America's House Price Time Bomb

[darmab]

With the American housing market in its worst crisis since the Great Depression of the 1930s, President Bush is authorising new legislation to pave the way for massive new government intervention designed to slow the slide.

The intervention would come as a little known quirk of US law threatens to drive down house prices even faster.

Faced with seemingly never-ending falls in the value of their properties, some American home-owners are taking radical action; they are choosing to walk away from homes and their mortgages.

http://news.bbc.co.uk/2/hi/business/7529277.stm

[mom211]

What would happen if the mortgage companies dropped the high interest rates for those folks who chose an adjustable rate mortgage? What if cc companies dropped their high rates? Do you think more people would stay and not default?

[darmab]

That's a good question. The article seems to suggest that it's not the interest rates that are causing them to "walk away" but rather the extreme drop in value of their homes. Personally, I can't even imagine paying $500,000 for an apartment, lol.

[Lisa in OK]

This should be interesting for my parents. They are going to be retiring in 2 years and are currently gearing up to buy their "retirement" house, for which they will be paying cash.

[Issachar]

What would happen if the mortgage companies dropped the high interest rates for those folks who chose an adjustable rate mortgage? A very good question with a sad answer.

Briefly, a mortgage is sold by the original mortgage company. They buyer pays so much for it because it has a certain "value", or in the case of adjustable rate mortgages, a potential and highly expected increase in value. That second tier mortgage holder takes a LOT of mortgages they bought and repackages them and sells them again .... who knows how many times this repeats ... each level paying more than the one before ( have to make a profit with each sell or there'd be no point in selling ) because each level is expecting the interest rate to increase. Also there are fewer buyers at higher levels which means that those at the higher levels own a LOT more mortgages than any or the original lenders (Think pyramid scheme). This is a part of what makes the rates go up ... the people at the higher levels MAKE them go up so that they can get a return on their "investment".

Yes, the housing market/economy really is that ridiculous. It is largely very wealthy, greedy, clever men sitting in mansions in exclusive areas taking a lot of money from the original borrower and house owner. (I never, hopefully, use the word 'home' when it comes to buying, selling, losing a dwelling place because a 'home' truly cannot be bought or sold; only houses can. A 'home' is a person, couple or family living together wherever, however ... and that cannot be bought or sold.)

James 5:
1 *¶Go to now, ye rich men, weep and howl for your miseries that shall come upon you.
2 *Your riches are corrupted, and your garments are motheaten.
3 *Your gold and silver is cankered; and the rust of them shall be a witness against you, and shall eat your flesh as it were fire. Ye have heaped treasure together for the last days.
4 *Behold, the hire of the labourers who have reaped down your fields, which is of you kept back by fraud, crieth: and the cries of them which have reaped are entered into the ears of the Lord of sabaoth.
5 *Ye have lived in pleasure on the earth, and been wanton; ye have nourished your hearts, as in a day of slaughter.

The original house buyer shares somewhat in the responsibility here too. What did they not understand about the word "adjustable"? Did they really think that a bank was going to lower the rate? Or maybe someday it might change slightly but not enough to matter? HA! Some of those rates were jacked BEFORE the first payment was due! Some within a couple payments ... However, there are a couple things at work here. One is that there is virtually no understanding of the compound interest formula (http://www.purplemath.com/modules/expofcns4.htm) by the vast majority of Americans. Instead, we rely on the bankers with a pleasant smile to "take care of us" because "they are there for YOU". And sometimes they are ... in a way ... I can guarantee you that they KNOW the compound interest formula, they KNOW and understand interest rates and what they do over time and they KNOW that the more money that the loan will generate the more it can be repackaged and sold. So we have all these hedge fund (definition is beyond the scope of this post) managers out there looking to buy mortgages. They, of course, are lookiing for the most "valuable" mortgages; i.e. high and higher interest rates. They have perfect motivation to jack the rates. Meanwhile, the folks at the borrowing end with happy hearts in their eyes, those folks that believe their smiling banker has their best interest's in mind, are totally trusting. Some say that they should have read all the small print first AND understood it. A couple comments on that ... those saying this rarely read the small print themselves ... they just didn't get into a bad situation so it's easy to say what everyone else "should have done". Also, if everyone was to read the small print AND understand it, they housing market would have been in a major slump a long time ago as people would still be in the closing process for months at a time. The fact is, we don't understand ALL laws concerning a certain matter before entering into some legal process; instead, we hire a lawyer to help us make our way through. Same with a loan ... we don't understand every aspect of a complex loan, instead, we "hire" a banker to help us through. Little do we know ..... I won't even get into the "dumbing down of America" embedded in the so called "education" system. Suffice it to say that the more ignorant a people are, especially when they don't know it because they were taught a lot of "something", the greater advantage they can be taken of. The average high school graduate has zip understanding of how an economy works and a college grad isn't much better.

This is getting too long. I won't say more unless asked.

Edit to add: The bottom line is, the top of the chain mortgage holders cannot lower the rates because they need the higher rates in order to make their "investment" worthwhile.

Issachar

[mom211]

Thank you for that explanation! We've certainly made our share of financial mistakes, but thankfully got our mortgage at a fixed rate.

In light of this thread http://www.rr-bb.com/showthread.php?t=54804 even if a person has no debt, small or no mortgage, and some emergency essentials that won't keep them from trials and tribulations.

[mom211]

What happens to those at the top of the chain mortgage holders if the economy collapses? They'd still have all the property to rent out right?

What about those who benefit from the credit cards (unsecured debt) with high interest rates if the vast majority default on them?


"Yes, the housing market/economy really is that ridiculous. It is largely very wealthy, greedy, clever men sitting in mansions in exclusive areas taking a lot of money from the original borrower and house owner. (I never, hopefully, use the word 'home' when it comes to buying, selling, losing a dwelling place because a 'home' truly cannot be bought or sold; only houses can. A 'home' is a person, couple or family living together wherever, however ... and that cannot be bought or sold.)


This?
James 5:
1 *¶Go to now, ye rich men, weep and howl for your miseries that shall come upon you.
2 *Your riches are corrupted, and your garments are motheaten.
3 *Your gold and silver is cankered; and the rust of them shall be a witness against you, and shall eat your flesh as it were fire. Ye have heaped treasure together for the last days.
4 *Behold, the hire of the labourers who have reaped down your fields, which is of you kept back by fraud, crieth: and the cries of them which have reaped are entered into the ears of the Lord of sabaoth.
5 *Ye have lived in pleasure on the earth, and been wanton; ye have nourished your hearts, as in a day of slaughter."

[Blessedhope777]

Issachar I really appreciate and look forward to your comments. I did not know how really stupid I was in finance/real estate until I got my real estate license last year and I had already "bought" three houses. We are military and had access to two VA loans but I always ended up losing money!!!! I couldn't understand why. I got my license under a "Christian" broker who was a "friend". After 6 months of trying to convince people that a house was a good "investment" especially in the middle of all this mess I decided to get out of the real estate business. I may be naive but it looks like a complete racket. When taking the course to take the test I thought it was wierd how it was always saying that agents should be honest. I don't believe there is enough regulation of the real estate business. I don't know one realtor that I have had in retrospect that was "on my side!"

[Bernardd]

And you're just talking about those financing the mortgages. What about the suckers who actually take the loan. You know, the people like me, who are willing to pay $350,000 (because of interest) for a $125,000 home.

I'm surpised someone hasn't come along and simply sold interest free houses for, let's say, a 20% profit.

Heck, if you paid $2,000 each month on a house payment, you'd have the thing paid-off in 5 years. How we got stuck on this 30yr mortgage nonsense is well beyond me.

[lmenningen]

Wasn't there a day and time when the maximum loan was limited to 2 1/2 times one base annual salary (not including overtime or other irregular income), while today it can be, what, 6 times?