fail while well-run businesses succeed?

Yes, and theoretically the homeowners who can’t afford their mortgages should be foreclosed on. However, there are several problems here. One is the sheer number of homeowners involved. Having that many families suddenly become homeless is not desireable and the banks really don’t have the resources to foreclose on so many homeowners anyway. Also, as I mentioned those loans were securitized and sold to banks as CDOs. If you have any investments like mutual funds or your 401k that are backed by those CDOs, those investments will suffer.
3) Does the mortgage crisis affect Americans who do not have mortgages but do have deposit accounts in banks that make mortgages?

Not so much with deposit accounts. Those are insured by the FDIC. As I mentioned above, if you have any mutual funds that contain any securitized sub-prime mortgages, they may suffer.
4) Does any of this mean it is a good time or a bad time to refinance a well managed mortgage? Should the crisis not even be a factor in my deciding whether or not to pursue a refinance? Is this a good or bad time to apply for a new mortgage?

It’s generally a bad time because banks are less welling to lend out credit.
5) What are the political ramifications? Have political leaders (the president, congresspeople) brought about, exacerbated, or profited from this crisis? Did they ignore opportunities to prevent the crisis? Is there a political party or ideology that could be or should be blamed?

No one has really been pointing fingers at any particular political figures and I don’t know of anyone profiting by this crisis (and I know a number of people who work in those markets).
6) Why is the federal government trying to solve the mortgage crisis? Is it their problem to solve?

The Fed has lowered interest rates in an attempt to reduce the number of foreclosures. It is the governments’s problem in the sense that they would like to limit the damage to the overall economy as much as possible.

@Throatwarbler Mangrove

The people who were speculating on price increases largely have no “skin in the game”. It’s a fact of the American entitlement society that “homeowners are losing their homes” is an acceptable description of the current phenomenon. Anyone who even has a basic understanding of what a mortgage is can see that it is incorrect - you only “own” something when you pay for it. REAL “homeowners” of course, cannot “lose their homes”. People who were able to get a secured loan on which they are now in default have not “lost” anything, since they never actually owned anything to begin with. Why should anyone shed a tear for them? They are no worse off than they were before, and if the market corrects itself, maybe they’ll actually be able to buy a house for real in the near future.

Whether you technically “own” your home if you are still paying off a mortgage is a moot point. If you cannot pay your mortgage, you lose your home and have to go find a new place to live. I will agree that no one should shed a tear for speculators or greedy buyers who purchased a house they could never afford, however there is no benefit to the economy to 1) have thousands of people suddenly become homeless and 2) have thousands of homeowners suddenly lose the value of their homes.

Also, the problem is compounded by the fact that there is no credit to be had. So those young people who would be interested in buying the bargain price houses won’t be able to secure mortgages to buy them with,

[Balthisar]

This kind of reminds me of what I’ve learned about the devaluation of the Peso back in '94 in Mexico. In that case, all of the interest rates shot up. Banks were foreclosing on homes and cars and everything credit related. It took another country to guarantee loans from private banks to stabilize their currency. Lots of people say auto loans are next, here.

[ParentalAdvisory]

@Throatwarbler Mangrove

REAL “homeowners” of course, cannot “lose their homes”.

Even with a 100%, no mortgage homeownership–skip that tax bill a few times and you’ll see who really owns your home.

[mack]

@Drum God

Even if these lenders go under, why is that a crisis?

Because the big fish eat the little fish and when the little fish are toxic and wormy, that’s not so good for the big fish.