I saw a stat today that 2% of US mortgages are in foreclosure. Wow! That’s a huge number! Within the past week the Fed chief suggested that lenders ought to take various steps to assist borrowers in trouble. I’ve got no objection to the parties to a contract taking whatever steps they wish to renegotiate their contract, but I’m not thrilled with other proposals I’ve heard that the government either place specific requirements on lenders, or allocate funds to bail out borrowers.
Am I incorrect in believing that both parties brought their problems upon themselves? The borrowers sought to finance homes under terms they could not meet, and lenders extended credit to folks who were unlikely to be able to satisfy the terms. Why exactly is it harmful to allow market forces to settle this out, even if it means some (many?) people will need to find other living arrangements, and many more peoples’ home values will decrease due to a surplus of houses on the market? In the process, perhaps a great many people will get a better idea about living within their means.
Have we allowed our economy to get to the point where it depends on people over-extending themselves to acquire houses and stuff they really can’t afford?
If there are any direct government subsidies, perhaps the government could offer to pay the first month’s rent for people who get foreclosed upon and need to move to an apartment. And maybe the government could make direct payments to moving and storage companies, to ease their transition.
We recently refinanced my house. We got a lower interest rate, dropped the PMI, and shortened the length of the loan, and our monthly payment dropped about $50.
I’m all for letting the market sort this out…most mortgages out there are just fine.
I’ll have to hunt around for a link, but I found a really interesting story on line one day that is similar to something my sister is going through.
While we tend to look down at those who gambled on low ARM’s back in the halcyon days of the housing boom, there is another type of person being foreclosed upon.
Story I read said there was a woman and her husband who bought a house. They were retired or semi-retired and this was no cheapie house. $400K or something, built for them per their specifications.
They moved in and were really happy for about five minutes. Hubby goes upstairs, enjoys a jacuzzi, comes downstairs. Not long after, the DINING ROOM CEILING FALLS! It turns out that when they put in the jacuzzi, nobody hooked it up to drain…all that water had collected in the ceiling till it reached critical weight and PLOP!
This wasn’t an isolated incident in the home. One total fuckup after another. Point being, when it was all SELLSELLSELL in the market, they couldn’t build homes fast enough…literally. So they did shoddy work, verging on criminal, that they knew wouldn’t be detected till after closing and so on. Legal remedies? Some were required to sign that they would go to arbitration before going to court, which the article indicated was a kangaroo court all its own.
They ended up in foreclosure because they couldn’t afford to pay for the house AND pay for these staggering repairs (how do you live in a house without a dining room ceiling etc. while justice slowly grinds along?).
I probably got some of the details wrong but that was the gist. My sister has been trying to get her brand new house fixed…she’s had similar problems, though not as dramatic. Keeps finding something that wasn’t done right, may have to tear out all the plumbing, etc.
Personally, I’m not interested in destroying the economy in order to teach people a lesson about fiscal conservatism.
The free market is sort of like the wilderness. You have an exploding deer population, do you let the “free market” sort it out? You could, but that means having massive overpopulation followed by mass starvation, migration and destruction of all manner of foliage as deer struggle to survive. Eventually, enough of them will starve so that the population drops to a manageable level, awaiting the next buildup. Or, you could take action and selectively cull the herd of females, so that you never wind up with overpopulation in the first place.
Let the free market sort this out all by itself, and it could totally screw up the real estate market, bleed over into other markets, and cause a depression that takes a decade or more to recover from. Or, you take action now to make sure the correction occurs in a way that doesn’t foul up everything for everyone.
The understandable impulse to minimize foreclosures should not be a pretext to prop up the housing market by rescuing too many strapped homeowners. Though cruel, foreclosures and falling home values have the virtue of bringing prices to a level where housing can escape its present stagnation. Helping today’s homeowners makes little sense if it penalizes tomorrow’s homeowners. An unstoppable free fall of prices seems unlikely. Slumping home construction and sales have left much pent-up demand. What will release that demand are affordable prices.
Good analogy, but you need to follow it to it’s logical conclusion. It’s about as easy to manage the economy is it is to manage the wilderness. You can’t single out one little piece of the wilderness and decide the “manage” it without effecting the rest of the wilderness. The reason you have an exploding deer population is because you probably did something to try and manage some other aspect of the wilderness in the first place.
So, in principle I agree with you that it’s no good to ruin the economy just teach people a lesson, except that teaching people a lesson is a big part of the economy. Before you do something, you should ask yourself if it not teaching people a lesson is worse for the economy than teaching them that lesson. And it’s a lot more that just “teaching people a lesson”. Some prices need to get back to equilibrium, and propping them up just makes the economy worse in the long run.
Yeah it was terrible how those people forced finance companies to OK loans like that. As a matter of fact zero percent down mortgages had to be forced on the finance companies. They of course can not be at fault. They were making millions .What could be wrong with that.
Loan companies that approved them . Just got screwed over didn’t they.? I personally forced refinancing companies to send me emails and letters everyday telling me how I could make out with a no money down variable rate mortgage.
I’m not looking to prop up the prices, I’m thinking more of easing the fall. You tighten up credit to more appropriate levels, you keep a handle on the foreclosure rate, and prices will go down over time. There are plenty of houses on the market today, keeping foreclosures down to manageable levels isn’t going to choke the supply.
Foreclosures now are only 1-2% of total mortgages. As noted upthread, during the Depression it was close to 10%. I think we’re already at a “manageable level.” In other words, 98-99% of mortgages are just fine.
At the moment there are no good answers. The trouble with teaching people lessons is that a lot of people who did nothing wrong will get taught lessons also. As property values nosedive so do city revenues. To cut costs they’ll have to do things like lay off cops. The state is cutting education, so teachers are going to go. In Cheesesteak’s analogy, it is like some guy with a garden near the wilderness getting it trashed because some other people are opposed to shooting Bambi.
I’m having a hard time keeping up, but it seems like a lot of our big banks are going to sell parts of themselves to oil-rich Arabs to keep afloat, cities are already getting screwed by very high interest rates on bond markets that were supposed to be safe investments, and some of the bond and mortgage companies are at risk. So we can’t let the market sort it out, but we also can’t just bail everyone out.
This is a splendid example of the case for regulation.
It has to get in line. Poisoning of pet food, lead in kids toys …there are lots of examples of why regulation is what we should be doing. The mortgage crisis is a creation of the lenders. No9 home buyer is responsible for a few billion in bad loans.
Actually, it is. All these years of pressure to buy while not there was no wage growth for the middle class led to people over-extending themselves with equity etc. The bill had to come due some time. If people had acted rationally, the economy would have crashed several years ago.
We’ve had lots of threads where we asked if WalMart etc. didn’t pay people living wages, how did they expect people to buy their stuff. The answer was by using their home as an ATM. The ATM has closed.
There has been tons of research showing that people do not make the rational economic decisions expected by classical economics. Lenders cannot expect borrowers only to apply for loans they can afford. That used to be the case - until lenders sold the loans and didn’t care if the borrowers could afford it or not.
The economy is like a blind person wandering in a field. You don’t want to constrain him too tightly - but you do want to put some fences in front of the cliff and the river.
IMO it’s like betting in Vegas. Mortgage companies were hoping for big rewards, buyers were getting way more house than they could otherwise afford, and as long as that upward trend continued it was all good.
I bought my place in Nov 02 and a few people gave me looks because I wouldn’t go ARM. I’m just not a betting guy. So I was the stupid guy who wouldn’t take a sure bet, but I feel a lot smarter now.
I wonder how the numbers crunch out on a foreclosure. When I bought, my agent told me that I shouldn’t plan to sell for at least three years, which I took to mean that was a “break even” point. I was paying $700 for an apt and got a $1000 mortgage for a house, so after 36 months, the $300 diff would be $10,800. Then there was downpayment, borrowing costs, etc. If I profited $20K from a sale after three years, maybe it would have sort of balanced.
Not thrilling to be foreclosed on, but maybe for some it wouldn’t have been the financial beating it conjures in the mind. Then the market tanked and people had to sell below what they paid, leaving them upside down…the optimistic math went out the window.
You know times are bad when Bank of America offers an “interest only” loan for ten years, as a precursor to the standard 30 year loan. I believe they call it a “ten-year mortgage,” but that seems wrong to me. As my consumer ec teacher told us in high school, the “mort-” in mortgage implies that the loan dies with time…and when it does, you own a house! Here, its slightly-less-evil twin merely appears.
The problems in China are excellent examples of what would happen if the radical free marketers would get their way. You’d think that rational business owners wouldn’t do stuff that would be so shameful that they kill themselves when exposed, right? Doesn’t work that way.
I’d go even beyond the lenders in assigning blame. What happened is that the market cooked up new and innovative financial products that no one really understood - especially not their implications. There was clearly an assumption that the number of people getting in trouble would not exceed a small percentage of the loans bought, which was true for low interest rates and rising prices. Very few people seemed to think what would happen if that wasn’t true. Just about every person in the chain was acting legally and in their own self interest. The exceptions are the mortgage brokers who had their clients put down false information - but that doesn’t seem to be a big factor.
Depends on what you mean by “wrong”. Clearly, they made the wrong investment decision. Doesn’t make the bad people or criminals, but it doesn’t mean that I should have to bail them out either.
Anyway, we went over all this a month or so ago in an identical thread. Anyone interested should do a search. I don’t think there is much more to say than was already said in that (and other) threads.
No, I mean the people who can afford their mortgages, and are current, and have 50% equity with nary an equity loan in site, whose neighborhood is going to hell because of the mistakes of their neighbors, and whose local firestation is going to be closed half the time because the city can no longer afford it - those people.
The thing that has changed since our previous threads (besides things getting worse) is a proposal to have banks cut indebtedness to the current assessed valuation of a house. This seems to me a really, really bad idea for many reasons. I originally thought this thread was going to discuss that.