Explain to me the sub-prime mess?

[Buccaneer]

I guess I play it straight on mortgages: fixed-rates, 30yr type of deals. Why are lenders having troubles right now and what is the sub-prime segment? Are there people getting slammed from adjustable rates and if so, why would anyone have ever taken those conditions? If it's not, why all of sudden are there more foreclosures when the job market has been holding steady?

[wade moore]

I guess I play it straight on mortgages: fixed-rates, 30yr type of deals. Why are lenders having troubles right now and what is the sub-prime segment? Are there people getting slammed from adjustable rates and if so, why would anyone have ever taken those conditions? If it's not, why all of sudden are there more foreclosures when the job market has been holding steady?

I'm somewhat educated on the general idea here, but not the specific issues that have caused my 401k to plummet over the last couple of weeks.

The issue here is that during the housing boom of the last 5-10 years everyone was looking to buy more house and then turn it around for profit. So they couldn't make the payments on a regular 30 yr fixed and would get some type of balloon loan. One of the main ones being "interest only" loans where for the first say 3-5 years you ONLY pay interest - nothing on the principal and then it would cause mortgage payments to be say 1/2 or 1/3 of what it would be. But once that 3-5 years passes the payments skyrocket as they have to start paying off the principal.

So, now that the bubble is bursting these people can't turn around and make a quick buck and they can't make the payments on their mortgage - boom, foreclosures.

In the end - it's a ton of people making stupid, stupid decisions. When you're making a huge purchase like a house you need to educate yourself on what you're doing and not set yourself up for failure like these people did. Not to insult anyone in this situation, but people were idiots for doing this if they did not have some sort of backup to be able to make the mortgage payments.

I'm sure there's more details to it than this, but I know this is a large part of it.

[Peregrine]

Another key factor here is in addition to the individual sub-prime mortgage companies like Countrywide that are having problems, these kind of loans were packaged up with a mix of other mortgages and securities and sold off, so that caused a lot of other companies to have exposure to the problems in the sub-prime segment. Also, companies and institutional investors that took a hit on this had to sell off other securities to raise cash to soak the sub-prime problems, causing stock values of other companies to drop from the mass selloffs.

[King of New York]

It was a perfect storm of greed. Borrowers decided to gamble that interest rates, because they had sunk to historic lows, were going to stay there for a long time: they went for Adjustable Rate Mortgages with very low initial rates and payments in order to buy as much house as possible, and then crossed their fingers that rates and their payments would not go up. Lenders also gambled that historically low interest rates would stay that way for years to come: they threw out traditional income-to-debt ratios and started lending money to people with little income and lots of debt, who could just barely make their initial payments.

Then the interest rates went up--not all that much, but enough to cause the most vulnerable borrowers, the subprime ones who represented the biggest credit risks, to go belly up.

For years I had to endure the taunts of acquaintances about their variable-rate mortgages and low payments, vs. my traditional 30-year fixed payment mortgage.

Of course, if the government decides to bail out all the folks who gambled and lost, then I really was a fool to play it safe.

[wade moore]

Then the interest rates went up--not all that much, but enough to cause the most vulnerable borrowers, the subprime ones who represented the biggest credit risks, to go belly up.I don't think you were necessarily saying it wasn't a factor, but I don't think you can underestimate the perfect storm of the boom in housing costs stopping. I think many of these people were banking on dumping the house either when interest rates started climbing or just before the balloon payments started.


Of course, if the government decides to bail out all the folks who gambled and lost, then I really was a fool to play it safe.

This would potentially make me the maddest at the US Government that I have been in my adult life.

[Kodos]

This would potentially make the maddest at the US Government that I have been in my adult life.

Even madder than getting us into a pointless quagmire war?

[wade moore]

Even madder than getting us into a pointless quagmire war?

Not to derail this thread, but yes.

[Radii]

This would potentially make the maddest at the US Government that I have been in my adult life.

It'd be up there for me as well.

[Peregrine]

This would potentially make me the maddest at the US Government that I have been in my adult life.


For me I think this was when they ditched habeas corpus.

[JPhillips]

Wade: I think you're only partly right. Having just left the DC area after shopping for a house, I think some of the sub-prime mess comes from people who can't afford a traditional mortgage payment. When houses are costing 300K or more it's difficult for families making less than say 80K to make a full payment on a thirty year fixed.

Now I think greed, stupid decisions, etc. inflated the cost of homes, but the fact remains that a lot of families really didn't have another option.

[Masked]

Another key factor here is in addition to the individual sub-prime mortgage companies like Countrywide that are having problems, these kind of loans were packaged up with a mix of other mortgages and securities and sold off, so that caused a lot of other companies to have exposure to the problems in the sub-prime segment. Also, companies and institutional investors that took a hit on this had to sell off other securities to raise cash to soak the sub-prime problems, causing stock values of other companies to drop from the mass selloffs.

Peregrine hit the real key as to why the sub-prime mess is becoming more and more critical - it has moved from being a problem faced by the guy who bought the house next door into one faced by the large, global financial companies.

One key example is the huge secondary market for mortgages that has essentially vanished over the past few weeks. Hedge funds and such hold enormous amounts of these "collaterlized debt obligations". As holders of the original mortgages default on their loans, these CDO's lose value (they become riskier for one thing and the asset, the house, backing the original mortgage has lost value). Without a market for these instruments, there is no way to know what there value is (do they even have value in the extreme case) - so they don't even know how much they have lost. Hedge funds by their very nature are highly leveraged entities. As the value of their assets drop, the banks (and investors) who have lent them vast amounts of money start getting nervous - they try to cash out or ask for more collateral. Now the hedge funds need to raise cash, but they can't sell their CDO's so they are forced to borrow more money at ever higher rates and/or sell whatever they can.

[rowech]

People, mostly 25-40 who live past their means and want as much as possible not realizing what a bad economy might look like is about what it boils down to. Everything else is just a derivative off of manipulating situations to fit under that.

[Buccaneer]

For me I think this was when they ditched habeas corpus.

You call me old? At least I read it in the paper when Lincoln did this.

[wade moore]

Wade: I think you're only partly right. Having just left the DC area after shopping for a house, I think some of the sub-prime mess comes from people who can't afford a traditional mortgage payment. When houses are costing 300K or more it's difficult for families making less than say 80K to make a full payment on a thirty year fixed.

Now I think greed, stupid decisions, etc. inflated the cost of homes, but the fact remains that a lot of families really didn't have another option.

I forgot you left the DC area..

Anyway... we'd probably disagree here on what "didn't have another option" means.. I understand what you're saying, I think I'd disagree with some of your definitions though.

[Buccaneer]

Thanks for all of the explainations, I understand now. Did anyone not see this coming, esp. when real estate prices in some parts of the country shot up unpredictably?

[wade moore]

Thanks for all of the explainations, I understand now. Did anyone not see this coming, esp. when real estate prices in some parts of the country shot up unpredictably?

I'd argue that a lot of people I know saw it coming.. I know my father and I talked about this before I bought a house and that was 3 years ago.

[Crapshoot]

Stupid people caught up in the rat race with the Joneses. If you make $3,000 a month, you are not going to be able to afford a house that costs $4,000 a month. This isn't rocket science.

[Chief Rum]

Remember, guys, financial institutions aren't in the business of owning property. And that's exactly what's happening now. Foreclosures are at an alltime high, but the buyer's market is pitiful, because people can't afford the houses at their current prices and at current rates. The result is, no one comes along to buy the foreclosed property, and the bank has to take on the property itself. Which is a liability for them. Not only are they not receiving payments for that property anymore, they are essentially paying interest on themselves. It's money leaking away. And that doesn't even mention that now they are responsible for the upkeep of those properties if they want them to hold their value until they can offload them.

These financial institutions have taken on huge costs with no apparent revenues coming in the near future.

I have to tell you, in the past three months, I have written tons--and I mean tons--of REO policies (that's the final actual step of foreclosure wherein the beneficiary of the mortgage loan receives the property as compensation for lack of payment) for financial lending institutions.

[st.cronin]

I think lots of people saw it coming, too. The question wasn't IF it would happen, but WHEN it would happen.

[rowech]

Thanks for all of the explainations, I understand now. Did anyone not see this coming, esp. when real estate prices in some parts of the country shot up unpredictably?

The economy's a balloon. It can't expand forever nor can it expand too fast.

[wade moore]

I think lots of people saw it coming, too. The question wasn't IF it would happen, but WHEN it would happen.*ding ding ding*

[Buccaneer]

There is a real estate web site that begins with "z" that I remembered looking at for a while. It showed, for each property, the appraised value over a 10-20+ period in a line graph. I was looking at properties all over the country to get an idea of comparative values and was surprised to see in some parts, the ridiculous spike in values that screamed correction. Fortunately, my property still has a nice steady climb to it.

[JPhillips]

A nice illustrative movie.

<object width="425" height="350"><param name="movie" value="http://www.youtube.com/v/kUldGc06S3U"></param><param name="wmode" value="transparent"></param><embed src="http://www.youtube.com/v/kUldGc06S3U" type="application/x-shockwave-flash" wmode="transparent" width="425" height="350"></embed></object>

[Craptacular]

Zillow.com

[Maple Leafs]

They're both longtime posters here and have the respect of everyone. I think we're all aware of the almost unbearable sexual tension between them, but I'm not sure I'd call it a "mess".

[PilotMan]

On the one hand it makes me glad that we didn't buy a couple of years ago when we were looking and at the same time ticked off, that when we will finally be able to buy we are going to need 20% down again. And folks, that ain't happenin' for a looooong time. Third, if you are an investor, right now has to be a goldmine of opportunity, if you can get the right deal.

[Buccaneer]

Parts of the country have gone through this before in the past 30 years.

[sterlingice]

Glad I stopped in this thread. They had about a 5 minute blurb about this on NPR a few days ago but this fills in some of the gaps :)

SI

[Buccaneer]

Thanks, Crappy. Here's what I mean - the value of my house over the past 10 years.

http://home.comcast.net/~ouray2/images/house.jpg

I guess there was a small spike the middle of last year but it seems to be back on the predictive track (the house is a little over 10 years old). Or does all of this mess apply to new homes in the past few years?

[sterlingice]

A nice illustrative movie.

It's not Schoolhouse Rock but a great idea, nonetheless.


SI<object height="350" width="425"></object>

[knolysis]

I hope you don't mind a long time lurker joining the discussion as I find the current mess somewhat fascinating.

My guess is that Bucc posted because the subprime mess is dominating the headlines and he wants to know why. As he pointed out, the job market seems fine, and could be argued to be improving.

My take on the situation is that the growth of financial markets and resulting complexities of investment strategies (e.g., hedge funds) have caused underlying investments to become entertwined in ways that are not fully understood by economists and professional money managers. Losses in one area of the market unpredictably spill over into another area.

Right now, investors are finding it difficult to sell various types of investments as many markets have suddenly become illiquid (a basic economic tenet is that the price of a security is partially determined by how easy it is to sell it, refered to as its liquidity). Losses have caused buyers to pull back from the markets.

The other option is to borrow money rather than sell securities. Unfortnately, because banks have been taking losses or aren't sure if they will take losses, they haven't been lending money (which is why the Fed injected some funds into the banking system earlier in the week).

Thus, instead of being able to sell bad investments or get a loan to ride it out, investors start selling the good investments they own to raise cash. This means my 401(k) and Roth IRA have been taking it on the chin lately as there are now more sellers than buyers in the market.

[wade moore]

Blah, this site still has little to no data for my area... at least specifically where my house is.

[Buccaneer]

Thanks, knolysis, for posting and welcome to FOFC. Hope you can become a regular.

[Celeval]

You're thinking of zillow, I think.

We had some of the same questions, although not so far-seeing as we just bought at the start of this year. 30-year fixed for us - although we're pretty conservative financially anyway.

[JPhillips]

The underlying problem is how leveraged the market is. Here are a couple of data points I saw.

The cash positions in mutual funds stand at 3.8%, slightly below the 3.9% low established in 1972.

Margin debt as a percentage of the S&P market cap has climbed to 2.4%, an all-time high. The previous peak? Early 2000, at the height of the Internet bubble.

[Buccaneer]

The underlying problem is how leveraged the market is. Here are a couple of data points I saw.

The cash positions in mutual funds stand at 3.8%, slightly below the 3.9% low established in 1972.

Margin debt as a percentage of the S&P market cap has climbed to 2.4%, an all-time high. The previous peak? Early 2000, at the height of the Internet bubble.

Highly leveraged due to real estate speculation or is there more?

[knolysis]

The underlying problem is how leveraged the market is. Here are a couple of data points I saw.

The cash positions in mutual funds stand at 3.8%, slightly below the 3.9% low established in 1972.

Margin debt as a percentage of the S&P market cap has climbed to 2.4%, an all-time high. The previous peak? Early 2000, at the height of the Internet bubble.

I think the data points you have seen are just an indicator of the increasing spread of previously successful investment strategies. Everybody chases performance (even the professional money managers).

The current use of leverage isn't specific to any particular market or strategy. A decade or so ago, it became apparent hedge funds were successful using borrowed money to amplify their returns. Copy cats emerged and now many investors use this same strategy (which is what I think the data point illustrates as the average investor can now buy mutual fund shares that use leverage to amplify returns). Works great in a strong, rising market. Not so great in a weak, falling market as it tends to compound itself as the underlying investments the borrowed funds purchased lose value.

[Logan]

Being one who works for the agency that regulates the national banking system, I'll just say that it makes life a lot easier when national banks only hold 2-3% of the country's subprime mortgages and we force lenders to run an analysis of whether the borrower of an ARM could repay the loan when amortized on a 30-year schedule, and if they don't, we shove a boot up their ass :).

[Crapshoot]

I think the data points you have seen are just an indicator of the increasing spread of previously successful investment strategies. Everybody chases performance (even the professional money managers).

The current use of leverage isn't specific to any particular market or strategy. A decade or so ago, it became apparent hedge funds were successful using borrowed money to amplify their returns. Copy cats emerged and now many investors use this same strategy (which is what I think the data point illustrates as the average investor can now buy mutual fund shares that use leverage to amplify returns). Works great in a strong, rising market. Not so great in a weak, falling market as it tends to compound itself as the underlying investments the borrowed funds purchased lose value.

Bingo. Another common strategy is the yen-carry trade, and that's been beaten to death as well. Arbitrages in today's world basically exist for infinitesimal periods of time - not longer.

[JPhillips]

Buc: From what I've read it goes much deeper than the subprime market. I'm not an investment banker, so everything I know comes second hand.

Second example: today any wealthy individual can take $1 million and go to a prime broker and leverage this amount three times; then the resulting $4 million ($1 equity and $3 debt) can be invested in a fund of funds that will in turn leverage these $4 millions three or four times and invest them in a hedge fund; then the hedge fund will take these funds and leverage them three or four times and buy some very junior tranche of a CDO that is itself levered nine or ten times. At the end of this credit chain, the initial $1 million of equity becomes a $100 million investment out of which $99 million is debt (leverage) and only $1 million is equity. So we got an overall leverage ratio of 100 to 1. Then, even a small 1% fall in the price of the final investment (CDO) wipes out the initial capital and creates a chain of margin calls that unravel this debt house of cards. This unraveling of a Minskian Ponzi credit scheme is exactly what is happening right now in financial markets.

[knolysis]

Bingo. Another common strategy is the yen-carry trade, and that's been beaten to death as well. Arbitrages in today's world basically exist for infinitesimal periods of time - not longer.

Very well stated. It never ceases to amaze me that people acknowledge this basic truth then proceed to ignore it when actually investing. Chasing performance is a fool's game yet new fools show up every day.

[Logan]

One of the main ones being "interest only" loans where for the first say 3-5 years you ONLY pay interest - nothing on the principal and then it would cause mortgage payments to be say 1/2 or 1/3 of what it would be. But once that 3-5 years passes the payments skyrocket as they have to start paying off the principal.

Not to nitpick, but this is a pretty big exaggeration. No matter what product you pick, the early years of your loan will be paid back almost entirely in interest. As anyone who has needed to sell their house shortly after buying it could tell you, you're automatically behind the 8-ball when you factor in closing costs and other fees because you haven't paid down any of the principal balance.

Take a $250k loan at 7%. Your monthly payments on a 30 year fixed will be $1,663. During the first year, you will pay an average of about $1,450 in interest each month, for a total of $17,419 over the course of the year. Meanwhile, you've only paid down $2,500 in principal. So you're saving a couple hundred a month and gambling that your house will appreciate to the point where that is how you're technically paying down the balance.

The huge payment changes arise more from the changes in rates when they reprice. An IO at 4.5% is much different than the fixed at 8%.

[wade moore]

Not to nitpick, but this is a pretty big exaggeration. No matter what product you pick, the early years of your loan will be paid back almost entirely in interest. As anyone who has needed to sell their house shortly after buying it could tell you, you're automatically behind the 8-ball when you factor in closing costs and other fees because you haven't paid down any of the principal balance.

Take a $250k loan at 7%. Your monthly payments on a 30 year fixed will be $1,663. During the first year, you will pay an average of about $1,450 in interest each month, for a total of $17,419 over the course of the year. Meanwhile, you've only paid down $2,500 in principal. So you're saving a couple hundred a month and gambling that your house will appreciate to the point where that is how you're technically paying down the balance.

The huge payment changes arise more from the changes in rates when they reprice. An IO at 4.5% is much different than the fixed at 8%.

Right. I just wasn't explaining myself very well.

[Anthony]

Now I think greed, stupid decisions, etc. inflated the cost of homes, but the fact remains that a lot of families really didn't have another option.

Renting. Co-ops. Condos. that's 3 options right there that don't involve the higher expenses of a house. houses aren't for everyone.

[Mizzou B-ball fan]

Had an amazing foreclosure in my neighborhood recently. Note that this is in the Kansas City area, where prices are relatively low compared to some of the coastal markets that you're discussing.

Home is a 6,000 square foot house (8,200 if you include unfinished basement space. 6 bedroom, 5 bath with a 4 car garage. Lot is one acre and is about 15-20 minute drive from downtown. It sold 1 1/2 years ago to the buyer for $1.2 million. Buyer had a bum loan like you all are discussing and it was foreclosed on. Last weekend, that house sold for $750,000. Quite a steal of a deal.

Another thing that should be mentioned. I've always make sure to take the 15 or 30 year fixed loans. If you take a 30 year loan and make one extra payment each year, you'll pay off that loan in 22 years rather than the 30 years it would take otherwise.

In regards to JPhillips comment that "there weren't any other options", I'd respond that there are plenty. In addition to renting, you can always move. There's a reason Kansas City is adding 25,000 residents a year right now. Lots of jobs available and housing that costs much less than an equivalent home on either coast. Our current home would easily cost 3X as much where we used to live in Baltimore.

[Flasch186]

if I wasnt sick I'd point you all to the thread where I predicted this mess....years ago.

[Draft Dodger]

They're both longtime posters here and have the respect of everyone. I think we're all aware of the almost unbearable sexual tension between them, but I'm not sure I'd call it a "mess".

This.
Is.
An.
AWESOME.
Post.

[sachmo71]

What will the fallout be? More regulation of lending?

[Toddiec]

Let me chime in on this with my opinion as a Real Estate lender. Most people in the industry knew that this bubble would burst sometime in a 3-7 year windows, but everyone had different methods to "get out of it" when the time came (remember I am talking from a bank standpoint, not the borrower). When the boom began a bunch of fly-by-night mortgage companies popped up everywhere to take advantage of not only the new house craze but the massive increase in refinances. They would take the large closing costs and then sell the loan to the secondary market (the Fannie Mae's of the world). So, the loan is no longer on their books, they get their one time income shot from the closing fees and all is good with them.

From there it is a trickle effect. The banks and credit unions had to do something to avoid being undercut by the mortage companies (and I am generalizing, it was more than just mortgage companies...they are not the evil entity I make them out to be in this theory) so they lowered rates. But that wasn't enough because EVERYONE had low rates, so they started lowering their lending requirements such as credit score guidelines etc. They then went with 110% financing and that kind of thing. Now, the appraisers also felt the crunch because banks wanted to meet the customers demands of buying the houses at inflated prices (people selling property took advantage of this boom as well) so you saw appraisal values spike.

So in the end, super low interest rate loans with decreased lending requirements and artificially increased appraisal values let people who normally couldn't get into a $300,000 house, for example, now suddenly be able to do so. So a lot of people took advantage of it.

Now comes the kicker. The banks and credit unions and mortage companies aren't stupid. They knew the balloon would burst, so they put in the interest rate kickers at 3 and 5 years. The sweetest deals out there were the 3 and 5 year variable type notes because thats what the lenders wanted people to get so they (lenders) would be protected. If you locked yourself in at a 20-30 year fixed rate at super low interest rates you were golden, but if you got a variable one, you were setting yourself up for a fall.

So here we are. The bubble burst and the interest rates are ballooning on Joe Blows variable rate note and all of the sudden he can't afford the payments. Unfortunately, he borrowed money on an inflated appraisal rate, so more often than not the borrower is head over heels in his mortage. He now owes more on a house than it is worth (thus the difficulty selling it because he wants enough to get out at least even) and can't afford the payments. The only real option is to walk away in a lot of cases.

Now, this is all my opinion from being in the lending business. I really have no idea of how wide spread the problem with repo's are going to be. It could be just a small number of really vocal people, but we won't know that until we can look back on all of this in a decade or so. Really, overall it is an interesting example of opportunity cost and short term vs. long term economic benefits.

[NoMyths]

Interesting thread -- let this be the rebuttal to the "Why would you ask a serious question around here?" folks.

[mrsimperless]

SWEEEEYIT!

The fed just cut the rates a half point! Now I can go out and get that ARM I've been wanting!!

[Toddiec]

What will the fallout be? More regulation of lending?

Probably. Heck, when someone accidentally runs into the curb outside the bank we get five more pages of loan regs and requirements from the Feds. :)

[Coffee Warlord]

Hey, I'm kinda hoping I can snag a foreclosed house in the near future. Gonna be in the market very soon, so here's hoping I can profit off other people's stupidity.

[knolysis]

What will the fallout be? More regulation of lending?

I think answering your first question is what is causing the current headline grabbing news. Nobody knows because investors that bought what were "safe" investments at the time suddenly find themselves holding below investment grade securities with little prior warning. If it keeps spreading globally it could put real pressure on economic growth. I hope the answer to your second question is "No". From the indications I read, mortgage investors poured cash into the secondary loan market (where mortgages are bought and sold) in search of higher returns. Lenders simply reacted by making more loans (which went to barely or unqualified borrowers). If we can weather the storm without Uncle Sam's intervention, it should sort itself out and the lenders that took the worst risks will be chewed up and spit out, restoring order to the market.

[Mizzou B-ball fan]

For those in the lending or broker business, what's going on with the interest percentages at this point. Where are they when compared to a year ago? Are they expected to drop further or will the banks have to keep them a bit higher to recoup on all the lost money on foreclosures? Will the fed rate drop of 1/2 point affect the interest rate?

[flere-imsaho]

Excellent thread. I was going to add more detailed content, but having read through it, there have been some explanatory posts. However, let me put a plug in that had one been a regular listener to NPR's "Marketplace" (they also have a podcast), you would have heard much of these explanations as well, and earlier. Great program. But I digress.

This would potentially make me the maddest at the US Government that I have been in my adult life.

Bear in mind, wade, that the government probably isn't going to bail out the borrowers, but likely a good number of the lenders, especially the bigger and more well-known ones. Countrywide springs to mind, as will any bank that we find out got caught up in the mess. From a bailout standpoint, this strikes me as the S&L scandal all over again.

Not to derail this thread, but yes.

Come on, for real? Government wasting money on people's stupidity > People dying?

Thanks for all of the explainations, I understand now. Did anyone not see this coming, esp. when real estate prices in some parts of the country shot up unpredictably?

People have definitely seen it coming for years. The activity of people borrowing past their means was always something that was going to end badly. However, I think a lot of people (and clearly many in the Fed thought this - just look at their past statements) thought the fallout would be relegated to a) those who mortgaged past their means and b) a bunch of the sub-prime lenders themselves. So yes, a "crash", but not one like what we're seeing.

What people didn't see (and again, Federal regulatory bodies, or even industry regulatory bodies are especially culpable since they should understand this process intrinsically) was that these mortgages would be bundled up and sold across the banking spectrum as investments. As has been pointed out elsewhere in the thread, it is the loss of value of these investments which is causing the current crisis.

If this was simply a case of a whole mess of folks losing their homes and some fly-by-night lenders going under, it would amount to a bunch of human interest stories on CNN on slow news days. When it's established banks & mortgage companies losing liquidity because they have massive investments that may suddently have little or no value, it's a completely different story.

I guess this is the thing that fries my tail the most. The financial folks at these institutions are smart people. They knew these were incredibly risky investments. They could have limited their liability. But noooooooooo, they had to be so greedy, and now they've put everyone else at risk.

They're both longtime posters here and have the respect of everyone. I think we're all aware of the almost unbearable sexual tension between them, but I'm not sure I'd call it a "mess".

Well played. :)


I guess there was a small spike the middle of last year but it seems to be back on the predictive track (the house is a little over 10 years old). Or does all of this mess apply to new homes in the past few years?

The value of homes is still based on supply vs. demand. For some market segments (condos in Chicago, to pick an example I know about) the demand was artifically inflated, and now that it has dried up, the over-supply combined with a lack of demand has caused prices to plummet. On the other hand, the supply of single-family homes in older Chicago suburbs has remained pretty constant, as has the demand, so prices haven't fluctuated much.

And there are much more extreme examples elsewhere in the country.

Being one who works for the agency that regulates the national banking system, I'll just say that it makes life a lot easier when national banks only hold 2-3% of the country's subprime mortgages and we force lenders to run an analysis of whether the borrower of an ARM could repay the loan when amortized on a 30-year schedule, and if they don't, we shove a boot up their ass :).

What I don't understand is why the entire lending industry can't be regulated this way. Also, I'll tell you this - we qualified for our mortgage just over two years ago and our lender (Countrywide, yeah, egads) was willing to give us a mortgage which would have consumed 80% of our monthly gross income. That's ridiculous. Obviously we bought a house for a lot less (roughly a third of what we qualified for), but I know a lot of people (the people in trouble now) didn't.

What will the fallout be? More regulation of lending?

I'm going to predict that the fallout will be the government bailing out the better-known mortgage companies and banks along the lines of them bailing out the airlines a few years back, but with no new regulation.

[digamma]

The fed cut the discount rate, not the fed funds rate, FYI.

[flere-imsaho]

And the discount rate means the banks themselves can borrow money at a lower price, which will help them with cash flow, which has been one of the bigger stresses in this situation.

[albionmoonlight]

I guess this is the thing that fries my tail the most. The financial folks at these institutions are smart people. They knew these were incredibly risky investments. They could have limited their liability. But noooooooooo, they had to be so greedy, and now they've put everyone else at risk.

Although, since they will probably get bailed out, it really wasn't a stupid play was it?

Let's take a chance. If it hits, then we make a ton of money. If it fails, then the government will bail us out in order to "save the economy."

It's kind of sad to say, but I think that these guys knew exactly what they were doing--gambling with taxpayer money.

[st.cronin]

I also assume there will be some level of bail out from the government. I'm also completely fine with that, even if it extends to borrowers.

[st.cronin]

Although, since they will probably get bailed out, it really wasn't a stupid play was it?

Let's take a chance. If it hits, then we make a ton of money. If it fails, then the government will bail us out in order to "save the economy."

It's kind of sad to say, but I think that these guys knew exactly what they were doing--gambling with taxpayer money.

I don't believe that being bailed out by the government is part of anybody's plan.

[flere-imsaho]

Although, since they will probably get bailed out, it really wasn't a stupid play was it?

Let's take a chance. If it hits, then we make a ton of money. If it fails, then the government will bail us out in order to "save the economy."

It's kind of sad to say, but I think that these guys knew exactly what they were doing--gambling with taxpayer money.

There's probably a lot of truth to that, with elements of a "gambling culture" at a number of these institutions. And for a while, it worked. Their quarterly returns were excellent. But how cynical....

[st.cronin]

double dola

There is a great deal of uncertainty right now, but really, its no more uncertainty than there usually is about this, that or the other thing. Speaking as a former stockbroker and a financial news geek, I think this has almost zero chance of having any kind of long-term, serious impact on the economy.

[flere-imsaho]

I don't believe that being bailed out by the government is part of anybody's plan.

Depends how you define "bailed out." The Fed has already a) pumped more money into the system and b) cut the discount rate. At these institutions I'm sure there's a fair amount of belief that the Fed will be a safety net should they get too in over their heads, based on the assumption that the Fed's too afraid to let some of these institutions suffer excessive consequences. I'm sure that's some hubris talking, but I don't think it's outside the bounds of reality.

[flere-imsaho]

There is a great deal of uncertainty right now, but really, its no more uncertainty than there usually is about this, that or the other thing. Speaking as a former stockbroker and a financial news geek, I think this has almost zero chance of having any kind of long-term, serious impact on the economy.

Depends how you define "long-term". If the result of this is that good mortgages for all but the best qualified dry up for a few years, then the new home market (and much of the residential building sector) goes into the tank, which has a good number of knock-on effects around the economy. Sure, that would all probably come back in 5-10 years, and perhaps that's what you meant.

The most likely long-term impact, in my opinion, would be a new reticence on the part of international investors to touch certain (or even all) U.S.-based investment products due to their perceived risk.

[Toddiec]

For those in the lending or broker business, what's going on with the interest percentages at this point. Where are they when compared to a year ago? Are they expected to drop further or will the banks have to keep them a bit higher to recoup on all the lost money on foreclosures? Will the fed rate drop of 1/2 point affect the interest rate?

Interest percentages are all over the board depeding on where you are at. I can only speak from a lender in Kansas' viewpoint, but our rates are maybe 1.5 to 2% over where they were in the heart of the boom. That still puts us in the mid to high 6's and low 7's so the rates are not through the roof. The problem we are seeing is that people can't qualify for refinances on the same property they bought three years ago. The vast majority of the time it is because they want to refinance from another institution but they owe 110 - 115% of what the house is now appraised at. So we can't do it.

I can't imagine loan rates would go down to compensate for losses. The Fed regulators are going to be watching this like a hawk because they don't want the market to get into an unstoppable free for all which could (theoretically) happen if lenders start trying to do things to bail themselves out. We don't want something as disasterous as the 80's crash (note..I don't think that will ever happen again due to the regs and Fed oversight of the industry, but that is always the fear that lenders have).

[st.cronin]

Depends how you define "long-term". If the result of this is that good mortgages for all but the best qualified dry up for a few years, then the new home market (and much of the residential building sector) goes into the tank, which has a good number of knock-on effects around the economy. Sure, that would all probably come back in 5-10 years, and perhaps that's what you meant.

The most likely long-term impact, in my opinion, would be a new reticence on the part of international investors to touch certain (or even all) U.S.-based investment products due to their perceived risk.

I think that's the most pessimistic plausible outlook.

[knolysis]

Depends how you define "bailed out." The Fed has already a) pumped more money into the system and b) cut the discount rate. At these institutions I'm sure there's a fair amount of belief that the Fed will be a safety net should they get too in over their heads, based on the assumption that the Fed's too afraid to let some of these institutions suffer excessive consequences. I'm sure that's some hubris talking, but I don't think it's outside the bounds of reality.

I don't see the Fed's actions as bailing out the institutions we are discussing in this thread. I think the Fed's actions are "bailing out" the institutions we are not talking about that now are having a hard time selling assets as part of the normal course of business. See the Sentinel Management Group's recent news. They are finding it difficult to sell securities they own to service client requests to withdraw funds. They are not the only ones in this situation and I think institutions in this situation are the ones the Fed is targeting right now.

[flere-imsaho]

I think that's the most pessimistic plausible outlook.

It was meant to be, so I'm glad I'm on track. :)

I don't see the Fed's actions as bailing out the institutions we are discussing in this thread. I think the Fed's actions are "bailing out" the institutions we are not talking about that now are having a hard time selling assets as part of the normal course of business. See the Sentinel Management Group's recent news. They are finding it difficult to sell securities they own to service client requests to withdraw funds. They are not the only ones in this situation and I think institutions in this situation are the ones the Fed is targeting right now.

That's basically what I meant. I didn't mean to suggest that the Fed is, now, trying to bail out the sub-primes, but that it was trying to help along those who bought the bundled mortgages from the sub-primes.

[gstelmack]

There's probably a lot of truth to that, with elements of a "gambling culture" at a number of these institutions. And for a while, it worked. Their quarterly returns were excellent. But how cynical....

You also have to understand that a lot of these guys get their huge return for the company, get their huge bonus, and LEAVE.

When I was at Salomon Brothers in the early '90s, that was a big gripe with the bonus program they were changing. Your bonus was based on the profit you brought in that year. So guys would lose millions for years on end, get lucky one year thanks to a bounce somewhere and get a bonus for millions, and walk out the door despite having cost the company money over the course of their career.

[wade moore]

Come on, for real? Government wasting money on people's stupidity > People dying? Major oversimplification. I don't want to debate the war in this thread, but serious oversimplification here.

[cubboyroy1826]

Okay here is an insiders view on this mess. I am a mortgage broker and have seen up close a personal the mess the mortgage business has become. One of the big things that helped cause this mess was the fact that lenders got stupid. Wall Street began to pay big money for pools of subprime loans and lenders began to design more exotic options for these subprime borrowers along with allowing no down payment from less than desirable borrowers. Take a look at the Option ARM/ Pick a Payment loans that are still being advertised but are almost nonexistant any more. You know the teaser commercials get a 400k mortgage for $1000 per month. Many people jumped on these loans part because the broker may not ave told the whole truth and part because they were blinded by the great low payment. What they did not understand was that this minimum payment did not even cover the monthly interest. So their mortgage balance climbed each month because most people only paid the minimum. The idea behind this loan is to take the money you save and invest it or do something else with it other than spending it. These loans were bad because the true underlying rate actually adjusted monthly in many cases which is bad in a rising rate environment. Other loans called liar loans were allowing W2 income borrowers to "state" their income. Well if they were telling the truth then they would have shown their W2s. Now some self employed borrowers who right off a whole bunch on their taxes used these loan which is really the market this was intended for. It was estimated that in California more than half of the loans originated were stated income loans.

Next comes the housing bubble. Many homeowners figured that home rates would continue to climb and that rates would stay low. Well as we know in many places home values have leveled off or declined. People cannot refinance because the value has declined, they now have rates that are adjusting by as much as 3% every 6 months to a cap of 6-9% above what their original rate.

Enter the rise in foreclosures. Now these subprime loans that lenders used to bundle together and sell off to Wall Street at a premium of 2-4% were not performing and Wall Street began to lose its appetite for the subprime world. Many lenders were lucky to get 95% of the loan amount from Wall Street as things started to crash. With Wall Street not buying up these loans lenders were forced to change their guidelines to make the product more palatable for sale. Many lender who had lived by high LTV subprime loans had to cut out many of their product and could no longer make enough premium on the loans they did and were forced to close their doors. This ripple affect move over into the A paper lenders that had done a lot of what was called Alt A loans which were for people with good credit but were self employed of didnt want to show any docuementation. The Alt A market was big money for many lenders. Yes they did offer the A paper loans but most of their business came from the other products. Once the investors for Alt A decided this was no longer a good investment a second wave of lenders began having problems like American Home Mortgage. It has come down to the lenders that are backed by bank should survive while the pass through lenders will be lucky to hang around.

In the end it was greed by everyone brokers, lenders, wall street, and homeowners. Everyone can be blamed for the mess things have become and as a broker i am glad that some of the crazy loans are no longer around. They were designed for a specific niche but many of my brethren pushed them on homeowners without telling the whole story. This mess is going to cause a thinning of the herd in the broker world and the lender world.

Okay enough, back to work.

[Logan]

What I don't understand is why the entire lending industry can't be regulated this way.

There's a ton of people out there who work for state banks, credit unions, thrifts, and mortgage companies (regulated by the Fed, OTS, state regulatory agencies, etc) who would literally laugh in the faces of their colleagues who worked for national banks because of the much easier regulation that they went through, and the extra shit they could get away with. Now who's laughing? I was at a Board meeting yesterday for a fairly "large" community bank and the President shook the hand of the head of my team and thanked him for being a hard-ass.

I don't believe that being bailed out by the government is part of anybody's plan.

Having examined a bank that was a big time SBA (small business) lender (where up to 75% of the loan is guaranteed by the government), I'll say that can very well be part of the plan.

[stevew]

if I wasnt sick I'd point you all to the thread where I predicted this mess....years ago.

Yeah, I remember watching the Cramer blow up a few weeks ago, and thinking "that's what Flasch must have been talking about."

[stevew]

Hey, I'm kinda hoping I can snag a foreclosed house in the near future. Gonna be in the market very soon, so here's hoping I can profit off other people's stupidity.

I bought a forclosed house because the previous owners decided they wanted to grow ganja in the basement and crawlspaces. 60 some plants, "for personal use".....yeah right.

[GoldenEagle]

I have a quick question that best fits this thread. I recently sought out a mortgage and got pre-approved, yada yada. The interest rate given to me by the credit union was 6.25%. With this cut in the rate, can I expect to get a 5.75% rate?

[Crapshoot]

Very well stated. It never ceases to amaze me that people acknowledge this basic truth then proceed to ignore it when actually investing. Chasing performance is a fool's game yet new fools show up every day.

Well, that's the thing isn't it? Everyone is chasing Alpha. I always thought the most-appropriate name for a magazine was Alpha, given the audience it catered to. :D

[st.cronin]

I have a quick question that best fits this thread. I recently sought out a mortgage and got pre-approved, yada yada. The interest rate given to me by the credit union was 6.25%. With this cut in the rate, can I expect to get a 5.75% rate?

It never hurts to ask. I think I spent more time and energy choosing a loan for my house, than I did the actual house. I forget what my exact rate turned out to be, but I saved a boatload of money.

[gottimd]

I took a 5 year ARM approximately 2 years ago. The reasons I did were:
A) I bought a Condo that I am not expecting to stay in for more than 5 years
B) Even if I did a 30 yr fixed, more than likely wouldn't have even touched the principle by the time I decided to move
C) I did comparisons based on a "Max fallout" of the interest rates to ensure I would still be able to make the payments assuming a modest merit increase from work year over year.

I went into the market at the worst time in DC, which I am still pissed about. Where I live, places were on the market for no more than 5 days, so everyone was making insane offers. My cousin was in the market in NJ at the same time and he made a bid on a great house, $50K over the asking price. He was outbid by someone who offered $125K over the asking price.

Anyways, my point being is that I went into a sellers market knowing how much I could afford on a monthly basis and capping myself off at that level. Anymore and I would've dipped into other funds and would've have to have lived paycheck to paycheck. Obviously I wanted a house, but at my current financial situation at that time and housing market, I knew I couldn't afford the asking price of $800K-$1M.

So I think its unfair to assume that everyone who took ARMS had no idea what they were doing, and as others pointed out already, it was essentially their only option, that or rent a 1-2BR apt for the same price as a mortgage or live with parents.

[Crapshoot]

double dola

There is a great deal of uncertainty right now, but really, its no more uncertainty than there usually is about this, that or the other thing. Speaking as a former stockbroker and a financial news geek, I think this has almost zero chance of having any kind of long-term, serious impact on the economy.

I ugh disagree. Fundamentally, the American public is hooked on credit. The average household in this country has negative savings - which is ridiculous on the face of it. A significant reason for this outplay of consumption is because felt that they could always tap home equity - treating that as a de0facto savings account. As more and more people realize that the housing bubble was just that, they're either sharply going to reduce consumption or deal with a liquidity crunch. The rest of the world (read: Asian Central Banks) has been happy to buy dollars (my favorite line, which I may have mentioned before, is that the Chinese peasant is subsidizing the American consumer), but this could be the start of a significant problem if the Fed keeps cutting interest rates to spur on reduced cash flow.

[Logan]

I have a quick question that best fits this thread. I recently sought out a mortgage and got pre-approved, yada yada. The interest rate given to me by the credit union was 6.25%. With this cut in the rate, can I expect to get a 5.75% rate?

As st.c said, it can't hurt to ask, but I wouldn't expect it. Mortgage rates have been steadily climbing and the national rate on a 30-year fixed right now is 6.27%, up 4 bp from last week. Click here (http://bankrate.com/brm/rate/brm_mtgsearch.asp?product=1&refi=0) to do a search of current mortgage rates in your area.

So I think its unfair to assume that everyone who took ARMS had no idea what they were doing, and as others pointed out already, it was essentially their only option, that or rent a 1-2BR apt for the same price as a mortgage or live with parents.

Agreed...ARMs can be a very good product for someone who is getting into it for the right reasons, with your #1 reason being the best.

[knolysis]

I have a quick question that best fits this thread. I recently sought out a mortgage and got pre-approved, yada yada. The interest rate given to me by the credit union was 6.25%. With this cut in the rate, can I expect to get a 5.75% rate?

No. Mortgage rates are closely related to 10 year bond rates. Changes in the Fed's discount rate tend to have little effect on long-term bond rates. You should check the conditions of your pre-approval. Depending on what stage of the mortgage you are in, you may have rate-locked the mortgage. I am guessing you haven't actually identified a property yet, so you probably have not locked in so your actual rate will likely be different from what you were "sold" during pre-approval.

[st.cronin]

I ugh disagree. Fundamentally, the American public is hooked on credit.

Its not like that's a new development. Pessimists have been decrying the same thing for at least 30, 40 years now (that I'm aware of). There is also some theory that debt is a GOOD thing for an economy, since it encourages growth. There are things about our economy that I don't like, but overall I would say its stronger than most people think it is.

[Crapshoot]

http://www.economist.com/opinion/displaystory.cfm?story_id=9646451

Good read.

[st.cronin]

One more thing: Everything I read suggests the big losers in this are going to be hedge funds. Hedge funds really contribute nothing at all to anybody except the people that manage them, so that's not at all a bad outcome.

[wade moore]

I took a 5 year ARM approximately 2 years ago. The reasons I did were:
A) I bought a Condo that I am not expecting to stay in for more than 5 years
B) Even if I did a 30 yr fixed, more than likely wouldn't have even touched the principle by the time I decided to move
C) I did comparisons based on a "Max fallout" of the interest rates to ensure I would still be able to make the payments assuming a modest merit increase from work year over year.

I went into the market at the worst time in DC, which I am still pissed about. Where I live, places were on the market for no more than 5 days, so everyone was making insane offers. My cousin was in the market in NJ at the same time and he made a bid on a great house, $50K over the asking price. He was outbid by someone who offered $125K over the asking price.

Anyways, my point being is that I went into a sellers market knowing how much I could afford on a monthly basis and capping myself off at that level. Anymore and I would've dipped into other funds and would've have to have lived paycheck to paycheck. Obviously I wanted a house, but at my current financial situation at that time and housing market, I knew I couldn't afford the asking price of $800K-$1M.

So I think its unfair to assume that everyone who took ARMS had no idea what they were doing, and as others pointed out already, it was essentially their only option, that or rent a 1-2BR apt for the same price as a mortgage or live with parents.

To be clear - I'm not saying everyone who took out an ARM didn't know what they were doing. I'm saying those that did it without understanding if they could manage it if the balloon payments kicked in are stupid. Sounds to me like you planned accordingly which is fine - there are good reasons to go with an ARM.

[chesapeake]

Depending on what you mean by a bailout, I'm not convinced that it will happen. Certainly the Fed will use its existing authority to try and mitigate a disaster, as it should. But I'm not sure Congress is going to fall over itself to approve a multi-billion dollar bailout of the industry.

The airline bailout was approved under different management and might not have passed under the current leadership. There certainly would have been more (some) strings attached.

The S&L bailout happened because very average folks were having their life savings disappear. When S&Ls started going belly-up, mom and pop had their life savings disappear. Politically, something had to be done.

What would have to happen for a bailout to become politically feasible under a Democratic Congress would be an easily made case that inaction would lead to catastrophic harm to middle class Americans. Even the perception that legislation was targeted to wealthy Wall Street insiders might be enough to kill a bill.

[gottimd]

One more thing: Everything I read suggests the big losers in this are going to be hedge funds. Hedge funds really contribute nothing at all to anybody except the people that manage them, so that's not at all a bad outcome.

Can you explain that?

I'm actually not too sure what a Hedge fund is, all I know is that my wifes rich friends in NY, who for the most part never worked a day in their life, got mommy and daddy's money and go together with other rich friends and started hedge funds. Not that I would ever wish failure on the hard worker or people who deserve it, but I'd like to see these F*ck sticks lose all of their parents money and have to work like the rest of us.

I think I have derailed the thread.

[Crapshoot]

Its not like that's a new development. Pessimists have been decrying the same thing for at least 30, 40 years now (that I'm aware of). There is also some theory that debt is a GOOD thing for an economy, since it encourages growth. There are things about our economy that I don't like, but overall I would say its stronger than most people think it is.

No, the optimism of the American populace is a good thing in the vast majority of instances - in the really bad instances though, its a problem. The savings rate decline is fairly new - last few years or so. That's the troublesome part, combined with the interest rates are being held artificially low by the vast dollar purchases of Central Banks around the world (part of the reason I find China-bashing so amusing). The day the dollar loses its role as the world's reserve currency is the day the American consumer wakes up to an unpleasant future.

[Crapshoot]

Dola, regarding savings rate data:
http://money.cnn.com/2006/12/21/news/economy/savings_rate/?postversion=2006122114

[st.cronin]

Can you explain that?

I'm actually not too sure what a Hedge fund is, all I know is that my wifes rich friends in NY, who for the most part never worked a day in their life, got mommy and daddy's money and go together with other rich friends and started hedge funds. Not that I would ever wish failure on the hard worker or people who deserve it, but I'd like to see these F*ck sticks lose all of their parents money and have to work like the rest of us.

I think I have derailed the thread.

Basically, a hedge fund is a mutual fund with outrageous fees, not regulated and not available to the general public. Some hedge funds claim very good returns, but usually after the fees are deducted they're no better than average. And a lot of hedge funds bomb.

[knolysis]

http://www.economist.com/opinion/displaystory.cfm?story_id=9646451

Good read.

Thanks for the link. I always enjoy the Economist's analysis. I like the phrase "If the lessons are to sink in...". They never seem to. I can"t believe we go so quickly from an Internet stock bubble to a housing bubble. It is as if nothing was learned less than a decade ago.

[flere-imsaho]

You also have to understand that a lot of these guys get their huge return for the company, get their huge bonus, and LEAVE.

I agree 100% and should have made that point when I was posting. The fact is that there's little reward for these folks for long-term success. Get a few excellent quarters under your belt, and you're on to something else with a hefty salary increase, a hefty bonus, or something else.

I took a 5 year ARM approximately 2 years ago. The reasons I did were:
A) I bought a Condo that I am not expecting to stay in for more than 5 years
B) Even if I did a 30 yr fixed, more than likely wouldn't have even touched the principle by the time I decided to move
C) I did comparisons based on a "Max fallout" of the interest rates to ensure I would still be able to make the payments assuming a modest merit increase from work year over year.

My wife & I also got a 5 year ARM about 3 years ago when we bought our house, and used much the same above thought process, except, with regard to #1, we expected we'd probably be in the house in 5 years, and so have to refinance to something else.

One of the reasons it's worked so well for us was that although we didn't have much in savings at the time, we had rapidly accelerating incomes (especially once we both made a jump from higher ed to the private sector. As a result we've been able to overpay and eat into the loan, and will be in good shape when we have to make a decision.

One more thing: Everything I read suggests the big losers in this are going to be hedge funds. Hedge funds really contribute nothing at all to anybody except the people that manage them, so that's not at all a bad outcome.

Except that a good number of pension plans invest heavily in hedge funds. Sure the managers won't suffer (they never do), but a lot of people have, or are going to, lose their retirement pensions.

[st.cronin]

Except that a good number of pension plans invest heavily in hedge funds. Sure the managers won't suffer (they never do), but a lot of people have, or are going to, lose their retirement pensions.

The cynic in me says that's necessary collateral damage for the education of our economy. But, yeah, that would suck if that happened to anyone.

[CamEdwards]

Threads like this are why I love this board. I've learned quite a bit in the previous two pages.

To piggyback off Coffee Warlord's desire to get a bargain via foreclosure, how likely do you think that will be? It seems here in the D.C. area prices have stabilized, but they certainly haven't fallen to where they were 3 1/2 years ago. When I first moved here, houses in my neighborhood were going for around 450k. It seems like they're now stable at about 600k.

When we moved here, we were reluctant to buy for the first year because we weren't sure if we'd like the area. Then when we decided we did, we were priced out of the market (I'm not going to get an ARM... it's a 30-year fixed rate for me). I'd love to go from being a renter to an owner again, but not at these prices.

[Chief Rum]

Hey, I'm kinda hoping I can snag a foreclosed house in the near future. Gonna be in the market very soon, so here's hoping I can profit off other people's stupidity.

If you look carefully, you may be able to. But it's no guarantee.

Another side effect of this quick boom and crash cycle is that most of the loans defaulting don't have much equity built into them. Meaning the bank hasn't received hardly anything back yet for making the loan in the first place. Which means there aren't as many 50% house value type foreclosures out there.

The banks only care to recover their loan amount, so good deals can be had. But you may have to be looking around. And I know there are a lot of other people with the same idea as you scouring those foreclosure lists.

[Crapshoot]

Threads like this are why I love this board. I've learned quite a bit in the previous two pages.

To piggyback off Coffee Warlord's desire to get a bargain via foreclosure, how likely do you think that will be? It seems here in the D.C. area prices have stabilized, but they certainly haven't fallen to where they were 3 1/2 years ago. When I first moved here, houses in my neighborhood were going for around 450k. It seems like they're now stable at about 600k.

When we moved here, we were reluctant to buy for the first year because we weren't sure if we'd like the area. Then when we decided we did, we were priced out of the market (I'm not going to get an ARM... it's a 30-year fixed rate for me). I'd love to go from being a renter to an owner again, but not at these prices.

To be honest Cam, I think you're in one of those areas of the country (like Boston, the Bay Area, and New York) where "price declines" means "lower rate of price rises or stabilization." If you were looking for a house in bumblefuck, USA, you'd be in a position to do something, IMO. :D Any would be foreclosed houses would get a whole bunch of auction-seeking types out there looking for a deal - I wouldn't pin my hopes on getting lucky that way.

Curious - are you one of those people that needs a "house" proper, or could you live in a large condo? That may be the most cost-effective route out there for you guys.

[Philliesfan980]

To be honest Cam, I think you're in one of those areas of the country (like Boston, the Bay Area, and New York) where "price declines" means "lower rate of price rises or stabilization." If you were looking for a house in bumblefuck, USA, you'd be in a position to do something, IMO. :D Any would be foreclosed houses would get a whole bunch of auction-seeking types out there looking for a deal - I wouldn't pin my hopes on getting lucky that way.

Curious - are you one of those people that needs a "house" proper, or could you live in a large condo? That may be the most cost-effective route out there for you guys.

I'm curious, what do you mean when you say "large condo?". Around here in the greater Philadelphia area, it's quite common for "townhouses" (which I'm assuming is interchangable with condo) to go for more than traditional single family homes. I think this is because a lot of young professional couples generally don't feel like dealing with the upkeep of a yard.

But other than that, a single family home and a townhouse both have the same principles - you get a loan for them. Assuming the same selling price, a townhouse might be more than a single family house because of the association fees that go along with them. I'm confused how you think a condo is cheaper than a house?

[Logan]

I think there are other areas like Philly that have really good condo/townhouse markets, because it's usually properties that are located in or close to these major cities, whereas houses are usually set further away where there is more open land.

The major drawback of having a condo, townhouse or any other attached property when you're not in a city like this is when it comes to resale -- it's an attached piece of property, not a free-standing house, and typically people are more hesitant to buy places where they share walls with neighbors, can't expand, have a place that looks exactly the same as the other 45 units on the block, etc.

Basically I'm just saying that Philly isn't the greatest example when it comes to a typical condo market.

[CamEdwards]

To be honest Cam, I think you're in one of those areas of the country (like Boston, the Bay Area, and New York) where "price declines" means "lower rate of price rises or stabilization." If you were looking for a house in bumblefuck, USA, you'd be in a position to do something, IMO. :D Any would be foreclosed houses would get a whole bunch of auction-seeking types out there looking for a deal - I wouldn't pin my hopes on getting lucky that way.

Curious - are you one of those people that needs a "house" proper, or could you live in a large condo? That may be the most cost-effective route out there for you guys.

Theoretically we could get by in a three bedroom house or condo, if I wanted the three boys to share a room. As it is, we're in a five bedroom house and I'd like to stay that way for now.

It's not a huge concern of mine right now as our lease runs through 2010 and is guaranteed to go up by "only" 50 bucks a month per year. We're actually paying about $500 less than most other renters in our neighborhood because we've been renting for three years already and extending our lease every year.

There's also a decent chance that we'll end up looking in the Wilmington/Philly market in a few years, which is another reason that I'm not going to overpay to buy a house here.

[King of New York]

I took a 5 year ARM approximately 2 years ago. The reasons I did were:
A) I bought a Condo that I am not expecting to stay in for more than 5 years
B) Even if I did a 30 yr fixed, more than likely wouldn't have even touched the principle by the time I decided to move
C) I did comparisons based on a "Max fallout" of the interest rates to ensure I would still be able to make the payments assuming a modest merit increase from work year over year.

I went into the market at the worst time in DC, which I am still pissed about. Where I live, places were on the market for no more than 5 days, so everyone was making insane offers. My cousin was in the market in NJ at the same time and he made a bid on a great house, $50K over the asking price. He was outbid by someone who offered $125K over the asking price.

Anyways, my point being is that I went into a sellers market knowing how much I could afford on a monthly basis and capping myself off at that level. Anymore and I would've dipped into other funds and would've have to have lived paycheck to paycheck. Obviously I wanted a house, but at my current financial situation at that time and housing market, I knew I couldn't afford the asking price of $800K-$1M.

So I think its unfair to assume that everyone who took ARMS had no idea what they were doing, and as others pointed out already, it was essentially their only option, that or rent a 1-2BR apt for the same price as a mortgage or live with parents.

Point taken. Under certain circumstances (you are going to be selling soon, or you have good reason to believe that you are going to experience significant income growth in the future), the ARM is the smart way to go.

I would guess, though, that the majority of borrowers in the last five years have opted for ARM and various exotic mortgages not because those loans were suitable for their circumstances, but because they wanted to gamble, or they did not understand what they were doing.

[Buccaneer]

I just got approved today for a large home equity loan to pay off all of our debts. You can't imagine how good it will be not to see those credit card statements and the stupid games they play to raise their interest rates. Not to mention the extra deductions I can take. I wasn't told the rate yet but it should be pretty good, I think.

[sterlingice]

Ok, was looking up something else and ran across this thread. We really do have some nice threads from time to time. Tons of great stuff here.

Depends how you define "long-term". If the result of this is that good mortgages for all but the best qualified dry up for a few years, then the new home market (and much of the residential building sector) goes into the tank, which has a good number of knock-on effects around the economy. Sure, that would all probably come back in 5-10 years, and perhaps that's what you meant.

The most likely long-term impact, in my opinion, would be a new reticence on the part of international investors to touch certain (or even all) U.S.-based investment products due to their perceived risk.

:bowdown:

SI