liar loans... how people buy homes

Parent Cafe
21

<p>Agreeing to disagree…</p>

<p>First of all, yes, most of the first payments go to interest and not to principal. Also, foreclosures tend to result in lower sale prices than you would get under normal conditions, so there isn’t much left over for the consumer. (If the consumer actually sellls the house and makes a profit, he would be able to keep the money that is more than the mortgage.)</p>

<p>Yes, these loans are immediately repackaged. Yes, the buyer may not be able to afford a home. However, I really can’t feel too badly for someone who doesn’t even read the basic stuff on the mortgage, like monthly payment. Really, do you NOT think that this whole practice drives up home prices? You all say that people can’t afford the higher home prices. Great. Let them only qualify for mortgages (or only get mortgages, no matter what they qualify for) that they can afford. Guess what? Home sellers would not be able to command high prices for their homes - no one would be able to get the mortgage - and prices would drop. (The argument against my post seems to be: “No one can afford the high home prices, so they have to lie about their income.” Um, if no one affords high home prices, they tend to go down. Eventually. That is what is happening now in many parts of the country.) Alternatively, do what everyone else does - don’t buy what you can’t afford. I have, and my friends have, moved to areas with a much lower cost of living so as to be able to afford housing. Fun? No. Dream city? No. Workable? Yes.</p>

<p>Ultimately, investors who buy high-risk mortgages and don’t do their homework on the banks are getting exactly what they pay for. Any business can, in the absence of government regulation, utilize various “signalling” mechanisms to show potential buyers/investors that they have good business practices. For a bank, this could very easily include requiring documentation (see post 17) and, if this is such a concern, actually attaching this documentation to the mortgages that are sold to Wall Street. Wall Street worried about being snowed? Require a W-2 to be attached to the sold mortgages. Minimal cost, minimal inefficiency in the market. </p>

<p>This really is something that rational people can avoid - there’s no strong-arming, coercion, or other practices that require Attorney General intevention - one that reputable banks can not engage in and signal to investors that they do not engage in; and one that investors can, if they so desire, screen for very carefully. If all three parties choose to be stupid (the person by taking a mortgage more than their salary; the bank by risking their reputation by issuing the mortgages; and the investors by not doing any basic checking on the bank), that isn’t a problem. Let them. The free market is not perfect, but I’m missing the part where there would be a failure of the market. It works here.</p>

<p>I’ll admit my biases. One of them is that, before taking out ANY student loans, I figured out what my payments would be. I also figured out my worst-case scenario and know that (while difficult) I could make my payments on that money. I had just turned 23. You’re now expecting me to feel sorry for people whose payments exceed their monthly income and don’t even question it? I’m not expecting super-careful, risk-adverse geniuses here, but this situation doesn’t require that type!</p>

<p>My second bias is that I don’t feel sorry for people who think it their birthright to live beyond their means. Doesn’t take a rocket scientist to figure out that you can’t live in a three-quarters of a million dollar house on a social worker’s salary. (Now, that is a job that can be done in almost any area of the country. Is her complaint that she can’t do the job that she wants, in the area she wants, living in the house she wants? Welcome to life.) Doesn’t take a rocket scientist to figure out that refinancing won’t turn your $5,000/month mortgage into a $1,000/month mortgage.</p>

22

<p>Aries, I agree with most of what you wrote, but the people involved in this mess are not the only people who are going to be affected by this mess. We are affected as a society by what is happening in the housing market. For example, we are going to have lower interest rates as a result of the problems in the housing market. So borrowers benefit, including ones that are fiscally irresponsible. Savers get screwed. Our money is devalued as the government prints more money to bail out the mortgage and real estate industry, and homeowners. </p>

<p>We don’t have a free market. With mortgage deductiblility, $500,000 tax free exclusions, and the ability to write off property taxes on your income tax, we are far from a free market. And yes, these things keep property prices much higher then they would be if they didn’t exist. </p>

<p>If we had a true free market, we would have depressions. We might not really want free markets. </p>

<p>In 1987 when the stock market crashed, a few firms went under. Do you know how many firms were really under water? How many well known firms were really under water? It was ugly. The Federal Reserve was really busy after the 1987 crash. </p>

<p>Free markets are for text books.</p>

23

<p>dstark, you are correct that a true free market doesn’t exist. But I wish it did.</p>

<p>I remember 1987. We bought our first house a month before the crash, with an adjustable rate mortgage. Cashed in almost all of our investments. One of the few cases where our timing happened to be perfect. The bank that issued the mortgage was caught up in the S&L scandal. (The bank president was our mayor & state assemblyman, by the way. This is NJ, afterall.) So many people really suffered for years – putting off retirement, losing jobs, fear, stagnation. It was ugly.</p>

24

<p>One could easily say that lower interest rates help cut the deficit as the US cost of borrowing goes down. It really depends how much we are borrowing. Most economists saw interest rates going up this year and they were all wrong. According to the Economist the flood of foreign investment in the US is still huge and the returns have a better risk reward profile than they can get at home. I actually said this early this year here based on info our company was getting from big money sources.</p>

25

<p>Stickershock, I lean toward wanting free markets too, but I heard this year, that in 1987, the firm that had some of my money was actually under water after the stock market crash. The Fed was at the firm every day for months trying to help the company get out of trouble. And the way it was supposed to work was, if the firm goes broke, the clients lose their money. As it worked out, the Fed helped the company get back on its feet, and I never knew that my money was at stake. So, I don’t know about free markets. :slight_smile: </p>

<p>Oh yes, The firm was sold a few years later for billions, so the owners became very rich. Broke to rich. Thanks to the Fed. </p>

<p>And I would bet that to this day, those owners are strong advocates of free markets. :)</p>

26

<p>Barrons, how much lower do you think interest rates are going to go? Next year hundreds of billions of mortgages are going to be reset. Do rates have to go lower to save the people who have these loans?</p>

<p>I was talking to a mortgage broker and he told me many buyers take out loans where the rates might be 6%, but they only pay 1% and add on the 5% to the principal. For example a $200,000 loan, the buyer pays 1% (2,000) and 5% (10,000) is added to the loan. After a year, the buyer now owes $210,000 instead of $200,000. Then the buyer refinances and pays 1% again. The rest of the interest owed is added to the principal. </p>

<p>The loans not only don’t get paid off, but the size of them increases every year. </p>

<p>Barrons, those loans are going to blow up.</p>

27

<p>Not only are the loans going to blow up, the buyers will use a lot of $$$ with their annual refinancing costs. It seems like a quick way to lose a LOT of $$$. :(</p>

28

<p>Those are very aggressive loans and I would not use those unless I was very sure the market was going to be strong–even I am not that sanquine. If they also put little down they will be in a tough position to refi as they probably have no equity. People will learn an expensive lesson.</p>

<p>But heh, people lost trillions in the last market crash on dotcoms, enron, worldcom and the rest and most people were doing no more than crying at their statements and seeing their 401K shrink by 50%. We lived through it and a nice recovery followed relatively shortly. Nobody said investing was always a winner. Looks like a home buying opportunity next year in the more overheated markets. I’m saving right now to buy next year.</p>

29

<p>

</p>

<p>Sticker Shock, I’m also in NJ, in an old house in a working class town. No blue ribbon school district or keeping up with the Joneses where I live. How do first time home owners get started nowadays? The house I bought for 135K 10 years ago is now 325K. Income levels have not kept pace with that. People take on bigger mortgages than they should, not necessarily to live in fancy dream homes, but to afford the most basic of properties. What will our kids do? As much as I read about empty nest syndrome, I’d really like them to have their own homes.</p>

30

<p>It’s worse than that where I live. I am in a very modest housing tract, where the original homes were built in the 50’s and are about 1000 sq. feet. These homes are now valued at $700,000 on up. This is below the median for the area, so its not like there is much choice for anyone who wants home ownership. When we moved here 18 years ago, it seemed like a good neighborhood for raising kids, with a combination of older, retired people and families with young children. The character of the neighborhood hasn’t changed – I have seen no gentrification, and new people coming in tend to be families with young children. I honestly don’t know how they can afford to buy in – though of course, many of them may be renters. </p>

<p>I think the problem is that younger, first time home buyers tend to buy with an optimistic view point - they assume that their earned income will increase over time, so they will go for a mortgage that is reverse-amortized with an adjustable rate that is discounted in the early years, figuring that 5 years down the line when their payment goes up, they will either have the income needed to meet it, or else they will refinance. But of course, things don’t always go as they hope.</p>

<p>You can condemn these consumers for their foolishness, but I see the exact same rationale being put forth on these boards all the time by students planning to take on high debt for their college education: it’s fine to borrow $100K to pay for Dream University because of course when they graduate they will make enough money to easily pay off the loan. People tend to rationalize borrowing beyond their means by envisioning the future best case scenario.</p>

31

<p>Yeah, where we live, it’s been high forever & just getting higher. Our house is about 60-70 years old & very modest on a small lot. Housing prices in the area are also $750,000+. Even in neighborhoods much further from town (requiring a 1+ hour commute in & 2+ commute back home), housing prices are often over $500,000 (this includes condos). There are many folks with household incomes of $160,000+ renting because they can’t afford to buy a home in a neighborhod they would want to live in. It is really tough to figure out where our kids will be able to afford to live, even after we help pay for their expensive college educations–often with >$100,000 out of our family incomes/savings.</p>

32

<p><a href=“Mortgage amnesia hits home – The Denver Post”>Mortgage amnesia hits home – The Denver Post;

<p>This article mentions many problems.</p>

33

<p>CalMom, I think that you are correct but what you’re saying doesn’t apply to “liar loans.” If your mortgage is more than your paycheck, it’s completely irrational to have it, no matter how you slice it. Yet, I’ve heard people say that the student loans are less painful over time - probably true. The important question is not whether you can afford it later, but whether you can afford it under your worst-case scenario. If your WCS is right now, then look at right now. </p>

<p>As for student loans… as I’ve said earlier, I’ve done out the math for starting salary, going back to my old profession, assuming no added income for my law degree. It is really scary how many people tell me not to worry (because there’s basically nothing left over at the end - yes, the numbers work, but barely) because that’s only the first few years and your income goes up or because you can stretch the payments out over 20 years. IMO, if the reasonably worst-case scenario doesn’t work out, then don’t do it. </p>

<p>The problem with first-time homebuyers is that they probably do not account for the costs of having children - losing a salary, saving for college, paying for all of the baby expenses (clothes, diapers, formula, shots, daycare, car seats).</p>