Re: Is it just the type of loan that's the issue? (I don't think so)elizillaOctober 3 2008, 14:52:36 UTC
"I'm not talking about McMansions either. However, I am talking about folks who are in $200K or $300K houses that should be in houses costing half as much. Now that the real estate market is cooling (or is stone cold) there are houses that those folks can afford - but they can't get out of their upside down loans. Perhaps an alternative plan for these folks would be government backed bridging loans to allow folks to downscale their houses? Or for the government to buy out that mortgage and sell the house on the open market?"
Thing is, there are folks who can only afford a $150K house, but they are in houses they paid $200K to $300K for, because there weren't any $150K houses available where they work, at the time when they bought. Now there are plenty of $150K houses. The housing stock in the area hasn't changed - just the valuations. They now live in the $150K house that they could afford, but they bought it three years ago, paid $200K, so they have an upside-down mortgage. If they could walk away from their current house and start over at zero, they could buy the house next door. A house that's exactly like the house they're in. But if they walk away, the bank is left holding the bag, and they are left with poor credit so they can't buy the house next door, and everyone loses.
If the taxpayer is going to pay $700 billion to hit the big reset button in the sky, why not keep people in their houses, rather than just pumping the money into the top level and keeping a bunch of Wall Street fat cats in the lifestyle they've become accustomed to?
Re: Is it just the type of loan that's the issue? (I don't think so)elizillaOctober 3 2008, 15:13:17 UTC
Yep, I agree (see plan below). However, there are also folks who say that they "need" 4 bedrooms when they could actually get by with three - or whatever stat you wish to use. By having folks downsize we might afford them the lesson of getting what they can afford vs. what they want. And, by doing it in this controlled fashion we can save their credit rating and all the other bad effects a foreclosure entails.
It's kind of saying "look, you made a mistake. we're not punishing you for it - we're offering you a reasonable way out". That's my intent - but perhaps it doesn't seem that way?
However, you also highlight the problem of having these types of discussions without more data. None of us really know how many folks fall into what general situations. We don't even seem to be able to agree on what the situations should be. So, we're hypothesizing based on the gut feeling that in a pool as large as this there are plenty of folks that might fall into pretty much any reasonable category we care to define.
Really, my main point is that Erik's initial suggestion "change them all to 30 year fixed and see what happens" doesn't strike me that it would work. (Which I think was his initial question - "would this work, if not, why not?")
Re: Is it just the type of loan that's the issue? (I don't think so)elizillaOctober 3 2008, 17:27:41 UTC
I don't know that getting people to downsize is the answer, short term. There aren't necessarily enough of those smaller houses out there, right now, since during the housing boom, no one was building modest sized homes. I remember when I was shopping for a house around here, the smaller places were all older ones, closer to the city center. A house like that in decent condition cost more than a brand new house on the edge of town, but that house on the edge of town would be twice as large. Sure, you could find an occasional cheap small house, but it would be the sort of fixer-upper that required extra investment beyond the purchase price just to make it livable, so it really wasn't cheaper.
Either you pay the premium for "walk to stores and restaurants" or you pay the premium for the bigger house. There are very few homes in the smaller-house-in-cheaper-location column. And with energy prices driving up the cost of commuting and the cost of heating, the value of well-located small homes is going to fall more slowly than the value of large homes farther out. This won't change until the surplus housing stock is used up and the builders start building again, and perhaps choose to build different kinds of houses because that's where the demand is.
Thing is, there are folks who can only afford a $150K house, but they are in houses they paid $200K to $300K for, because there weren't any $150K houses available where they work, at the time when they bought. Now there are plenty of $150K houses. The housing stock in the area hasn't changed - just the valuations. They now live in the $150K house that they could afford, but they bought it three years ago, paid $200K, so they have an upside-down mortgage. If they could walk away from their current house and start over at zero, they could buy the house next door. A house that's exactly like the house they're in. But if they walk away, the bank is left holding the bag, and they are left with poor credit so they can't buy the house next door, and everyone loses.
If the taxpayer is going to pay $700 billion to hit the big reset button in the sky, why not keep people in their houses, rather than just pumping the money into the top level and keeping a bunch of Wall Street fat cats in the lifestyle they've become accustomed to?
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It's kind of saying "look, you made a mistake. we're not punishing you for it - we're offering you a reasonable way out". That's my intent - but perhaps it doesn't seem that way?
However, you also highlight the problem of having these types of discussions without more data. None of us really know how many folks fall into what general situations. We don't even seem to be able to agree on what the situations should be. So, we're hypothesizing based on the gut feeling that in a pool as large as this there are plenty of folks that might fall into pretty much any reasonable category we care to define.
Really, my main point is that Erik's initial suggestion "change them all to 30 year fixed and see what happens" doesn't strike me that it would work. (Which I think was his initial question - "would this work, if not, why not?")
John H.
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Either you pay the premium for "walk to stores and restaurants" or you pay the premium for the bigger house. There are very few homes in the smaller-house-in-cheaper-location column. And with energy prices driving up the cost of commuting and the cost of heating, the value of well-located small homes is going to fall more slowly than the value of large homes farther out. This won't change until the surplus housing stock is used up and the builders start building again, and perhaps choose to build different kinds of houses because that's where the demand is.
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