Home interest rates and the financial crisis

  1. Many homebuyers bought houses with adjustable-rate mortgages. Were they paying their mortgages before their interest rates reset?

  2. Many homebuyers bought houses with interest-only mortgages. Were they paying their mortgages before their interest rates reset?

  3. ISTM that there were a lot of early warning signs that people would lose their houses when interest rates reset, and that would drive down the housing market.

What would have happened if lenders heeded the warnings (having already gotten themselves into a bad situation) and kept the mortgages at their original interest rates and also stopped lending to sub-prime borrowers?

I have an idea that it might have bought some time, but that if nothing else was done the economy would still have collapsed.

The key is that once the lenders had sold the mortgages on, they did not have the legal ability to change the rate even if they had the will to do so.

The investors who bought the mortages had a contract with the loan terms locked in.

And then once you factor in the dicing and slicing of the CDOs, etc., you get the effect that to change John Smith of 123 Main Steet’s individual mortgage, you need to renegotiate hundreds of deals with the hundreds of people who each own $15-worth of John’s mortgage.

That Gordian knot is what made the slide of the last 18 months all but inevitable. Unless the Feds were willing to simply at a stroke rewrite every mortgage by law, and tell the investors to all go pound sand. But they in turn had already leant the proceeds they expected to make to somebody else, so they’d be insolvent if the Feds ate their expected higher returns. …

Any way you look at it, the house of cards was holding itself up off the table. Just like Wile E. Coyote running off the cliff, he can hang there in mid-air as long as he doesn’t look down. But once he does look down & reality dawns, he’s doomed to the fall.

I hadn’t thought of that. Thanks.

This is not really true. The lenders certainly could have sent letters to the people with mortgages saying we have decided to keep your interest rates low. The people with mortgages would need to agree to the new terms. If the terms were better for the borrows I would think that most would accept the new terms. This is not really any different than refinancing your loan with your current lender. My mortgage holder sends me email about once a month with exciting no closing cost refinance opportunities for current customers. Sadly the do not seem to be at a lower interest rate than my current 5.25%.

They were sold the idea that the house would go up in value and you would have equity to tap or be able to get a new mortgage. In worst conditions. you would have to sell and make money.
It did not work out that way. I saw a program yesterday about an expensive subdivision in California that is littered with empty foreclosed homes. They interviewed a young couple who said their mortgage had gone up 1500 dollars. Their house had dropped significantly in value. They are considering walking away. They could buy next door and save a ton of money. If they can get a mortgage.