Will someone explain to me about the morgage co. problem?

Why are the morgage co. in trouble. Laymen's terms please. When you get a loan, don't they have to pay for house and you pay them back? Why are there so many foreclosures?

Not everyone pays them back. There are many foreclosures because many persons are not paying them back.

OK, say you want ot buy a house, first they do a credit check on you which is basically a history of how responsible you have been with paying back owed money in the past. They get an idea of the risk involved with loaning you that dough. The higher the risk the higher the interest rate they are going to charge you on that loan, if they even decide to give you one. And that was the problem, the mortgage companies got greedy and were giving out home loans to people with horrible credit and coupling that problem by charging them exhorbitant interest rates. Basically they were making the most irresponsible borrowers pay unusually high monthly notes, a recipe for disaster. Then as they were losing all of this money they couldn't sell the houses quick enough so they had to begin drastically reducing home costs, thus the housing market crash and the exact definition of "a buyer's market"

Laymen's Terms...AoK, well bad loans based on inflated home prices and overvalued appraisals. Lenders giving loans with little to know equity 100% loan of the home price. Now a little more for you when you inflate something above it's intrinsic value it has away of self correcting when market conditions change such as in this situation example...real wages don't keep up with rising loan agreements and your home also starts to lose value depreciate and you can't borrow against it anymore to keep the cycle going. I told you it has a way of self correcting rather you realize it before or the signs are not clearly apparent in the beginning. WHEW..that's only part of the story and I tried to Laymen term that.

The Federal Reserve lowered the cost of borrowing, and interest rates were kept artifically low, to delay a recession several years ago. Soon banks were willing to lend to just about anyone, but instead of offering fixed-rates, they created and offered Adjustable Rate Mortgages (ARMa) and other "innovative" financing schemes like Interest Only mortgages (a fancy way to rent), no down payment, and even cash back loans to separate the fools from their money.

So, the first wave of financial trouble occurred when housing prices stopped rising, and home owners found it harder to use their home as an equity ATM by getting second, third and sometimes even fourth mortgages. The consumer spending that has kept the economy stable is fading fast.

Now, home prices have dropped significantly, and a lot of home owners are now substantially "under water" - their houses are worth alot less than the price they bought them for. So, the temptation is getting greater and greater for many new homeowners to 'walk away' from their mortgages, and let the house fall into foreclosure.

The next wave was the interest "resets" on existing ARMs that raised the monthly payments on sub-prime homeowners , then as the economy weakens these defaults began to spread to more creditworthy loans like Alt-A and Prime mortgages. Since the qualifications for geting refinancing are getting steeper, more homeowners with shaky credit are getting behind, and will soon not be able to pay the larger money payments.

Much of this "housng bubble" was created by buyers and lenders overlooking household income and other qualifications, or changing it upward on apps to get approval of loans that wouldn't have been approved in a saner market. A substanial amount of these "liar loans" are out there waiting to implode.

Meanwhile, banks didn't want to hold on to to all this paper, especially the risky stuff, so, they began to bundle mortgages into classes (tranches), insured these package deals (CDOs) them and then sold them to investors as being safe high yield, investments As the price bubble started to collaspe the investors soon found that they could not sell these investments for anything close to what they bought them for, and belatedly found out that high yield does mean more risk after all. Since this practice is ubiquitous, and liquidity is a coward (it runs away from higher risk), no bank knows the exposure other banks have to this toxic waste paper, so interbank interest rates (LIBOR) rose sharply - because banks were more reluctant to lend - even to other banks.Lately this rate has declined, but more bad news could easily restart the flight from lending risk between banks.

To hide the fact that banks were having serious problems they created a new form of asset whose worth could only be estimated (worthless) because they were allegedly rarely traded, and also created companies to "buy" them to hide staggering losses from their balance sheets - much like what Enron did..

As, credit gets scarce, and borrowers either can't or won't borrow more, retail sales are becoming weak. How much more time does it take to fire 50,000 employees than just one? So much for unemployment as an indicator that things are now alright - unemployment will grow as companies have to cut costs, causing a further weak economy, causing more layoffs... So the Fed and the European Central Bank(s) are beginning to dump large amounts of liqidity (easier credit) into the insolvent banks to prop them up, or are cajoling other banks to buy what's left of the more insolvent banks (BofA buying Countrywide) to keep up the illusion that there's nothing wrong here, hoping the crisis will solve itself or go away over time. The weakening economy is starting to cause mortgage problems in commercial property as well...

The Fed's powers do not extend to forcing banks to lend or people and companies to borrow - and they can only cut interest rates to zero - giving away free money isn't going to happen.

That's enough gloom, time to have a cold one....

there are numerous reasons why the problem has occurred, the main one u see in the media, involves arm loans, these are loans that have a variable rate, adjustable rate mortgages, and depending on the size of the loan and the rate monthly payments over the life of the loan can go up, lol never seen one go down, if the loan was large enough and the rate goes up high enough the monthly payment could increase 1000-2000 a month. a lot of folks who didnt qualify for a regular mortgage took these loans to get into a house, and some who did were sold a bill of goods saying look at the low start interest rates and what they werent told was the adjustment period which could be 6 months, 1 yr, 2yr, 3yr, etc, the rates started low but could increase 2% every adjustment up to a maximum of normally 13% for good credit for poor credit it could go as high as 18-20% a loan for 200,000 @6% the payment is 1200 a month same 200,000 at 13% is 2214 without taxes and homeowners, lots of loans were made to folks with poor credit, they didnt have to prove income with good credit, etc. lots of self employed folks took no income verifciation loans, and now lots of folks due to job layoffs, slowdowns in business, accidents, health probs. etc can no longer pay the strting rate mortgages let alone the increase, their credit has deteriated and they cant refinance at the going rate because of late mortgage payments, one 30 day late on a mortgage hurts your credit badly 2 30 day lates or one 60 day late destroys your credit and you cannot refinance with a conventional bank for 2 years, basically. now the rates are up, those not paying are losing their homes, and there are so many no one can buy them all, therefore the lenders are losing money as its not coming in and they are sitting on vacant homes to be sold for less than what the lenders are owed. athe analogy is like a snow ball rolling down hill, the bigger it gets and the faster it goes, till crash, and thats just what has happened, hang on we have at least till summer of 2010 before this levels off as these mortgages were sold in abundance thru the biginning of fall 2007, and yes i predict its going get worse in the next 18 months. i have sold over 1000 mortgages in the last 10 years only one of which was a arm loan, i am totally familiar with interest only loan, pay option arms, etc, and once i explained to a client the pitfalls and the worse case scenario of these loans i had only 1 client in 10 years demand to be put into an arm. the rest thank goodness were smart enough to listen, i sleep well at night as i now know although i didnt make as much as my coworkers, i didnt hurt anyone, all the loan officers were taught to sell armloans better commission rates and u sold it by telling the client dont worry about the adjustment we will refinance you before then, what they didnt tell the customer is oh by the way we will double up on what we make off you by charging you again for the second loan. lol u would be surprised at the doctors, lawyers, school teachers, law enforcement officials etc. that were sold loans that i wouldnt sell to my worse enemy and they didnt understand what they were signing there name and lives to. today these folks are in trouble as some of them owe more than the house is worth, and the property values for the first time in 20 years are declining

The lenders got greedy when the rates went down and they all decided to loan money to people with bad credit histories.

The real problem was they got them into adjustable loans, so , for the first 2 years, the payment was say $450 but then when the rate adjusted, say double the apr, now the payment is
$900 and they can't pay it.

The mortgage lenders are giving loans to people who really don't qualify or who are a bad risk. Then these people default on the loans in record numbers. Then the mortgage company has to file bankrupt because these loans aren't getting paid. It is a domino effect. Also, people are getting loans at short term low interest rates and then the interest is going up and they can't keep up with the payments. So the best thing is for mortgage companies to make sure they are loaning only to those with high credit scores and for the buyer to only get loans with fixed interest rates.

There are a lot of different reasons for the current problem however the main one I see over and over works as follows:

1. Over the past few years, housing prices have been going up dramatically and they were selling quickly. Therefore, if you bought a house with no money down with creative financing, you could sell it if you could no longer pay the payments and still make money.

2. Then, the interest rates started to drop dramatically making adjustable rate mortgages more attractive. Many people that owned homes were actually able to take cash out to pay off other debt (like credit cards) and have a lower payment over all. Unfortunately, a lot of these people were using this extra cashflow to buy new things on credit instead of investing or saving the money.

3. Because housing prices kept going up, people could run up their debt and refinance their mortgage every year or two, take out more cash and still keep their monthly payments affordable.

4. Then, interest rates started to go up. All of a sudden, people couldn't afford to take out cash to pay off their other debts. The alternative was to sell thier home to get out of their mortgage obligation.

5. Then, so many people put thier homes on the market that it got to be tough to sell their homes unless they lowered the price.

6. Prices of homes began to tumble and soon, people couldn't even sell thier homes for enough money to cover the mortgage. Therefore, they had to consider a "short sale" or foreclosure.

7. Short sales caused the prices to go down even more. People couldn't sell their homes, couldn't pay the mortgage payments, and couldn't take out cash to pay off all of their credit card debt. So, in addition to foreclosures, credit card companies started having problems as well.

8. Since credit cards are typically unwritten by major banks, the major banks started cutting back on other types of mortgages to reduce their exposure to future risk.

The bottom line is that, at this point, if you have a sizable down payment, you can still get an interest rate in the high 5's to low 6's. However, the companies that were "specializing" in making extremely profitable loans to marginal buyers are going out of business quickly.

Ironically, most of the programs that helped fuel the problem weren't even around 10 years ago. So now, it really isn't that the mortgage industry isn't doing loans, it's that the "marginal" programs are going away.

Mortgage companies became greedy. They reasoned, If a person cannot afford to buy a house that costs more than he can afford on a regular FHA or bank loan, let's sell him an ARM, an adjustable rate mortgage. Interest rates for FHA and regular bank loans are 6-9% or higher depending on the state in which you live. ARM rates start at 4% but change as the economy changes. When the energy crisis hit and rates went up due to inflation, ARM rates increased to a level where the buyers did not have enough money to make their payments.
For a short term mortgage lenders and banks made a ton of money on commissions and fees. Now, those very same lenders are losing their shirt. Those people who purchased homes they could not afford at the urging of the lenders were defrauded.
If you don't understand, e-mail me.

WHAT HAPPENED IS THAT BANKS STARTED GIVING LOANS TO SUB-PRIME INDIVIDUALS.

THIS MEANS, YOU CAN'T AFFORD A HOUSE, SO WE GIVE YOU A TEASER RATE... SAY 4.99% FOR 2 YEARS. AT THAT RATE, YOU CAN AFFORD THE HOUSE.

THEN THE RATE AFTER 2 YEARS JUMPS TO 9.99 OR CLOSE TO DOUBLES YOUR MONTHLY PAYMENT AND YOU CAN'T AFFORD THAT.

THEN TO ADD FUEL TO THE FIRE.... HOUSE PRICES WENT SKY HIGH CAUSE INTEREST RATES JUMPED. IF YOU LOOK, YOU'LL SEE HOUSES GO FROM $140,000 TO $230,000 BECAUSE AT A LOWER INTEREST RATE, IT'S THE SAME PAYMENT.

THE ONLY LOANS THAT AREN'T HAVING PROBLEMS ARE THOSE WHO REQUIRED 20% OR MORE DOWN AND NEVER GOT INTO THOSE ADJUSTABLE RATE'S TO BEGIN WITH.

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