Sub-Prime Mortgage Bail-Out??

[Kacy]

Originally Posted by 82ndtrooper

I have no sympathy for stupidity, or materialism.

Well said 82ndtrooper.

I was about to refinance our home with an ARM. After everything was said and done, they were going to tack on an additional $10,000 to the loan, only cutting the monthly payment by less than $100. NO THANKS!

People are so wrapped up in the "now" and all these materialistic things. They don't look at the big picture. (Or they see the big picture and they don't care) They are screwing themselves in the end...along with all of us honest taxpayers.

[GratefulCitizen]

Originally Posted by 82ndtrooper

Failure to plan, and crude sales practices is on the shoulders of the lenders, not the United States tax payer. Remember, any money the Federal Government has is not there's it's OURS !! We pay the taxes, and the democrats invade the social security system for welfare programs, but of course, there are no reasons to reform the social security system. Yeah, it's not broke. Not until I apply for it in 20 years.

This "failure to plan" is pervasive in American society.

I see planning (risk assessment) as involving 3 stages:

1. Known liabilities -- how much you know it should cost you.
2. Known potential liabilities -- bad luck that you can foresee.
3. Unknown potential liabilities -- bad luck that you can't foresee.


So often, people will get through stage 1 with a little wishful thinking and plow forward without any further planning.

Most wise souls will deal with stage 2.

Stage 3 is ostrich territory. No matter how unfair or unexpected, you're still responsible.
Prepare the best that you can.
Have the best SA you can.

(These lessons are taking slowly to my 15-year old. It seems natural consequences are the only teacher to which he'll listen.)

[nmap]

Originally Posted by Eagle5US

OK...So, I am a potential home buyer planning on purchasing a home between April and Jun of 2008.
Other than significantly complicating my mortgage experience...what does this mean for those of us who are responsible with our money and actually honor our word when we sign our name to a promissory note?

Eagle

I think you need to consider a number of issues.

First, is your income stream secure? Could a recession cause your job to evaporate? Is your income likely to keep up with inflation, or not? I don’t need to know the answer to such questions, but as a buyer you might wish to consider them.

Second, I’d urge you to get a fixed rate mortgage. An ARM might have a lower initial cost; it could, in principle, have a lower total cost than a fixed rate mortgage. That said, interest rates seem susceptible to an increase here. First, because of the inflationary factors mentioned previously; second, the demographic bulge of the baby boomer generation. With regard to the boomers, their investing habits may have been part of the reason for the 20-year “virtuous cycle” (strong stock market, low interest rates, high economic growth) that we seem to be exiting. The implication is that we’ll see a trend to higher rates from quite some time.

Third, be aware of the risk of inflation. There is a real risk that the value of the things we buy – food, gasoline, whatever – will increase significantly over the years ahead. This can lead to a crunch if someone has a big mortgage along with other bills. You’ll be glad to know that Texas is one of the national leaders in producing wind-generated electricity, so this may buffer you from some of the impact of high fuel costs. Also, Texas has no income tax – so local areas tend to tax properties aggressively. I would suggest not buying as much house as you can afford.

Finally, by May of 2008 I expect cash to be King, with good credit being nearly as good. Therefore, you’ll have the opportunity to hammer the sellers hard. A person on the verge of losing their house is more motivated to sell – and will sell at a lower price – than might otherwise be the case. Take a trip down to the courthouse and look at the foreclosure notices. If you have the time, attend an auction and observe – see what houses are going for. Realtors can be valuable contacts, and might steer you to a good deal – but it’s worth remembering that, per the laws of agency, realtors represent the seller. Except in the special (and rare) case where you (the buyer) directly compensate the realtor, any realtor you use will get partial compensation from the commission generated when the transaction is done. That means the seller is paying the commission, so all the agents involved in the deal are obligated to work for the seller’s best interest. Also, their commission is impacted by the price paid. Don’t expect them to encourage efforts to get the best deal. If my premises are validated, you can get a house for a really good price – if you avoid falling in love with any particular house and negotiate aggressively.

Good luck, and welcome to Texas!

[Eagle5US]

Originally Posted by nmap

Good luck, and welcome to Texas!

A most excellent post! Thank you!
We had already planned on a fixed rate note and are already scouting homes off of the internet for a local contact (Realtor) is looking at for us. We are watching homes get discounted about 10K per month that they have stayed on the market. Not to say that any of the homes on our list (yes we have MANY potentials on the list) will still be there in 6 months...but we are trying to observe and look for patterns.
We have also found that Tejas taxes homes aggressively as you stated. But-it is what it is and we have loved Texas every time we have been stationed there in the past. This will, however, be our first home buying experience there.
Thank you again for a most excellent post.

Eagle

[kgoerz]

The way I see it the Mortgage companies were offering these Finance E-1 and up, LES Accepted as Down Payment home loans. People jump all over them. The Mortgage companies got rich and continue to do so. But instead of just the idiots who signed these loans making them rich, we all get to chip in.
On another note. Hillary's Heath care plan that targeted everyone making over $400,000 per year to pay for it. She calls that the Rich by the way. Just got lowered to targeting everyone making more then $250,000 per year. I guess $250,000 per year is considered rich now.
I guess in a few more months I am going to be rich also. I can't wait. Isn't getting a non fixed interest rate considered gambling. Is anyone who signs these loans actually surprised when they go up.

That sounds like a textbook example from the books Rich Dad, Poor Dad and The Millionaire Next Door, saying how people tend to buy liabilities instead of true assets

Thats a good one to use when you walk in with a new Gun.

[82ndtrooper]

Originally Posted by nmap

Perhaps I can offer a different view on this.

The bailout purports to be helpful to borrowers, and this is true to some small degree. Helping people about to lose their homes is good political theater.

Actually, the problem lies in the derivatives market. To understand that issue better, let’s look at what happens with a mortgage.

An aspiring homeowner goes to a mortgage broker and applies. The mortgage is approved, and a fee is generated for the broker – which may be an individual, a bank, or a brokerage firm. The loan (mortgage) is then packaged with other loans and sold to investors. So far, so good, right? The purchasers of the package of loans have a responsibility to know the characteristics of the security they’re buying.

However, it’s possible to take a package of loans and put them together in a different way – for example, a CDO (Collateralized Debt Obligation). A CDO is broken into parts called “tranches”, which have different priorities for being repaid. Therefore, the highest quality tranch is paid before anyone else; however, they get a lower yield. Lower quality tranches get more yield, but accept more risk of not getting paid. The quality (or rating) is assigned according to a mathematical model created by the company selling the securities. Rating firms do not independently evaluate the model.

This gets far nastier. CDOs can be repackaged into new CDO securities (called CDO squared), and the new CDOs have tranches that, in turn, have different priorities for repayment. There are, as I understand it, CDO3 (CDO cubed) and CDO4 securities.

The problem? No one – not the Fed, not treasury, not the banks, not anyone – knows how to evaluate the securities. If someone wishes to sell them (or, for that matter, buy them), how does one come up with an appropriate price? It’s as if I strolled up and said I had a coin for sale, but couldn’t (or wouldn’t) provide other details. It might be a pure gold coin, of recognized type – or it might be a shiny penny. Unless you knew what you were buying, how could you possibly make a bid? So, to be safe, you’d offer a very low price. However, that means that the seller would take a horrific loss – and if the seller happened to be managing money for others, those clients (investors, whatever) would be quite unhappy. Lawsuits would be the order of the day.

Oh, but it gets worse. The derivatives are leveraged – a lot. So a small loss on the underlying security can completely wipe out capital. This happened to a hedge fund managed by a major Wall Street firm. By the way – state pension funds, banks around the world, and lots of other financial entities bought these things (CDOs and their cousins, CLOs).

We were, in fact, looking at a general failure of the global financial system. We probably aren’t out of the woods yet. I have been betting on inflation for some time, and it is developing apace. This is bad for the country – and devastating for the folks trying to live on a fixed income or a meager wage. If you think ammo is expensive, wait a year.

And if you want to look at the problematic aspect, ask what our national creditors will do as we debase the currency. Will they continue to hold trillions in U.S. debt securities, or will they sell? Will they continue to buy U.S. debt securities? Because if they sell (or even quit buying) long-term U.S. rates will go up a lot, no matter what the Fed does. If that occurs, times are likely to get hard.

Now….should the federal government bail out all these people? Probably not. Will there be a price to pay? Sure – massive inflation. Probably a weaker economy. But the consequences of not acting aren’t pretty either. So will politicians choose to defer the day of reckoning, even at the risk of making it worse? I’ll leave that answer to others.

Here’s a link for your reading “pleasure”.

LINK

Tranches, CDO's, CLO's and derivitives give me headache. They did in graduate school and they still do today.

You probably would have been better off explaining REIT's. Nice dividends, but the prices/valuations of the property's are no longer providing capital gains/growth.

Remember, banks love loans on the balance sheet. It is an asset not a dept and this is what is reported in 10Q and Annual Statements, and certainly the quarterly's. The more loans, the more assets to report. They'll take the risk in low interest rate climates, but not in high interest rate climates.

[Lanyard]

Originally Posted by nmap

but it’s worth remembering that, per the laws of agency, realtors represent the seller. Except in the special (and rare) case where you (the buyer) directly compensate the realtor, any realtor you use will get partial compensation from the commission generated when the transaction is done. That means the seller is paying the commission, so all the agents involved in the deal are obligated to work for the seller’s best interest.

I think this was changed around 2005 or 2006. I think that, like Colorado, you can get an Agent that represents the Buyer exclusively. ( http://www.trec.state.tx.us/questions/faq.asp ) The Buyer's agent actually get paid (ususally) by the Listing Realtor. When a home goes into the local multiple listing service (MLS) the listing agent offers to share their commission with any agent that can bring a Buyer to the deal.