Explain to me the sub-prime mess?

[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]

Originally Posted by sachmo71

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]

Originally Posted by sachmo71

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.

Originally Posted by wade moore

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.

Originally Posted by wade moore

Not to derail this thread, but yes.

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

Originally Posted by 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?

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.

Originally Posted by 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".

Well played.

Originally Posted by Buccaneer

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.

Originally Posted by 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 .

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.

Originally Posted by sachmo71

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]

Originally Posted by flere-imsaho

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]

Originally Posted by albionmoonlight

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]

Originally Posted by albionmoonlight

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]

Originally Posted by st.cronin

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]

Originally Posted by st.cronin

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]

Originally Posted by 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?

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]

Originally Posted by flere-imsaho

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]

Originally Posted by flere-imsaho

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]

Originally Posted by st.cronin

I think that's the most pessimistic plausible outlook.

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

Originally Posted by knolysis

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]

Originally Posted by flere-imsaho

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]

Originally Posted by flere-imsaho

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]

Originally Posted by flere-imsaho

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.

Originally Posted by st.cronin

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]

Originally Posted by Flasch186

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]

Originally Posted by 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.

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]

Originally Posted by knolysis

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.

[st.cronin]

Originally Posted by 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?

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]

Originally Posted by 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.

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]

Originally Posted by 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?

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 to do a search of current mortgage rates in your area.

Originally Posted by gottimd

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]

Originally Posted by 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?

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]

Originally Posted by Crapshoot

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/dis...ory_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]

Originally Posted by 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.

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]

Originally Posted by 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.

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]

Originally Posted by st.cronin

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...ion=2006122114

[st.cronin]

Originally Posted by gottimd

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]

Originally Posted by Crapshoot

http://www.economist.com/opinion/dis...ory_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]

Originally Posted by gstelmack

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.

Originally Posted by 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.

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.

Originally Posted by 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.

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]

Originally Posted by flere-imsaho

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]

Originally Posted by 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.

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]

Originally Posted by 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.

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. 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]

Originally Posted by Crapshoot

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. 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]

Originally Posted by Crapshoot

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. 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.