Federal Government Bailout of subprime mortgage crisis

[humandraydel]

This is an incredibly complex issue with far more wide-reaching implications than the average person realizes. I'm troubled by the government bail-out that has been proposed, but I've learned enough about the topic to appreciate that something really needed to be done because of the ripple effects the problem is causing.

Well, don't assume that the bailout will have only positive effects. Right now the investors who bought securitized subprime mortgages expected a certain yield and had a contract with the mortgage servicers to back it up. But instead, the government is going to step in and allow mortgage servicers to go against that contract by freezing the interest rates and lowering the yield (significantly) for investors.

This means that from here on out, investors are going to see that a contract is not a guarantee because the government can step in at any time and change that contract. That means investors are going to require MORE of a risk premium, which means that interest rates are going to go up, possibly significantly. A significant increase in interest rates is of course going to mean people can afford less house, resulting in a drop in house prices. Either way you look at it, the days of subprime borrowers is over.

[Joan.of.the.Arch]

Here's a short NY Times analysis article that is a starting point for someone like me.

http://www.nytimes.com/2007/12/07/business/07mortgage.html?_r=1&hp&oref=slogin

[marvholly]

I am very troubled by this plan foor many reasons

It will just prolong the problem/agony
It makes a mockery out of contract law
It will NOT help those who need it most
It is just a PR spin/grandstanding by the administration, banks.... to show they are doing something
Its going to cost us all in the long run

[marvholly]

Forgot this:

On another financial discussion board a person asked this week if the members thought he could afford a particular house. After the principle & interest payment he had about $1000/month. He had NOT considered real estate taxes, home owners insurance, repairs, utilities, food, auto or commuting expense,...........

Needless to say EVERYONE advised him NOT to buy but this is where people's heads are. They just have NO clue.

[disneysteve]

this is where people's heads are. They just have NO clue.

You're right. People don't have a clue. That's why it used to be the job of bankers and loan officers to run the numbers with you and show why you could or couldn't afford the home you were looking at. If you couldn't afford it, they wouldn't lend you the money. But all that changed somewhere along the line and lenders started handing out money to everyone and anyone, regardless of their ability to repay it. That's what has gotten us in this mess. If we would go back to needing a 20% downpayment, having monthly housing expenses that don't exceed 28% of income and a purchase price no more than 3 times annual income none of this sub-prime garbage would be happening. Instead, we've got people buying homes with 0% down, 100% financing on homes costing 5 or 6 times their annual income.

[project15]

But all that changed somewhere along the line and lenders started handing out money to everyone and anyone, regardless of their ability to repay it. T

I blame the increase in housing prices for this. People couldn't afford the increase in price and so banks started getting creative. Either housing prices need to drop significantly (pre 2003 levels) or we all need higher salaries.

[disneysteve]

I blame the increase in housing prices for this. People couldn't afford the increase in price and so banks started getting creative.

That is backwards, though. You couldn't sell your house for an inflated price if no buyer could afford it or get financing for it. It was the availability of easy credit that helped push prices up so quickly.

[bjl584]

I have heard, now I have only heard and have not yet researched whether or not this is accurate, but anyway, I have heard that a few years ago our wonderful federal government started to pursuade lending institutions to give out loans to those individuals who could otherwise not afford a home, as it was the politically inncorrect and "unfair" that some of us could "live the American Dream" and buy a home, and others of us could not. So, in order to avoid legislative action, the lending institutions came up with the whole concept of subprime loans and hoped against hope that appreciation of real estate would save them from defaults. But, it didn't pan out that way, and viola! we are in the mess that we are in. Now the government steps in once again on the backend to "save" us!! How wonderful! As I said, I'm not sure how accurate this scenario is, but it does make sense given the track record of politicians, and at the very least it makes for some interesting conversation.

[disneysteve]

Well, bjl584, home ownership is at a record level in this country, so it wouldn't surprise me. Lots of people think the record home ownership rate is a good thing, but I never thought so because lots of those people who became homeowners couldn't really afford it. Now, that is exactly what is happening. People keep failing to realize that there is more to being a homeowner than paying the mortgage. It is costly to own a home. Suze Orman uses the rule of thumb that owning a home will cost you 40% more than the mortgage payment when you add in taxes, utilities, insurance, maintenance, etc. So when people who are paying $1,000/month for their apartment decide they can afford a house with a $1,000 mortgage, they don't account for the fact that the house will probably cost them closer to $1,400/month. The reality is that not everyone is meant to be a home owner. If that is politically incorrect or unfair, that's just too darn bad.

Of course, all the "creative" financing deals just worsened the problem. Sure, you might be able to afford the loan on day one, but if you can't afford it once the interest-only period ends or after the ARM resets, what good is it?