“If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” J. Paul Getty
Individual mortgage holders are in the first situation; together they are in the second.
I want to look into this whole situation of freezing some adjustable rates (that are scheduled to increase for adjustable rate mortgages) more – because I don’t really understand what is actually involved in the “agreement.” But my impression is that the government is paying nothing, giving no other incentives (like reducing taxes owed). With that being the case I can’t see why some people think it is bad. some people are saying it is unfair to people that were careful They don’t get this benefit. That makes little sense to me. One of the things you have to learn about investing and personal finance is there are no guaranties. You enter into mortgages with your best guess about what will happen (as the lender or the one receiving the loan).
From my very surface understanding of what is involved is that the government used some moral suasion to try and get lenders to step up and provide more favorable terms than originally agreed to. I not that confident such a think we end up happening in practice but I don’t have a problem with the attempt. It is an interesting case where no single mortgage holder owes enough to harm the lenders but together the class does hold enough to harm them. So the lenders have gotten themselves into a situation where the problem is not just one for the mortgage holders but one that could harm them (because they have too much lent to the class – risky residential mortgages).
The risk of a cascading bad impact. One waive of foreclosures triggers another and another… Thus creating huge losses for lenders. For that reason it makes sense to me that if (which is a huge if) they class of lenders can all agree to sacrifice some to avoid starting the runaway cascade of foreclosures they may benefit. Of course each individual lender would likely benefit if just everyone but them sacrificed.
It seems to me if there really is some significant amount of freezing of loan rates that will have a significant impact on how much harm the foreclosures do to real estate prices and the economy. And so I can see how such an agreement could benefit everyone. But as I say I really need to read more about all this. And I am skeptical that individual lenders will try to limit there sacrifices and as each cuts back there sacrifice the risk of the cascade increases.
An actually bailout – government money paying off those that took bad financial risks I would be very reluctant to support.
Related: How Not to Convert Equity – Housing Inventory Glut – mortgage terms explained – 30 year fixed Mortgage Rates – Homes Entering Foreclosure at Record – Ignorance of Many Mortgage Holders – Beginning of the End of Housing Bubble? (April 2004)
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Sorry but that is a symptom of massive ignorance. Not knowing an incredible important aspect of your largest financial decision is like not know what days you are suppose to show up for work. There is a minimum amount of knowledge people should have that sign a mortgage. I think at least 34% of mortgage holders need to read this blog. Ok, I probably alienated all of them, so if that is the case then they should read some of the blogs we list in our blogroll.
There is a big problem in that logic – it could maybe make sense if you had good reason to believe rates will be lower in the future than when you took out the loan (but that is a very questionable). I don’t know why someone would think that in the last couple of years – the risks have been much better than rates would go up a few hundred basis points than down that much. Basically I can see someone that is very financially savvy using an adjustable mortgage to qualify and if they know they will move in a fairly short period…
Related: Learning About Mortgages – Mortgage Defaults: Latest Woe for Housing – How Not to Convert Equity – 30 year fixed Mortgage Rates
CNNMoney is not exactly intellectual discussion of economic and investing issues but normally it offers fairly good material for the large number of people. Especially those who really don’t want to read Warren Buffett or Brad Setser. Still the following quote in their article, Cashing in on hot real estate is just wrong:
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San Diego-based certified financial planners Christopher Van Slyke and Terry Green recommend an unconventional plan: taking out a new $500,000 ARM.
Handel and Laport can pay off their existing mortgage before the rate rises and retire their other debts. They can put the remaining $200,000 into stock and bond funds.
To be sure, borrowing against a house to put the proceeds into the market rarely makes sense. But in Handel and Laport’s case it does because so much of their net worth is tied up in their home, and the super-hot L.A. real estate market looks primed for a fall…
They can convert equity that might melt away.
They can what? In no way does increasing their leverage convert equity that might melt away. Any amount of “melting away” will still happen after this increase in leverage – no conversion has happened. They still have a full ownership interest in the real estate. If the value of their house fell $300,000 before or after this supposed “conversion” they would “lose” (on paper) the same amount: $300,000. The investment risk for the house has not changed (for the whole portfolio you could argue it has but that gets complicated and subject to debate).
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