Funny little cartoon that explains the US Mortgage mess | The Coffeehouse

phreaks

The funniest ones are always true.

http://www.businesspundit.com/sub-prime/

harumscarum

So if people made their house payments the system would have been fine?

GoddersUK

Just a question - does the US have council/affordable housing for those that can't afford to buy like the UK?

phreaks

harumscarum wrote:

So if people made their house payments the system would have been fine?

Yes, of course.

phreaks

GoddersUK wrote:

Just a question - does the US have council/affordable housing for those that can't afford to buy like the UK?

I think That is what Fannie Mae does, sort of.
http://en.wikipedia.org/wiki/Fannie_mae

Isshou

harumscarum wrote:

So if people made their house payments the system would have been fine?

I think a number of factors go into that.

For example the option ARM loans have multiple payment options, the lowest happening to be under the amount of accrued interest. Naturally people looking for the cheap way out will pay the lowest value. The remaining interest has to go somewhere, so it gets tacked onto their principle and increases the amount the borrower owes, so the slowly lose value on their homes by only paying off part of the interest (which grows as the outstanding balance grows) then a few years down the line when the option arm goes into the adjustment phase it adjusts so that the borrower has to start paying down the loan, which by this point brings the monthly loan payments so much higher than what they could afford.

They start making partial payments or skipping payments, which the lender doesn't like because they don't get paid.

Of course the mortgage brokers are long out of the picture and the banks they are dealing with have since divided up their home loan and put it into several home loan backed securities so the borrower really doesn't have a good way to renegotiate the terms of the loan to something they can actually afford.

That is only one of the bad practices that led to some of the US Mortgage mess. You can even start a home loan upside down. The down payment and fees being added onto the home loan makes the loan more than the value of the house. Starting a loan upside down is one of the worst financial mistakes you can make.

phreaks

Isshou wrote:

harumscarum wrote: So if people made their house payments the system would have been fine?

I think a number of factors go into that.

For example the option ARM loans have multiple payment options, the lowest happening to be under the amount of accrued interest. Naturally people looking for the cheap way out will pay the lowest value. The remaining interest has to go somewhere, so it gets tacked onto their principle and increases the amount the borrower owes, so the slowly lose value on their homes by only paying off part of the interest (which grows as the outstanding balance grows) then a few years down the line when the option arm goes into the adjustment phase it adjusts so that the borrower has to start paying down the loan, which by this point brings the monthly loan payments so much higher than what they could afford.

They start making partial payments or skipping payments, which the lender doesn't like because they don't get paid.

Of course the mortgage brokers are long out of the picture and the banks they are dealing with have since divided up their home loan and put it into several home loan backed securities so the borrower really doesn't have a good way to renegotiate the terms of the loan to something they can actually afford.

That is only one of the bad practices that led to some of the US Mortgage mess. You can even start a home loan upside down. The down payment and fees being added onto the home loan makes the loan more than the value of the house. Starting a loan upside down is one of the worst financial mistakes you can make.

Those things are all true, but really isn't relevant to the market being what it is now from an institutional perspective.

When mortgages are defaulted on, someone has to take a loss. That is the significant part.

Since the mortgages were securitized, it's not just the lender taking the hit, it's also the funds and investors that are holding these securities.

As the default rate grows, nobody wants the CDO's anymore, so their value decreases even more...

Then factor in the CDS's that were leveraged on top of these, it's a real mess.

Isshou

phreaks wrote:

Those things are all true, but really isn't relevant to the market being what it is now from an institutional perspective.

When mortgages are defaulted on, someone has to take a loss. That is the significant part.

Since the mortgages were securitized, it's not just the lender taking the hit, it's also the funds and investors that are holding these securities.

As the default rate grows, nobody wants the CDO's anymore, so their value decreases even more...

Then factor in the CDS's that were leveraged on top of these, it's a real mess.

I agree, but if there was regulations that prevented things like the option arms allowing payments less than the interest on the loan some of the defaulting could have been avoided, which would mean the securities wouldn't be all failing, and the losses could be managed.

Of course it takes every part of the process for it to have mucked up this bad. In theory, if the default rate didn't sky rocket, securitizing the morgages would have buffered the defaulting that was known to occur and could have been a way for viable sub-prime lending. Of course one thing led to another and the default rate sky rocketed and the securitizing just made the damage more wide spread.

Of course non of us are economists or financial professionals so it's all sideline speculation anyways.

rdaJay

Isshou wrote:

I agree, but if there was regulations that prevented things like the option arms allowing payments less than the interest on the loan some of the defaulting could have been avoided, which would mean the securities wouldn't be all failing, and the losses could be managed.

<sarcasm>
Ah, but you forget a tenent of modern US Conservatism. Paraphrasing Ronald Reagan, Government can't solve the problem.. Government IS the problem.

To have regulation is to have government intervention. And that's bad. Let the markets figure it out. Everything will be fine in 30 years. Just watch.
</sarcasm>

Bas

I was at page friggin twenty-one when I realised that I wasn't even halfway yet, and gave up.

phreaks

Bas wrote:

I was at page friggin twenty-one when I realised that I wasn't even halfway yet, and gave up.

You were almost halfway!
That is where they really start to get good, I would post some of the LOL ones, but Charles wouldn't appreciatte it.

lumbule

From the consumer point of view, ARM loans are just not a good idea. People need to educate themselves about the different kinds of loans before talking to a loan officer. Yeah, you may get a smaller payment for the first part of your term but you eventually and most likely will pay more in the long run when compared to a fixe rate loan. Put part of the blame on who came up with the ARM loan.

phreaks

lumbule wrote:

From the consumer point of view, ARM loans are just not a good idea. People need to educate themselves about the different kinds of loans before talking to a loan officer. Yeah, you may get a smaller payment for the first part of your term but you eventually and most likely will pay more in the long run when compared to a fixe rate loan. Put part of the blame on who came up with the ARM loan.

Ya, lenders were nefariously marketing these loans to unsuspecting buyers under the notion that , equity will increase enough in the period before the option resets that they would be able to refinance to a lower fixed rate at some period in the future.

That is partly why Ameriquest was sued under Class Action for deceptive practices.

Unfortunately, the governments penalty of mailing all the injured mortage holders $800 did nothing to fix the problem.

And here we are now...

rdaJay

phreaks wrote:

lumbule wrote:
From the consumer point of view, ARM loans are just not a good idea. People need to educate themselves about the different kinds of loans before talking to a loan officer. Yeah, you may get a smaller payment for the first part of your term but you eventually and most likely will pay more in the long run when compared to a fixe rate loan. Put part of the blame on who came up with the ARM loan.

Ya, lenders were nefariously marketing these loans to unsuspecting buyers under the notion that , equity will increase enough in the period before the option resets that they would be able to refinance to a lower fixed rate at some period in the future.

That is partly why Ameriquest was sued under Class Action for deceptive practices.

Unfortunately, the governments penalty of mailing all the injured mortage holders $800 did nothing to fix the problem.

And here we are now...

If anyone is interested, there is a very interesting podcast available on This American Life:

http://www.thisamericanlife.org/Radio_Episode.aspx?sched=1242

If you're unfamiliar with the format, it is the telling of a theme (in this case, the Giant Pool Of Money) using narratives of the people involved. Specifically, people who took the loans, people who made the loans, and people who sell the loans were all taped.

Sometimes, This American Life can be a little bit "out there". This episode, however, is very interesting if you're interested in the American Housing situation.