Is it just the type of loan that's the issue? (I don't think so)
anonymous
October 3 2008, 12:41:07 UTC
What's your basis for this statement: "But I think that's a very small number compared to what Wall Street expects the default rate to be on the adjustable rate mortgages" ?
I don't think the problem is the loan terms. I think the problem is that the loan terms were created to encourage folks to buy more house than they could afford. In other words folks were tempted by various adjustable rates, jumbo loans etc. because they bought the initial payment down to what looked affordable in the short term. So, I have no reason to expect that the folks that are having trouble paying their mortgage would be less likely to default on a 30 year loan.
But perhaps that's a detail that can be tweaked? I do like the idea that removing risk from the mortgage is a "tidy" way to solve the problem. So, how to fix the fact that over extended homeowners still can't pay a 30 year mortgage? How about...
1) Make it a 50 year loan - or whatever length it has to be to reduce the principal+interest payment to a set percentage of the homeowners income (see note).
2) Make it an interest only loan - the government owns the house but lets you live there. Not quite sure how to structure this.
3) Write down the principal of the house (Biden mentioned this last night) to a point where the homeowner can afford the house (using the same sort of calculation as I mentioned in (1)). When the house is sold the government (and tax payers who funded this) would get back the prior value of the house (maybe plus a certain amount of interest?)
So, all in all I like your idea of "trickle up" - remove the risk from the mortgages and let the trading of mortgage backed securities continue.
However, I disagree that simply changing to 30 year loans will solve the problem. The key issue is that folks over-extended themselves.
Note on the calculation of what's affordable: This would be a key sticking point. How would one fairly decide what is affordable? And how would one reasonably stop people bilking the system?
John "I'm not anonymous I just don't have an account and don't want to create one" H.
Re: Is it just the type of loan that's the issue? (I don't think so)hotwire7October 3 2008, 14:03:48 UTC
There is a universe of home-owners who got these bad mortgages for a variety of reasons. Some of them are indeed very over-extended. No doubt there are a few who are beyond helping. But as long as we keep that number down to the "ordinary" expected number of defaults all is well.
On the other end of the scale there are homeowners with a lot of equity in their homes who got tricked into re-financing at what was presented as a lower interest rate. These folks would be very happy to just go back to the old fixed rate.
And most of them are in between these two extremes. We need to give them enough help so they can stay in the home and keep making payments, rather than having an incentive to walk away.
Yes, there are $500k houses that folks should never have bought. But I can show you many neighborhoods full of $50k and $30k houses that are being walked away from. It wouldn't take much money to prop those loans back up, and it's hard for me to argue that a $30k home is extravagant for anybody who has a job. I was in one of those neighborhoods yesterday, and it's getting ugly. These are working-class homes, not McMansions.
One key point here is that it actually does not matter if a few people "bilk the system" and we give some folks more assistance than they actually needed. Remember, we're doing this to help the banks and the credit system. The fact that we're actually helping, or even giving a gift to, some ordinary homeowners is merely a side effect. We're just reducing the banks credit risk, in a much more efficient manner than buying all their bad paper.
It is my (unsupported) argument that even if there was an outrageous 50% rip-off rate, it would be more efficient and less of a ripoff than just buying whatever junk paper the banks want to unload. And if we the taxpayers are going to be ripped off, I'd far rather be ripped off by a million poor homeowners taking little nibbles than a hundred rich bankers gorging at the trough.
Re: Is it just the type of loan that's the issue? (I don't think so)
anonymous
October 3 2008, 14:25:19 UTC
I absolutely agree with your sentiments in the last paragraph.
However, I still disagree that the problem is the loan type (adjustable, jumbo or whatever vs. 30 year fixed). I think the fundamental problem is that folks qualified for loans they just plain couldn't afford. Otherwise, why would there have been a "sub-prime" market anyway? The lenders reduced the bar way too low so as to sell more mortgages.
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?
Folks walking away from $30K or $50K houses maybe should be renters not owners? However, I've no problem with helping them be owners rather than renters. That's socialism on a grand scale though - but I'm up for it.
Also (and perhaps this is the bigger problem) there are folks who got home equity loans or re-fi's to buy jet skis and other such toys. Perhaps those are the folks that could convert to a 30 year loan.
So, yes, I support your idea (trickle up). But, I think you're over simplifying to think that converting them to 30 year fixed rate loans would solve the problem.
But, I don't want "Palinesque" soundbites from you ;-) Show me the facts! We need to know how many folks are in which of these categories: (1) Could afford a house lower down the spectrum that would provide safe and practical accomodation (yes, I realize that someone who works in Silicon Valley can't buy a house in North Dakota) (2) Over extended their home equity but with a 30 year fixed rate and some BUDGETING & PERSONAL RESPONSIBILITY FOR CRISSAKES! could afford to stay where they are (3) Don't have a steady enough income to be a "reasonable risk" for even a $50K mortgage
I know you really don't have access to those numbers - so we basically have different points of view on the size of each category and how best to help them.
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)
anonymous
October 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.
Re: Is it just the type of loan that's the issue? (I don't think so)elizillaOctober 3 2008, 14:40:32 UTC
The problem with changing from a 30 year loan to a 50 year loan, is that it hardly drops the payments at all. At 30 years, the first payment is already almost all interest - only about $20 or $30 goes to the principal. If you extend the loan to 50 years, the payment might only drop by five or ten dollars.
The other problem is that with the declining house prices, many people are "upside down" on their mortgages. Ie: They bought a $200,000 house, financed $195,000, and now the house is worth $150,000. They have negative equity. What incentive is there for them not to just walk away and let the bank take that house?
I would say, though, that if the taxpayers are going to take the hit for this, I'd rather see it go to the home owner.
Heck, convert the loan to a 30 year fixed, write down the principal to whatever the current value of the home is, and offer the person the chance to stay in the house with this new loan. Pay the difference to the banks, so they are no longer holding the "toxic paper". If/when they sell the place, the taxpayer gets some share of whatever equity they pull out of it after paying off the loan. Maybe set some requirements, that the home owner has to live there and keep making payments for X number of years, and have some sort of penalty if they don't.
I'd limit it to owner-occupied homes, and not offer it to "flippers".
Re: Is it just the type of loan that's the issue? (I don't think so)
anonymous
October 3 2008, 15:17:53 UTC
"The problem with changing from a 30 year loan to a 50 year loan, is that it hardly drops the payments at all. At 30 years, the first payment is already almost all interest - only about $20 or $30 goes to the principal. If you extend the loan to 50 years, the payment might only drop by five or ten dollars."
Good point - I forgot about basic math there for a while. Sorry about that.
"Heck, convert the loan to a 30 year fixed, write down the principal to whatever the current value of the home is, and offer the person the chance to stay in the house with this new loan. Pay the difference to the banks, so they are no longer holding the "toxic paper". If/when they sell the place, the taxpayer gets some share of whatever equity they pull out of it after paying off the loan. Maybe set some requirements, that the home owner has to live there and keep making payments for X number of years, and have some sort of penalty if they don't.
I'd limit it to owner-occupied homes, and not offer it to "flippers"."
This get's my vote - it addresses the problem I saw with Erik's initial proposal (unless I missed something). AND it's far simpler than my over-complicated approach.
Besides, you ride a V-Strom which everyone knows is FAR BETTER than any bike Erik rides... ;-)
Re: Is it just the type of loan that's the issue? (I don't think so)elizillaOctober 3 2008, 17:10:38 UTC
Don't even get me started on V-Stroms. Unless, of course, you want to buy this one, so I can buy another 20 year old Honda and reduce the amount of wrenching I have to do regularly just to keep the darn thing streeted.
I don't think the problem is the loan terms. I think the problem is that the loan terms were created to encourage folks to buy more house than they could afford. In other words folks were tempted by various adjustable rates, jumbo loans etc. because they bought the initial payment down to what looked affordable in the short term. So, I have no reason to expect that the folks that are having trouble paying their mortgage would be less likely to default on a 30 year loan.
But perhaps that's a detail that can be tweaked? I do like the idea that removing risk from the mortgage is a "tidy" way to solve the problem. So, how to fix the fact that over extended homeowners still can't pay a 30 year mortgage? How about...
1) Make it a 50 year loan - or whatever length it has to be to reduce the principal+interest payment to a set percentage of the homeowners income (see note).
2) Make it an interest only loan - the government owns the house but lets you live there. Not quite sure how to structure this.
3) Write down the principal of the house (Biden mentioned this last night) to a point where the homeowner can afford the house (using the same sort of calculation as I mentioned in (1)). When the house is sold the government (and tax payers who funded this) would get back the prior value of the house (maybe plus a certain amount of interest?)
So, all in all I like your idea of "trickle up" - remove the risk from the mortgages and let the trading of mortgage backed securities continue.
However, I disagree that simply changing to 30 year loans will solve the problem. The key issue is that folks over-extended themselves.
Note on the calculation of what's affordable: This would be a key sticking point. How would one fairly decide what is affordable? And how would one reasonably stop people bilking the system?
John "I'm not anonymous I just don't have an account and don't want to create one" H.
Reply
On the other end of the scale there are homeowners with a lot of equity in their homes who got tricked into re-financing at what was presented as a lower interest rate. These folks would be very happy to just go back to the old fixed rate.
And most of them are in between these two extremes. We need to give them enough help so they can stay in the home and keep making payments, rather than having an incentive to walk away.
Yes, there are $500k houses that folks should never have bought. But I can show you many neighborhoods full of $50k and $30k houses that are being walked away from. It wouldn't take much money to prop those loans back up, and it's hard for me to argue that a $30k home is extravagant for anybody who has a job. I was in one of those neighborhoods yesterday, and it's getting ugly. These are working-class homes, not McMansions.
One key point here is that it actually does not matter if a few people "bilk the system" and we give some folks more assistance than they actually needed. Remember, we're doing this to help the banks and the credit system. The fact that we're actually helping, or even giving a gift to, some ordinary homeowners is merely a side effect. We're just reducing the banks credit risk, in a much more efficient manner than buying all their bad paper.
It is my (unsupported) argument that even if there was an outrageous 50% rip-off rate, it would be more efficient and less of a ripoff than just buying whatever junk paper the banks want to unload. And if we the taxpayers are going to be ripped off, I'd far rather be ripped off by a million poor homeowners taking little nibbles than a hundred rich bankers gorging at the trough.
Reply
However, I still disagree that the problem is the loan type (adjustable, jumbo or whatever vs. 30 year fixed). I think the fundamental problem is that folks qualified for loans they just plain couldn't afford. Otherwise, why would there have been a "sub-prime" market anyway? The lenders reduced the bar way too low so as to sell more mortgages.
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?
Folks walking away from $30K or $50K houses maybe should be renters not owners? However, I've no problem with helping them be owners rather than renters. That's socialism on a grand scale though - but I'm up for it.
Also (and perhaps this is the bigger problem) there are folks who got home equity loans or re-fi's to buy jet skis and other such toys. Perhaps those are the folks that could convert to a 30 year loan.
So, yes, I support your idea (trickle up). But, I think you're over simplifying to think that converting them to 30 year fixed rate loans would solve the problem.
But, I don't want "Palinesque" soundbites from you ;-) Show me the facts! We need to know how many folks are in which of these categories:
(1) Could afford a house lower down the spectrum that would provide safe and practical accomodation (yes, I realize that someone who works in Silicon Valley can't buy a house in North Dakota)
(2) Over extended their home equity but with a 30 year fixed rate and some BUDGETING & PERSONAL RESPONSIBILITY FOR CRISSAKES! could afford to stay where they are
(3) Don't have a steady enough income to be a "reasonable risk" for even a $50K mortgage
I know you really don't have access to those numbers - so we basically have different points of view on the size of each category and how best to help them.
But hey, it's an interesting debate...
John H.
Reply
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?
Reply
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.
Reply
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.
Reply
The other problem is that with the declining house prices, many people are "upside down" on their mortgages. Ie: They bought a $200,000 house, financed $195,000, and now the house is worth $150,000. They have negative equity. What incentive is there for them not to just walk away and let the bank take that house?
I would say, though, that if the taxpayers are going to take the hit for this, I'd rather see it go to the home owner.
Heck, convert the loan to a 30 year fixed, write down the principal to whatever the current value of the home is, and offer the person the chance to stay in the house with this new loan. Pay the difference to the banks, so they are no longer holding the "toxic paper". If/when they sell the place, the taxpayer gets some share of whatever equity they pull out of it after paying off the loan. Maybe set some requirements, that the home owner has to live there and keep making payments for X number of years, and have some sort of penalty if they don't.
I'd limit it to owner-occupied homes, and not offer it to "flippers".
Reply
Good point - I forgot about basic math there for a while. Sorry about that.
"Heck, convert the loan to a 30 year fixed, write down the principal to whatever the current value of the home is, and offer the person the chance to stay in the house with this new loan. Pay the difference to the banks, so they are no longer holding the "toxic paper". If/when they sell the place, the taxpayer gets some share of whatever equity they pull out of it after paying off the loan. Maybe set some requirements, that the home owner has to live there and keep making payments for X number of years, and have some sort of penalty if they don't.
I'd limit it to owner-occupied homes, and not offer it to "flippers"."
This get's my vote - it addresses the problem I saw with Erik's initial proposal (unless I missed something). AND it's far simpler than my over-complicated approach.
Besides, you ride a V-Strom which everyone knows is FAR BETTER than any bike Erik rides... ;-)
John H,
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