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Midori | Can somebody explain me in clear english what is going on financially with the home loans crisis? |
I heard the market is experiencing one of the worst dowfalls in years. That homeowners are not able to afford their houses anymore.
I know that happened because lenders gave out money to less than qualified borrowers.
But how is that somebody buys a house today and agrees to pay X amount of money and now can't afford it? Isn't it a fixed interest rate?
And also how is that this can affect the whole market or the US economy ? |
 |
 
Nick Z
|
The interest rates for mortgages are fixed. But not necessarily for a long time.
Many people have to start paying current interest rates after a year or two of getting their mortgage. And current interest rates are higher now than they were before. Which means that people's monthly payments are going up. And many of them can't afford to pay anymore.
And these bad loans are affecting many companies because many companies own these bad loans. And they will loose big money, if people can't pay.
Mortgages are usually converted into financial securites and sold in the debt market. Which means that any company can buy these securities. And many non-mortgage companies did buy them.
A good example is E*Trade, which is a brokerage company that lets people trade stocks in the Stock Market. The management of this company bought a lot of mortgage backed securities. And now it's stock price is down something like 35% since the middle of July. |
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Angie
|
Part of the problem is that few of those loans are fixed rate loans. Many are Adjustable Rate Loans, or at least have a low "teaser" interest rate attached. When the interest rates start going up, they become harder to pay for some, and hence, the crisis. Also keep in mind that the economy in general isn't what it was. Many have lost jobs, and as a result, now can't afford those loans. |
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jimdotedu
 |
Over the past 5 or so years, lenders offered "teaser Rates" or adjustable rate mortgages where when the fed raised interest rates, the interest on the mortgage also went up. People bought houses because they were appreciating so fast they could resell them before the rates went up.
Things caught up to them, and mortgage rates went up, houses were harder to sell, and a lot of people got caught (including lenders)
Most of the lenders are publically held company's and are loosing money -- the shareholders don't like that so they sell their stock, and the price goes down, The companies have a hard time borrowing money to make new loans, or pay debt they already have, so they sell other investments, and the price on them goes down.
Some people hold money in their IRAs and such and are selling out of these to save their homes. More selling = reduced prices, so almost everything is hurt. |
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CPA/PFS
|
There are basically 2 issues in the home loan market.
One is the "sub prime". Simply stated, these are the high risk loans to borrowers that had poor credit histories or otherwise barely qualified for the loan.
The other is ARMs. Adjustable Rate Mortgages. ARMs typically have a fixed interest rate for a period of time and then float up. When the fixed rate period ends ... many homeowners can't afford the increased payment. This is a huge issue as $521 billion of mortgages will reset in the first 6 months of 2008 ... which is more than all of 2007 ... which has been bad.
Think about it this way. Lots of people respond to car ads touting the monthly payment and ignore the overall purchase price. Then after a fixed period of time they have a balloon payment. They often times end up owing more for the car than it is worth. Similar things are happening in the lending/housing market.
As to why it impacts the whole market ... with more re-sets and sub primes you get more people who can't afford their payment. That leads to more foreclosures. The more foreclosures the more existing houses are on the market. Home prices tend to drop ... making the problem worse. The sub-prime lending market has virtually been shut down.
Now, what should be done about this? Nothing.
I hope this is simple enough for you. |
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Brain
|
Again, it is a combination of things that are contributing to the downfall. 1. First problem. Borrowers spend too much and don't save or think of paying down their home loan. Then, they lose hours, or spouse loses their job, etc. and they haven't planned for it, so they STOP paying their home and eventually they walk away from the home. 2. An investor sees that home and buys it for lets say $50K less. 3. That just made every home that is like it worth $50K less. in that neighborhood. 4. John doe in same neighborhood tries to re-finance the arm he had, but his home is worth $50K less than what is owes, so he walks away and the circle of loans continues. Hope this helps. :) sad sad sad sad |
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zioncanyon
 |
people have bought houses on credit and cannot afford it anymore...these people were given teaser rates and now it is time to pay the piper...in all fairness, it is not a crises anyways, just a weeding out of those that should not have bought homes anyways...things are returning to normal |
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dvskv
 |
There is much GOOD ADVICE but something very similar did happen back around 1988 - 1989 when the price of homes was appreciating very fast and Savings & Loans were lending money to finance mortgages and in doing so they inflated the real market value and home appraisals so much to allow people to buy more home than they could afford or to refinance. Shortly thereafter there was a big savings & loan scandal and the unfortunate ones were those individuals who bought on the tail end when prices were at their peak bec in 1990 there was an abundance of homes for sale that a Seller could not be choosy or he/seh might be stuck with making mortgage pymts forever...unless they had a lot of savings in the bank to ride out the valley. The real estate continued to be slow and did not pick up again until 1998 before it took off like arocket from 1999.
It's still a GOOD TIME to BUY UP if you have plenty of savings in the bank but one would be foolish to offer full price; rather they should look & selectively identify targets that interest/appeal to them as well as having good resale bec of location etc in even a bad market.
By the way, I recall the strangest classified ad back in the early 1990's when a Seller who would lose money bec his house was worth less than he/she paid was actually offering a Buyer cash to assume his mortgage loan...In that particular situation, the pic it is painting is what the market price for that home once an individual subtracted the associated sales commission and other related expenses, the Seller realized that he/she would still own the bank money and had lost $$ on the deal so to minimze the impact this seller decided to save/reduce many of those transaction fees by simply having the title to the proprety transferred legally and recorded at the courhose and let the new Buyer deal wth the Bank/S&L who assumed the previus Buyer's mortgage...
Hope the Above Info Helps! |
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kate
 |
The old loan types were fixed rate .
Because people wanted more house than they could afford , they invented ARM (adjustable rate mortgages) that had a fixed rate for 2 to 5 years , then the rate reset to a much higher rate .
Also , there are the 'negative amortization' loans where the rate was always higher but only about 1/2 of the interest was required for a few years and the other 1/2 was added to the loan balance every month . After a few years , the loans were way more than when they started .
People with the ARMs and Neg Ams were hoping that house prices would continue skyrocketing , then they would just sell before the big payments kicked in .
Whoooooops , did Not happen that way !
Now , they can't make their New payments and the lenders and investors that gave them $$$ are Not going to get it back . . . and some of that $$$$ came from pension investments , sooooo
Even seniors may have their pensions cut because of the mortgage defaults .
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