So called experts

[Winstonm]

But those are the people who are getting screwed now. The people who will get screwed if Countrywide goes down are mainly people with existing mortgages who bought before the bubble and took out home equity loans.

 

How can imprudent borrowing ever be classified as getting screwed? If you make $1000 a month and take on car payments on a new Corvette for $800 a month, are you getting screwed when your car is repossessed? If anyone refinanced before the bubble, there is no problem as home prices hadn't doubled yet. The only problem is for those who refinanced after the bubble was well established.

 

When people can't get new mortgages at a reasonable rate, home prices will plummet.

 

These home prices are not plummeting - they are reverting to mean - this is what happens when a bubble pops. Real estate prices are sticky. It will be some years before the full effect of deflating prices is complete.

 

 

The amount that you can take on home equity loans is based on the equity on your house. Even a small drop in the price of a home can make a big % difference on your equity. People with excellent credit are suddenly going to find themselves cut off, forced to take either unsecured loans at a ridiculous rate or collapse into bankruptcy

.

 

People with excellent credit won't have a problem as they will not have placed themselves into this predicament. The only ones who will be in trouble are those who gambled on ever-rising real estate to cover their transgressions of having no money down and over-financing.

 

Houses are meant to be dwellings, abodes, places to live - they were never intended to be investment vehicles.

[pbleighton]

I doubt many home equity loans are callable upon demand.

 

This is true.

 

That would be very rare. Also most variable rates have caps on them.

 

This is technically true, but the caps are so high that for the majority of homeowners with a mortgage which is a significant proportion of their income a rise to the (or less) cap would force foreclosure - see my post on ratios and down payments.

 

As to bailing out Countrywide, I share Mike's and Richard's distaste for it. I hope it can be avoided, but *too big to fail* may apply here, and if it does (I don't know), it would be stupid for the Feds not to do it. We shouldn't trigger a recession in order to give an object lesson in moral hazard, particularly since the political consequence would be that the bar for bailouts in the future would be lowered.

 

Peter

[pbleighton]

People with excellent credit won't have a problem as they will not have placed themselves into this predicament. The only ones who will be in trouble are those who gambled on ever-rising real estate to cover their transgressions of having no money down and over-financing.

 

Not so. Alot of people will be vulnerable if we get a recession and moderately higher interest rates at the same time.

 

Peter

[mike777]

BTW I think people, experts and the media have been predicting a housing crash for at least 60 years.....one day they may even be right...this is not a home realestate crash or close to it yet.....

 

A recession just means a tiny blip for the economy....look at past ones in the last 100 years.

 

Even the depression only slowed things down for less than ten years. Yes it means pain for many but it is not the end of the world. We can survive and be stronger soon. :)

[Winstonm]

People with excellent credit won't have a problem as they will not have placed themselves into this predicament. The only ones who will be in trouble are those who gambled on ever-rising real estate to cover their transgressions of having no money down and over-financing.

 

Not so. Alot of people will be vulnerable if we get a recession and moderately higher interest rates at the same time.

 

Peter

If a buyer did not use an exotic loan or did not overextend, then he can afford his house payments - whether the home value goes up or down is irrelevant.

 

The only way recession would hurt this person would be in job loss.

[pbleighton]

If a buyer did not use an exotic loan or did not overextend, then he can afford his house payments - whether the home value goes up or down is irrelevant.

 

Winston, about 30% of mortgage loans made in the last few years are adjustable rate loans. They are hardly exotic.

 

Peter

[Al_U_Card]

btw the market rallied 350 points or so today..Fed injected 17 billion just today into economy....a good start.

So the dow goes up 350 and the rich people get richer....and on what? Not just speculation.....when the fed ponies up 17 billion....that came from where? Oh yeah, they can PRINT money...whether the value is there or not....so your goods and services get devalued by the same amount....so YOU are subsidizing the rich so they can get richer....now THAT is rich.

[Al_U_Card]

For those who want to know.

 

http://www.apfn.org/apfn/reserve.htm

[mike777]

Keep in mind the stockmarket is not a zero sum game....

 

The pie grows bigger....the pie is not static....many forget this...or do not understand this...of course the pie can grow smaller too....:)

 

If your point is there is evil, some evil in the capital market system we do not disagree. Some evil does not mean all evil...:)

 

Charity upon your fellow man does not have to be a bad thing.

[Winstonm]

If a buyer did not use an exotic loan or did not overextend, then he can afford his house payments - whether the home value goes up or down is irrelevant.

 

Winston, about 30% of mortgage loans made in the last few years are adjustable rate loans. They are hardly exotic.

 

Peter

Peter,

 

If you can't afford the payments, you can't afford the house. The only reason to use ARMs was to take advantage of proclaimed rising home prices and falling mortgage prices - a gamble that you could buy too much house and then refinance it at a lower rate.

 

80/20 loans, interest only ARMs, ARMs - these were all created simply to move the merchandise - the house - allowing the originatiing lender to collect a fee, package the risk into a MBS and sell it, allowing the next guy to collect more fees when he stripped the MBS and created CDOs....and on and on.

 

To believe the last 2 years of the housing bubble 2005-2006 were about providing homes to poor working families is simply burying one's head in the sand.

 

The bubble forced home prices to rise to unaffordable levels - new mortgages were needed to get people initially into the homes otherwise the demand would drop and prices would have stabalized.

 

Do you really think the reason car loans were extended from 4 years to 5 years and then to 7 years was because consumer's demanded new loan products? No, it was because automobiles became too expensive for consumer's to afford with 3-4 year financing. New financing arrangements had to be created to keep the iron moving.

 

Housing was no different. You may not wish to call the ARM exotic, but to a buyer from 20 years ago it would be.

[Gerben42]

The bubble forced home prices to rise to unaffordable levels - new mortgages were needed to get people initially into the homes otherwise the demand would drop and prices would have stabalized.

 

This is the part I don't get. If already-built houses become too expensive it is cheaper to build a new one yourself. You know you're going to pay for that one exactly what it costs, rather than twice as much.

[mike777]

The bubble forced home prices to rise to unaffordable levels - new mortgages were needed to get people initially into the homes otherwise the demand would drop and prices would have stabalized.

 

This is the part I don't get. If already-built houses become too expensive it is cheaper to build a new one yourself. You know you're going to pay for that one exactly what it costs, rather than twice as much.

Yes but:

 

 

Your huge new house may be worth nothing.

Your new land may be worth nothing.

 

Your junky old junky house on junky land may be worth million.

 

Does this sound goofy..of course..but this is calif and NY and boston and DC

Location, Location, Location

 

This is why many are leaving calif.......many including me

 

I live in a place that would be millions in calif....but cheap here. Well that is a bit of .....hyperbole...but a million here goes alot further than calif.

 

I really have no idea why because many places that cost a million or more are pure junk...not on beach.....but pure crap.

 

Of course in my opinion if you are not on beach...in calif you might as well leave...

I..lived on beach for a few years...moved inland...and then left...

 

too put this another way..live west of 405 or move out of state!

[Al_U_Card]

You can't expect to look at the card played and understand the position and the end-game. The big picture involves getting out of your hand and into the game.

 

The mortgage thing is just one element in a falling house of cards. There are so many ways to find out about market manipulations, international cartels, government (official and unofficial) wrong-doing.

 

Time to do some serious investigation before the round is called.....it is still not too late but time is a-wasting.

[pbleighton]

The only reason to use ARMs was to take advantage of proclaimed rising home prices and falling mortgage prices - a gamble that you could buy too much house and then refinance it at a lower rate.

 

This is simply untrue. I was in the mortgage business for two years (late 96 to late 98), and one of my bridge partners is still in the business. The reason most people choose ARMs is that they don't want to buy interest rate insurance from their lenders, because it is so expensive.

 

80/20 loans, interest only ARMs, ARMs - these were all created simply to move the merchandise - the house - allowing the originatiing lender to collect a fee, package the risk into a MBS and sell it, allowing the next guy to collect more fees when he stripped the MBS and created CDOs....and on and on.

 

This is silly conspiracy theory. What happened was capitalism - people bought new loans they liked.

 

To believe the last 2 years of the housing bubble 2005-2006 were about providing homes to poor working families is simply burying one's head in the sand.

 

Who in these posts has said that it was? I certainly haven't - it's just capitalism.

 

The bubble forced home prices to rise to unaffordable levels - new mortgages were needed to get people initially into the homes otherwise the demand would drop and prices would have stabalized.

 

More conspiracy theory.

 

Do you really think the reason car loans were extended from 4 years to 5 years and then to 7 years was because consumer's demanded new loan products? No, it was because automobiles became too expensive for consumer's to afford with 3-4 year financing. New financing arrangements had to be created to keep the iron moving.

 

I think consumers were given more choices. You seem to object to this.

 

Housing was no different. You may not wish to call the ARM exotic, but to a buyer from 20 years ago it would be.

 

BFD. A laser printer was unheard of 30 years ago, but I have a cheap one sitting on my desk. Deregulated financial markets are a fact of life. IMO they bring more good than bad, but they certainly have a down side.

 

Winston, I think I've figured out your proble. You want to go back to the fifties :P

 

Peter

[jtfanclub]

OK, so...two things that aren't true here, stated as fact. One was the callablility, one was the floor price.

 

Let me go through an example, using my parents, with the numbers entirely made up.

 

Suppose my parents bought a house with a mortgage in 1970 for $50,000.

In 1995, the value had increased to $100,000, main due to inflation.

Now it's worth $200,000.

 

Currently, they have a mortgage for $50K on it, since they got a second one and the first one has expired.

 

Back in 2000 or so they took out a line of credit, for $100K, at about 6%, with a 12 month payback. They're currently using $60,000 of it. Every month, they owe $5600 on the line of credit, and the LOC drops to $55,000. Every month, they pay $600, and take out another $5000 loan, pushing it back up to $60,000.

 

This is a completely stable situation. They owe a total of $110,000 on a $200,000 house, the amount of which is falling slowly as they pay off the 2nd mortgage. Eventually, they'll sell the house (they're not getting any younger), which will pay off the money they owe and then some.

 

Well, if the housing bubble just settles, then it's not a big deal. Even if the house drops to 1995 levels slowly, they'll end up having to play $1600 a month instead of $600 a month for 10 months to drop down to the new value of the house. They won't be able to go on vacations, may have to dip into their 401K, or ask me or my sister to help out, but they'll survive. Sucks to be them, since their retirement was going to be funded by the sale of the house, but we'll make it.

 

But if the housing bubble bursts, then housing values will drop to effectively zero, as far as the banks are concerned. My folks will find that they have to pay off the entire secured line of credit in 12 months and the interest...$65,000, give or take. They can't come up with that kind of money. I can't come up with that kind of money. Nobody will be offering them a secured loan for the house, because nobody will be sure if the house can sell for more than $50K on short notice. Then, it's foreclosure time.

 

Eventually, the panic that ensues after the housing bubble bursts will be over. The house will be worth $120K or whatever it settles to. Unfortunately, due to the panic, my parents no longer own the house- they were forced to give it up at its low ebb, which will be far lower than the settled value.

 

Panic kills. Losing Countrywide will probably cause panic. Floating Countrywide won't keep the bubble from popping, but it will prevent houses from dropping well below their bubble value while the market sorts itself out.

[Winstonm]

The only reason to use ARMs was to take advantage of proclaimed rising home prices and falling mortgage prices - a gamble that you could buy too much house and then refinance it at a lower rate.

 

This is simply untrue. I was in the mortgage business for two years (late 96 to late 98), and one of my bridge partners is still in the business. The reason most people choose ARMs is that they don't want to buy interest rate insurance from their lenders, because it is so expensive.

 

80/20 loans, interest only ARMs, ARMs - these were all created simply to move the merchandise - the house - allowing the originatiing lender to collect a fee, package the risk into a MBS and sell it, allowing the next guy to collect more fees when he stripped the MBS and created CDOs....and on and on.

 

This is silly conspiracy theory. What happened was capitalism - people bought new loans they liked.

 

To believe the last 2 years of the housing bubble 2005-2006 were about providing homes to poor working families is simply burying one's head in the sand.

 

Who in these posts has said that it was? I certainly haven't - it's just capitalism.

 

The bubble forced home prices to rise to unaffordable levels - new mortgages were needed to get people initially into the homes otherwise the demand would drop and prices would have stabalized.

 

More conspiracy theory.

 

Do you really think the reason car loans were extended from 4 years to 5 years and then to 7 years was because consumer's demanded new loan products? No, it was because automobiles became too expensive for consumer's to afford with 3-4 year financing. New financing arrangements had to be created to keep the iron moving.

 

I think consumers were given more choices. You seem to object to this.

 

Housing was no different. You may not wish to call the ARM exotic, but to a buyer from 20 years ago it would be.

 

BFD. A laser printer was unheard of 30 years ago, but I have a cheap one sitting on my desk. Deregulated financial markets are a fact of life. IMO they bring more good than bad, but they certainly have a down side.

 

Winston, I think I've figured out your proble. You want to go back to the fifties :P

 

Peter

Well, the fifties weren't bad, Peter. :P

 

Let me continue our discussion. First, none of this is conspiracy theory it is simply economics.

 

Interest rates were dropped and held too low for too long. This created an artificial demand for houses. When demand outstrips supply, prices rise.

 

People bought new loans they liked? Hard for me to think that you actually believe this to be true on a large scale. Perhaps some had the option to buy any loan they wanted, but as you can see from the incredible amount of foreclosures occuring, most took the only loan that came close to allowing them to buy.

 

There is a reason for the more exotic mortgages to increase at the end of the bubble - no more worthy buyers so unworthy buyers were brought into the mix via creation of loans allowing them to buy - no doc 80/20 liar loans and the like.

 

By the way, I am not blaming the mortgage products themselves for the mess. The creation of innovative financing can help over time.

 

All I am saying is there is no valid reason to bail out the end-of-bubble buyers and mortgage holders simply because the bubble burst.

 

One principle from the 1950's should still be valid today: fiscal responsibility; however, I'm afraid that concept is passe'.

[Al_U_Card]

This is indeed the difficulty with a zero-sum game when the participants are convinced that it is not zero-sum but that the pie is getting larger with time (no matter how much you eat....) The problem is that the bakers are the ones that are setting the price of the pie and it is far outstripping the "value" of the pie ( real or imagined quantity that is left). When finally, a few unfortunates are the sacrificial lambs and cause the general populace to realize that their dream is just that.....everyone lines up for their crumbs. The problem is that the bakers knew all about this and have stockpiled ingredients for the next "pie". We just keep lining up......

[pbleighton]

But if the housing bubble bursts, then housing values will drop to effectively zero, as far as the banks are concerned. My folks will find that they have to pay off the entire secured line of credit in 12 months and the interest...$65,000, give or take. They can't come up with that kind of money. I can't come up with that kind of money. Nobody will be offering them a secured loan for the house, because nobody will be sure if the house can sell for more than $50K on short notice. Then, it's foreclosure time.

 

jt, I just checked with my bridge partner, who is#2 at a decent sized mortgage broker in Connecticut. He says this is absolutely not true, at least in Connecticut, and in most states.

 

In Connecticut, equity loans are 10+ years. After the draw period, any existing balance is flipped to a 20 year mortgage, fixed or adjustable depending on the agreement. At no point is the loan callable.

 

Peter

[Winstonm]

JT:

 

What is the purpose of MEW in your example? It is a silly use of equity. If instead of withdrawing - borrowing more, actually - they would have simply paid the mortgage down to zero, no amount of bubble-bursting would matter.

 

This is the fallacy of wealth creation by housing. To extract that wealth one must sell the asset - borrowing does not increase wealth but depletes it unless you can gain more on the money than the cost of the loan.

 

The one thing we seem to have lost in this country is the concept that borrowing assumes a risk; if the bet goes bad, it is the borrower and not the taxpaying system who needs to pay the piper.

 

I agree that allowing Countrywide to fail is bad; if Countrywide, a Fed primary dealer, were to fail, that would indicate systemic financial crisis.

 

However, as the Fed cut by 50 basis points today, party on, dude.

[jtfanclub]

jt, I just checked with my bridge partner, who is#2 at a decent sized mortgage broker in Connecticut. He says this is absolutely not true, at least in Connecticut, and in most states.

 

In Connecticut, equity loans are 10+ years. After the draw period, any existing balance is flipped to a 20 year mortgage, fixed or adjustable depending on the agreement. At no point is the loan callable.

Well, if I'm wrong about Ohio, then we'll ride it out in good shape. I don't claim to know much about these tools, just what I've been told. It would be a relief it they they're that long term.

[jtfanclub]

This is the fallacy of wealth creation by housing. To extract that wealth one must sell the asset - borrowing does not increase wealth but depletes it unless you can gain more on the money than the cost of the loan.

 

The one thing we seem to have lost in this country is the concept that borrowing assumes a risk; if the bet goes bad, it is the borrower and not the taxpaying system who needs to pay the piper.

It's not that simple. Their intent was to spend the money while they were alive, not to make money. Ideally, rather than live in their house until it was time to sell, and then have all this money but no longer be mobile enough to use it, they would 'pre-spend' some of the money travelling etc. When they were no longer mobile enough enough to live in the house, and needed to move elsewhere, the money they got out of the house would fund that move only.

 

I feel confident that a majority of baby boomers have the same plan.

[pbleighton]

Perhaps some had the option to buy any loan they wanted, but as you can see from the incredible amount of foreclosures occuring, most took the only loan that came close to allowing them to buy.

 

Every single borrower had the option of a fixed loan, and the option of buying a cheaper (smaller, worse neighborhood) home.

 

These were all invidual decisions. Willing buyer, willing seller.

 

Peter

[Gerben42]

But if the housing bubble bursts, then housing values will drop to effectively zero, as far as the banks are concerned. My folks will find that they have to pay off the entire secured line of credit in 12 months and the interest...$65,000, give or take. They can't come up with that kind of money. I can't come up with that kind of money. Nobody will be offering them a secured loan for the house, because nobody will be sure if the house can sell for more than $50K on short notice. Then, it's foreclosure time.

 

Why would they suddenly have to pay back everything? Sorry but I am clueless about this kind of business. I would not be very happy taking a loan which has the risk of suddenly having to pay everything back. As you say, they would be okay if they could simply pay back the loan according to plan, regardless of the value of the house inbetween.

[Winstonm]

Perhaps some had the option to buy any loan they wanted, but as you can see from the incredible amount of foreclosures occuring, most took the only loan that came close to allowing them to buy.

 

Every single borrower had the option of a fixed loan, and the option of buying a cheaper (smaller, worse neighborhood) home.

 

These were all invidual decisions. Willing buyer, willing seller.

 

Peter

Yes, Peter, I agree. But you are not factoring in the last 2 critical years of the bubble, when the system broke down with no-document loans, appraisers using inflated values, and mortgage risk being sold so no hazzard was left with the originator - it was all about collecting fees along the way.

 

It is the same in all speculative bubbles - the Minsky Moment arrives and the Ponzi finamcers get whacked first.

[jtfanclub]

Well, I have been told I'm wrong here, but I understand that it's a revolving line of credit....each month they pay the interest and pay back or take out what they owe. If the wheel were to stop suddenly, they'd get thrown off, because they couldn't pay back the line of credit.

 

It's easier to imagine in the reverse. Suppose that every month you got a $5,000 5% COD. When each became mature, you just redeposited the money. The bank's happy, because they're paying 5% on $60,000, which they can then loan to other people for more and make a profit. But if you were suddenly decide to stop depositing the money, the bank would have to pay you back your $5K per interest each month...$60K plus interest over a year...and the bank has no say in it. This is pretty ordinary for CODs.

 

It was my understand that this is how it worked on the revolving line of credit. My folks took out as much as they needed, and paid the interest. They took out additional loans to pay off the principal, just enough to keep the balance even. If the revolving LOC were to stop, then they'd suddenly have to pay the principal off as well as the interest. If that's over 20 years, no problem. If it's over one year, big problem.