Can someone simply explain the mortgage crisis. I just told someone that I read millions are in trouble but..?

..I really don't know what happened. They were given loans & then the intrest rate went to high so they couldn't afford the payment & are now losing their house? Please explain cause I really never heard what happened. Are certains states hit harder?

My husband is a mortgage loan officer, so I get daily reports on the state of the industry and dire warnings about the economy. Basically, from what I can understand, it's at least a two-fold problem. On one side you have lenders who gave loans, often 100% loans with no down payment to people who really did not qualify, who didn't have the income or potential income to keep up with payments once they were in their houses. They also often didn't understand how mortgage loans work, how their loan will possibly change over time, etc. This kind of ignorance is not just because loan officers weren't informing their clients, but also because the clients were choosing to remain ignorant--granted, it's a complicated and frustrating thing to figure out. And alot of those lenders were simply being unscrupulous about who got loans, approving loans to people who couldn't or didn't have to prove income, fudging the truth on paperwork, and so on, in order to the the loan approved and get their commissions.

On the other hand, there are millions of people out there who chose not to be educated about the process (and information is out there), who lied about their assets, or who are just plain not smart about how they spend their money, leaving no money left to make that mortgage payment. I hear tales daily about how this client or the other one went out, bought a new car, went on vacation, but boo-hoo, couldn't pay their mortgage. Let's face it, we're a society that is addicted to immediate gratification and we have a hard time being smart about saving and spending our money. People were also re-financing right and left to get some extra cash--but spending that cash on stupid stuff that only put them more in debt. Some people did use the cash from their re-fi's for medical reasons, and other legitimate purposes, but in reality it wasn't "extra" cash, as people tended to think--it was just a reshuffling of what they already had; not new money.

And then there are just lots of hard-working people who tried to do their best and due to illness, or other catastrophic circumstances, couldn't keep up. And now with the economy going down the tubes, more of those people will be suffering the same kind of losses and losing their homes.

Some people bought far more home than they needed or really could afford. Some people didn't purchase the right kind of loan for them (but loans that made alot of money for the lenders). The reasons are many. Years ago, my father-in-law was shaking his head and saying that all that kind of lending was going to come back and bite everyone in the butt. And it has. People cannot afford the homes they bought and can't pay back their loans. The lenders are not making back the money they lent--money that funds other ventures, loans, and business. And money that pays THEIR employees.

My husband chooses to be a more ethical loan officer, and so makes a pittance--we're a family of five living in a tiny house and won't be upsizing any time soon. The 2 year old is still in our bedroom with us and will be there a while longer. No cable, no long distance, one cell phone, and very frugal living. More and more people will have to do the same, too, as the economy declines further. Prepare yourself!

What happened, plainly speaking, is a two-part issue:

1. People bought houses they could not afford.
2. Companies (mortgage companies, banks, etc.) lent money to people they should not have lent it to.

And it's a circuitous problem: #2 circles back to #1. The companies should not have lent money to the people who bought houses they could not afford, simply because those people could not afford to pay the loans they took out.

It's as simple and as tragic as that.

People signed mortgages that had adjustable rates after a certain time period (3 or 5 years). The paperwork spelled out how high the rates could go, but people didn't bother to read it. So when the time came, and rates went up, they could no longer afford their homes. Now the market is great. There are homes for sale by the hundreds. If you're looking to buy, now's the time.

I admit I was confused too. I wondered how so many people could be in trouble. I mean, is the job market that bad? Have that many people lost their jobs and they can't make their mortgage payments? I read an article in Reader's Digest the other day that explained one couple's situation. The woman became a real estate agent in California and started selling 2 houses a month. Her husband was laid off from his sales job so, after seeing how well she was doing, he started selling real estate too. Their income went from $60,000 to $160,000 in a year. They bought 2 new vehicles and found a house for $379,000. They got a sub-prime loan. I think it said they had interest only payments for a while, so none of their monthly payments were going toward principal. It was an adjustible rate loan with a balloon payment of $50,000 at the end. Well, the bottom fell out of the real estate market, they were both real estate agents, they had their mortgage, 2 new car payments, plus whatever other expenses and they couldn't pay it. She went 6 months without a sale. They lost the house and the bank sold it for $220,000. That's just one example. I think people who got fixed rate loans at legitimate banks are ok. It's the people who really couldn't afford to buy a house to begin with, who went with mortgage companies that only wanted to make a loan and didn't care if the people could make the payments, that are having trouble. Lenders work on commission too so the more loans that get approved, the more money they make. Apparently some lenders were making loans with terrible terms to people who didn't know better.

Here is the real story:
Greedy Builders, despite mounting inventories, kept building.
Greedy Realtors kept hyping house prices up, despite the high inventories.
Greedy People believing hype of never ending price increases, bought houses with no down payments.
Every pyramid scheme will pop eventually.
With people losing jobs, increasing rates for short term mortgages, foreclosures started to bring prices down.
Now, you owned a house worth 200,000 with a mortgage of 350,000 and had to sell. The banks didn't got any money from you, because you just walked away.
Next, the banks got in trouble... it just goes on. .

Sure and, like most things, it ain't terribly complicated:

1 - Stupid humans doing stupid-human tricks (read: taking out loans that any moron knew they were unlikely to be able to repay),
2 - Lenders who knew they would be selling the mortgages to other investors saw the stupid humans doing stupid-human tricks and said to themselves "Hey, we can make a good living helping the stupid humans to do their stupid-human tricks! (and, boy, were they right!), and
3 - Despite four layers of banking regulation in this country all the regulators were asleep at the switch (but, then, what do you expect from bureaucrats?).

To summarize: Without stupid humans doing their stupid-human tricks there would have been no "mortgage crisis". It's not really a crisis anymore than there's a recession going on: their called market corrections and they happen with some frequency - it's just that most folks and most certainly the idiots who bring us the "news" can never seem to remember this one simple fact of financial life in America. Oh, well, at least some of us do and know how to act like it, too.

As for whether or not some areas were harder-hit than others:

1 - Yes, just like always,
2 - For example: CA, FL, AZ, NV (aka: The Usual Suspects), and
3 - Some areas of this country have waaayyyyy more than their share of stupid humans.

It is very simple - Greed.

1.) People wanted to buy houses that they had no way of affording. Greedy and stupid.

2.) Companies were eager to lend money to people who were unqualified. Greedy and stupid.

I just read an article on the internet about a lady who makes $25,000/year who bought a $379,000 house with monthly payments of $4,000 (before the ARM adjusted up). Who moron is surprised when they lost a house they couldn't afford???

These stick figures explain it well:

http://www.mymoneyblog.com/archives/2008/02/subprime-loan-crisis-explained-by-cartoon-stick-figures.html

Beware of the rude language!!!
Beware of the rude language!!!
Beware of the rude language!!!

Hey Lynne, there is a really cool article in THE ATLANTIC this month. It's about the housing bubble and how it is a social phenomenon... and how it happened and how we can curtail booms and busts with small actions.

It's an amazing magazine. Check it out. I picked up my first copy yesterday and the thinking and ideas in there blew my mind. I think you'd love it.

It really can't be answered simply, but I'll try.

Busybody do-gooders complained that poor people were
denied mortgages and pushed Congress to do something. So Congress told the banks that they had to start giving mortgages to those who couldn't afford them. Thus was born the sub-prime mortgage industry. Banks charge higher rates to those who are at high risk of defaulting. Even then, the loans were so risky that the banks didn't want them. Thus was born the mortgage-backed security industry (the immediate cause of the current 'crisis'). In a nutshell, the banks don't want to keep these mortgages, so they package huge groups of them together as 'investments portfolios' and sell them to other banks, venture capitalists, hedge funds, even pension funds that are supposed to keep workers' money safe.

Everything was fine for a while, but the lowered standards for getting a mortgage for poor people eventually leaked through to the mortgage industry as a whole. I sold real estate 20 years ago and the rules were a lot tighter. There was no such thing as a mortgage where you didn't have to verify your employment or income to the bank. These loans started to appear - with higher interest rates, introductory 'teaser' rates that were affordable but were not when the rate went up, other gimmicks to get people who had no business buying a house to buy a house.

But it was no problem. House prices kept going up, so people could sell before the interest rate changed and cash out, then buy an even more expensive house. Places like Las Vegas, parts of California, Arizona, Florida, all over the country (except most of the Northeast that kept losing factory jobs) saw massive real estate investment. It started to get crazy. Someone would put their house up for sale and there would be a bidding war and they'd get fifty thousand MORE than they asked starting out.

That kind of craziness can't continue. When the real estate bubble burst, all of those new buyers that weren't worried about their adjustable rate loans going higher because the rising market would let them refinance and actually borrow MORE, were screwed when prices didn't go up. And they couldn't refinance, and they couldn't afford the new, higher payments.

It was totally their fault for getting into something they did not fully understand, but blame goes to the real estate brokers and agents who knew better and put people into these loans anyway, and the mortgage lenders, and the financial backers who bought these time-bomb mortgages.

When the loans started going bad, the financial companies that held them couldn't give them away. Many companies leveraged themselves to buy them. Leverage means you only have to put up a small amount of your cash to buy something worth a lot more - basically what a mortgage is, but a little different when it involves stocks and bonds and such. When the value of these mortgages became practically zero, the investors had to cover those losses by selling other assets. You may have heard about Bear Stearns earlier this year, the company that the government stepped in to 'bail out'? They were a large investment banker that got caught...word got out that they had a lot of these bad loans, and investors in Bear Stearns got nervous that they wouldn't get all of their money out, and caused what is called a 'run' on the bank, and the bank basically failed. NOT ONE BANK IN THIS COUNTRY has enough money to give every depositor back every cent if every depositor wants their money TODAY. Money is constantly moving around in other kinds of investments, that's how our financial system works.

I am making it sound worse than things actually are. The system still works fairly well. ANY market that gets too overheated will go through a correction, and that includes housing. When buyers start to believe that they are getting a good deal at current prices, they'll start to buy, and that is taking place in markets all over the country. In other markets, the number of foreclosed homes may still go up for a time, but things will eventually improve.

You have to be really careful about what you hear in the news. The media has an interest in painting as dark a picture of things as they can, if it will help the political candidates that they favor. They overwhelmingly favor Obama and the Democrats, and bad economic news helps the Democrats because they promise everyone that they'll kiss all the boo-boos and make them all better, when the exact opposite is the truth. Democrats led the push to make mortgages easier to get for people who can't pay for them.

The media likes to throw around words like 'crisis' and 'emergency' when the situations are nothing of the sort. Yes, housing is in a slump and the banks who made and invested in bad loans are taking a beating - and deserve to. But the media will shout out that "Foreclosures are up 50%!" to get you to believe that the sky is falling. What they WON'T tell you is that the overall default rate on a home mortgage is, on average, less than 2% of all homeowners. That means that 98% of homeowners are paying their bills. The media will scream '"Up 50%!!!!!", but they will NOT tell you that this amounts to less than 3% overall, instead of 2%, and that more than 97% of homeowners are making their payments.

A problem? Yes. A crisis? Not hardly

Enter Your Message or Comment

User Name:
User Email:
Post a comment:

Archive: Forum -Forum -Finance - Links - 1 - 2 - RSS - All RSS Feeds
The Causes and the Results. 0.054
Copyright (c) 2011 Financial Crisis Tuesday, May 29, 2012 - Terms of use - Privacy Policy