A Second Mortgage Disaster On The Horizon?

[Phred42]

From 60 Mins Last Night - video included

You ain't seen nuttin yet!


A Second Mortgage Disaster On The Horizon?
http://www.cbsnews.com/stories/2008/12/12/60minutes/main4666112.shtml

(CBS) When it comes to bailouts of American business, Barney Frank and the Congress may be just getting started......

...snip..

it turns out the abyss is deeper than most people think because there is a second mortgage shock heading for the economy. If you thought sub-primes were insanely reckless wait until you hear what's coming. .....

...snip...

The trouble now is that the insanity didn't end with sub-primes. There were two other kinds of exotic mortgages that became popular, called "Alt-A" and "option ARM." The option ARMs, in particular, lured borrowers in with low initial interest rates - so-called teaser rates - sometimes as low as one percent. But after two, three or five years those rates "reset." They went up. And so did the monthly payment. A mortgage of $800 dollars a month could easily jump to $1,500.

[bdamomma]

1. we all better hang on this is going to be a bumpy ride.

[kirby]

2. While everyone likes to blame the poor

It has been trendy to scape goat the poor and the Sub-prime market so far. However the Option ARM stuff is middle/upper class stuff and is much much larger.

[CoffeeCat]

6. I agree with you...

We live in the suburbs, and we were encouraged and pressured to avoid a conventional, fixed-rate
mortgage and to "take advantage of today's amazing financing opportunities!" And we were dealing with the largest
real-estate company in our state--owned in-part by Warren Buffet. We were also dealing with Wells Fargo for the financing.

I think many people think this stuff goes on in the back rooms of small mortages companies. It happened across
the board--everywhere.

When we began looking for a house three years ago--practically every McMansion and other high-end home had a
"Get into this house for only $800 a month!" sign out front.

These loans were positioned as smart financial solutions.

We were treated like ingrates because we asked for a fixed, 15-year mortgage, "Are you sure??? You could afford
so much more house!"

I agree with you. The suburbs are infested with mortgages like this. Everyone---from the realtors to the mortgage
brokers, encouraged people to buy more house than they could afford and to afford it by using these wacky ARMs,
3-2-1 buy downs and interest-only loans and teaser rates---to make it happen.

In the best of all worlds--with a robust economy--people will default as these loans reset and their mortgage
payments double. However, we're in horrendous economic times. People are losing their jobs. It's more
difficult to gain employment once you are laid off. Small businesses are failing.

I'm trying to see nothing but disaster for this country---but it's really difficult.

[Blue Meany]

9. My experience is similar...

I refinanced when the rates were down and insisted on a fixed-rate mortgage and instead of reducing the payments, I cut the pay-off period in half. But the bank was pressuring me to take out more money for renovations or whatever, and tried really hard to get me into an ARM. I can't imagine why anyone would take anything but fixed-rate, but lots of people were apparently doing it. I'm somewhat less inclined to bail them out than others who had fewer options.

[Trajan]

3. It is an income issue as well as a loan issue ....

Yeah ... the structure of these loans are difficult to manage, but available income is the biggest problem because the lack of spendable money is impacting ALL businesses, which is driving the cycle of unemployment in a vicious cycle ....

IF workers had been receiving decent and reasonable wage increases over these last 3 decades, instead of a kick in the ass as they have under conservative rule, they would HAVE enough money to pay the mortgage resets ....

They would also have enough money to buy cars and go on vacations and buy goods and services and all the other things that middle class families do when they get paid decent wages ... None of this would have happened ....

Squeeze the middle class ? ... They squeeze you right back ...

The problem is NOT that workers make too much money, it is that workers make too little money ....

The problem is NOT UAW workers making too much money, it is the rest of the workforce NOT making something reasonably close to decent wages ...

Pay workers what they are due, and they will spend it .... even on mortgage resets ...

[Phred42]

5. Correct - here's a graph that shows it

Source: http://www.opednews.com/articles/2/The-Shallowest-Generation-by-Jim-Quinn-081212-593.html

[kirby]

7. Looking at your graph?

Why were people buying homes that doubled in value when their incomes went up 4.3%? They couldnt afford it. To maintain the 'growth' of the housing bubble, the financial firms got 'creative' to keep purchases and refinancing volume up. There was no way people could afford the homes without flipping them or being part of a super growing economy.

All the money to be made went from the .com bubble to the housing bubble to the oil bubble.

[Phred42]

10. This one isn't mine.

you'll have to ask the author

[girl gone mad]

15. People bought because prices were going up.

They were lured into believing the gains were real. The media constantly repeated the refrain that "home prices have never gone down in America". A lot of middle class people who were being squeezed on wages felt that investing in a home was their safest bet.

[CoffeeCat]

4. And also...

If you had terrible economic times when every mortgage was a conventional, fixed-rate mortgage--you still would see
many people losing their homes, because of a basic inability to pay the bills.

So yes, you have the subprime mess--where people who couldn't afford their monthly payments defaulted. And, as the OP
points out, you also have all of this creative financing out there, and those low interest rates will reset soon.

However, there are many people who have conventional mortgages who are losing their jobs and they can't afford the
bills. It's more difficult to become re-employed again. I just spoke with the school nurse at my child's school.
Her husband lost a job that payed six figures. They're very scared. In today's economy, you can't just "find
another job" and recover easily. They're having trouble finding a comparable job. Furthermore, when they realized
that they might have to move to a different city, they felt even more trapped. Their realtor told them that most
homes in their neighborhood have been sitting on the market for nearly a year. So, they can't even move!

These are average suburbanites. So, I suppose this phenomena is another "wave" that will crash over our economy.

Everybody ready for the tsunami?

[Overseas]

8. When I watched the show I wondered if the bailout money is being saved

to extend the length of the low interest rates for the next waves. That would be sensible. To use some of the cash to minimize the increase in rates for those "teaser-rate" loans.

But we're not micromanaging the finance sector, just the blue collar workers.

And how sad to see that we're blaming the eager people who just wanted a chance at the American Dream of home ownership and bit those tempting offers being floated all around them. I've been a renter for all of my adult life. Couldn't afford those loans but they sure looked tempting.

[girl gone mad]

16. Could be, but the positive effects will be minimized..

because of the huge price declines. It makes little sense for these borrowers to hang on to a depreciating asset, even if the payment stays low.

[sarcasmo]

11. Let us not forget about the most terrible loan of them all, the NINJA loan.

No Income

No Job

No Assets

Hey, you still qualify for this sweet home right over here.

[Citizen Number 9]

12. "No Income"? How common were these loans, actually?

I wasn't aware of any lenders who said you didn't have to have income to get a loan.

Wasn't the primary problem that borrowers were lying about their income and then signing the lies?

[northernlights]

17. more common than you'd think

When I bought this place 5 years ago, I was out of work (laid off after tech bust) and buying cash. I had realtors tell me to buy more house by lying about my income because nobody was checking!!!! (Naturally I blew them off. I don't knowingly do business with criminals!)

I saw a kid of about 22 or 23 on Dr. Phil a few weeks ago. He had been flipping houses for $$ and lying about income every step of the way. Nobody checked. He got caught in the crash and now owes a bundle -- maybe a couple million -- with asolutely no way to pay it back. He tried setting up a blog and writing about his experience to warn other people. FBI caught on and filed fraud charges. So now he has criminal charges and no income and a zillion in debt. Amazing.

[Citizen Number 9]

18. That sorta supports what I've been saying about the mortgage meltdown

for some time now.

A whole lotta people participated and got theirs, leaving the investors to do the slow burn.

The Real Estate Agents made their sales and got paid.

The mortgage brokers got their fees and foisted the contracts off to the investment houses

The appraisers and inspectors got paid.

The seller did well because prices were going up.

And the Buyer got his. Presumably, the Buyer knew the risks in accepting a mortgage under false pretenses and was willing to accept it in hopes of a flip, or long-term equity or something. Many were able to do just that before the crash.

Apparently, the ones that really got screwed were the buyers of the debt packages.

[Mike 03]

13. Yes, but I didn't know this was still a surprise. What worries me now is the pending

insolvency of commercial real estate mortgages such as stores, malls. I expect hundreds of companies and thousands of stores to shutter between January and April.

[Citizen Number 9]

14. Exactly

And those loans are more likely to show up in local and regional banks' portfolios, so expect another round of bad news regarding those institutions.