Les Jones

I am the recipient of a sub-prime loan. I hear a lot of rhetoric about it, but most of it is ill-informed.

If you get a home loan and you make your payments for 2 years on time just fine, you are able to afford your home. The notion people bought too much home or whatever is mostly wrong. If people were in default because they didn’t make payments before the ARM rate balloons, it might make sense. But that is not the case.

If people had the chance to keep making their payments, they would, for the most part. But, you find yourself in between a rock and hard place that the banks put you in. Rather than reward you after 2 years of making payments faithfully, they raise your interest rate every 6 months by a large amount. So, you must refinance or your payment goes up out of control.

That’s the way the bank penalizes you and gets another quart of blood out of you. And all you did was meet they bet and pay your bills on time and be a good lendee.

But then, your house is not worth what you paid for it. So you cannot get refinanced. Nor can you stay in the home you have made faithful payments on.

They don’t want your home really, they merely meant to stick it to you 2 years down the line when you were forced to refinance. Another closing cost to pad their pocktes. And, maybe that’s okay, they took a risk on you. But, they got your money the first time.

Now, thanks to this mess, even though our house is worth more than what we paid for it, we may have trouble getting refinanced. My credit rating is far higher than it was 2 years ago. Now we found out that no refinancing will happen today without at least 5% down. Great. Less than 3 months before we have to refinance before our payments skyrocket, we have to somehow save an extra few thousand dollars we were not expecting.

We spent hundreds of hours and thousands of dollars renovating our house. We have made payments fine. No problems. And now we face losing our house because of the banks crappy decisions. We are punished for their errors.

If all the ARMs were converted to fixed rate loans at the intro rate of the ARMs, this crisis would have not happened. People would keep paying on their houses and stay in them.

In addition to the usury Swanky describes, some lenders had additional incentives to make risky loans. Thanks to the creation of unregulated derivatives markets, they could sell their loans as part of complex packages and wash their hands of the risk. The complexity of those bundled instruments was the perfect recipe for contagion, because few traders fully understood what they were buying, so they just projected their confidence in real estate/housing markets onto the packages, resulting in overvalued holdings.

Trading of poorly understood commodities directly conflicts with free market economics, but since many Republicans think “free” means unregulated, they stepped right into a huge pile of market failure, and now we are all suffering.

Les,

I don’t know that I agree with Shiller. How many markets outside the US were experiencing upswings in mortgage defaults prior to the credit crunch? What is the rate of mortgage default?

To what extent was the boom in real estate financed by mortgage backed securities?

Oh, and I forgot to mention there is an earlypay-off penalty that equals about $3k for us. So, you have to refi, and they penalize you for doing it, and the cost of the refi and if you don’t refi, your payment increases so you can’t afford it any longer.

$3k penalty, $1k in closing costs, plus 5% down… It’ll cost more to refinance our home loan than it did to buy the house in fees…

I believe that the rot cause of the run up in housing prices, along with the commodity bubble, is the demographic collapse of Europe and Japan. Without a new generation to borrow from the old one, pensions and banks had to go elsewhere and invent profit where none existed in order to fund the retirement of aging masses. In the U.S., the expansion of the CRA allowed for the extra money to flood a market whose expansion was based on pulling additional people into the market - people who would not be able to pay back what they borrowed. Banks and finance saw easy money/profit, and everybody got into the game, not just poor people. Many bad loans went for second homes and investment properties. Fannie and Freddie hid the bad debt in mortgage backed securities, and that bad paper, passed off as good, led to the finance crisis. The way things played out was heavily influenced by bad social policy (CRA expansion), but the root cause of the bubble was European collapse and the need to put the pension capital to work were not enough was to be found.

Some people are spinning this as “bad loans” are the problem. As in “bad borrowers”. Let’s get back to the real issue. An ARM is a loan which YOU MUST RE-FINANCE in 2 years. No sooner, no later. And when you do, they hit you with fees again. Their way of getting more out of you.

What caused the crisis are two things: a loss of confidence in the situation, and the terms of the loans themselves.

And, there were likely some people who could not manage the loans they got. In the hot markets, that may well be what started the fuse.

But this is why it is everyone’s problem. Yes, YOU need to be very concerned! Why?

Your house is worth what other houses near yours with the same number of bedrooms and bads and near the same square feet and age. Mainly the BR and baths. So, you may have a $200k house, in a great neighborhood and you have a 6% fixed loan and you are “safe”. That is an illusion. The guy 3 blocks down in a similar house just found out his ARM is hitting the 2 year mark and he has to refinance. He knew that. No worries. BUT wait! Even though he has good credit and pays his bills with plenty left over, the bank just let him know he needs 5% down plus closing costs to refi. He doesn’t have it. He goes into foreclosure. His house sells for $140k.

Your house is now worth $140k.

Even better. Guy number two 5 blocks away has his ARM coming to the 2 year mark now. He saved the 5% plus closing costs and is ready to refi his $200k house. But, it’s now appraised at $140k thanks to the other guys. He can’t get refinanced unless he comes up with the $60k difference… He forecloses and his house sells for $120k.

Your house is now worth $130k.

You think you want to move? What if your job makes you move? When do you think your house will be worth $200k again? There are still 50 ARMs in your area to be dealt with. Your house is going down in value…

We are all at risk! All home owners!

This is why the government needs to be working to turn all ARMs into fixed rate loans NOW. Before every house in America is upside-down, AAA+++ credit, or not.

The plague is coming to you. Believe it.

Swanky,

The problem with all of your arguments is that none of that should have been a surprise to you. ARM was not the ONLY financing option you had; you chose that with 0 down and now when you have to up the ante, you are in trouble because you bought a house before you were ready (in the traditional sense) to buy.

I am not saying you should lose your house.

“This is why the government needs to be working to turn all ARMs into fixed rate loans NOW.”

Actually, this cure would be worse than the disease. What would happen to mortgage interest rates if the lender knew that the contractual interest rate could could be lowered at the convenience of the borrower? Obviously, they would have to have much higher rates to cover the additional risk. If you think your home value is falling fast now, try an economy where mortgages are 10% and up. As for fairness, would you want to have your retirement plan lent out in a 6% mortgage that could be reduced to 2% on the borrowers whim?

The only reason to take an ARM over a fixed rate is if a person a) knew that they would be moving in the next few years or b) were risking that either the house value would go up or that interest rates would drop. That’s why they call it risk, sometimes you lose (ask me about my 401k). Trying to unilaterally rewrite contracts that both parties freely entered into would be much worse.

The real crime, Swanky, was that gun they held to your head …

You guys are asses. Sorry, but you are. You still don’t get it.

I hope your neighbor forecloses and your house is worth half what it was 6 months ago. You deserve it.

Wake up!

I have an ARM because that was what was available to me. You think I would choose that over a fixed loan? You are drinking the Kool-aid.

I’ll say it one more time and maybe you’ll hear.

You get an ARM because the bank thinks you are a risk. You pay your mortgage on time, no problem for 2 years, and then the interest rate sky rockets. And there is a huge penalty for paying off early. So, you MUST refinance in 2 years or see your interest rate go to 13%, or pay a big penalty for paying off early. This is the banks way of getting more out of you because you were a risk. Okay. That may be fair. In 2 years, my credit is better and I can get a better loan.

But, it didn’t work that way. Your house isn’t worth what it was because people within a few miles of you have foreclosed. And, 6 months ago you could get a refi of 100% and they’d even roll your closing charges into the loan. Now you need 3-10% down. Unless you knew that a while ago, you are not prepared. Do you have 10% of your home’s value in the bank right now? I don’t.

And do you think banks want to own your home and try to get their money out rather than convert that ARM into a fixed and have you continue to live there and pay the mortgage? How does it make sense to not do that? How is it good to have a few million more houses foreclose? Will you happily see your neightbor (and your house is worth what has sold in the last 6 months within a few miles of your house) foreclose and watch your home value fall due to no fault of your own?

If you can’t pay your mortgage, fine. But if you pay your mortgage fine for 2 years and then find yourself in a mess that the capital markets made, that sucks. You did your part. I did my part.

There are a lot of ARMs out there like ticking time bombs. The mess the economy is in won’t be over until all the ARMs either foreclose or get refinanced into fixed loans. That’s still 2 years away. We have not come close to the bottom. And the banks are not making it easier to refinance, so MORE people who have paid their mortgage for the past 2 years will be foreclosing. And that effects every house within the zip code’s value. That means you. Laugh it up. Your house’s value will go down too. Eventually, they all will. Give it 2 more years of foreclosures and lending markets drying up.

Stop listening to the pundits. They are absurd. This is caused by the lenders. And it could be stopped tomorrow if all the ARMs were converted to fixed rate mortagages at the interest rate the loans originated at. Let people continue to pay the monthly rate they have been paying for 2 years. If they can’t do that, fine. But, if the banks insist on then raising the rates to 13% and watching as houses foreclose and home prices free fall, well, we’re all screwed.

I have excellent credit. I have a long credit history. I have lots of chances to get out of this mess. I am lucky. But a lot of people are getting screwed. They did their part. they paid their mortgage. And they are losing their houses. Is that right?

Just to actualy answer the above.

“The problem with all of your arguments is that none of that should have been a surprise to you. ARM was not the ONLY financing option you had; you chose that with 0 down and now when you have to up the ante, you are in trouble because you bought a house before you were ready (in the traditional sense) to buy.”

ARM was the only option. Well, that, or not buying a home.

I paid 10% down plus closing costs.

My “risk” was a bankruptcy a few years ago due to abusiness that went south. But, I have a long credit history and was AAA. I make good money and have paid my mortgage no problem.

I am a very good risk, but the bankruptcy made me look bad. I made good money and still do. That bankruptcy made the computers choke.

So, I get an ARm, 2 year later my credit rating is 70 points higher, and I make 20k a year more than I did when I signed that loan. Yet, I may still lose my house because of the markets. Because there could be a lot of houses in my zip code that have foreclosed and sold very cheap. Right now, they appraise you house, not on the houses sold around you in the last year, but in the last THREE MONTHS. The skews it towards the foreclosures. 8 moths ago, 3 houses around mine sold for $50k more than I paid. When I bought my house it appraised $20k above what I paid and we dramtically renovated. Doesn’t matter now if 3 houses foreclose this month around me….

“The only reason to take an ARM over a fixed rate is if a person a) knew that they would be moving in the next few years or b) were risking that either the house value would go up or that interest rates would drop. That’s why they call it risk, sometimes you lose (ask me about my 401k). Trying to unilaterally rewrite contracts that both parties freely entered into would be much worse.”

You are assuming it was a choice. As explained above, my credit made me look like a “risk”. That’s why I had an ARM and why most do. But, if you pay your bills, should that not prove you are not a risk? Doesn’t work out that way right now.

(Coming in much later on this :))
“ARM was the only option. Well, that, or not buying a home. I paid 10% down plus closing costs.”
Swanky’s answered his own complaint here.

In reality, Swanky could not afford to own a home. The traditional measure is: pay 20% of the value as a down payment, and pay no more than 1/3 of your income in a fixed-rate mortgage.

Swanky couldn’t do that. So, got a “deal” that was really a sucker deal. Paid for two years of home at a discounted (below-prime rate), then got kicked out.

No surprise at all.

Wrong.

Since then, I refinanced my home after the 2 year “grace period” at 4%. In the 2 years we owned the house and renovated it, it gained 40% in value after the appraisal. And that was an FHA appraisal. IF you know, you know how strict they are.

I had plenty of money to make my payments and renovate the house and more. And after 2 years, my credit was far better and the refi proves it.

The rate I had on the sub-prime loan was not great, but the rate I would have started paying after 2 years, which increased every 6 months, would have run me out of my home.

Luckily, I got a refi before more of the people in my area went into default and their homes tanked or my homes value might have went south.

So, you guys still don’t understand.