A continuing saga:
The credit crisis is no longer just a subprime mortgage problem.
As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists.
***Until recently, people with good credit, who tend to pay their bills on time and manage their finances well, were viewed as a bulwark against the economic strains posed by rising defaults among borrowers with blemished, or subprime, credit.
“This collapse in housing value is sucking in all borrowers,” said Mark Zandi, chief economist at Moody’s Economy.com.
***An example of the spreading credit crisis is seen in Don Doyle, a computer engineer at Lockheed Martin who makes a six-figure income and had a stellar credit score in 2004, when he refinanced his home in Northern California to take cash out to pay for his daughter’s college tuition.
Mr. Doyle, 52, is now worried that he will have to file for bankruptcy, because he cannot afford to make the higher variable payments on his mortgage, and he cannot sell his home for more than his $740,000 mortgage.
“The whole plan was to get out” before his rate reset, he said. “Now I am caught. I can’t sell my house. I’m having a hard time refinancing. I’ve avoided bankruptcy for months trying to pull this out of my savings.”
Don’t worry, Mr. Doyle! You should have a $600 stimulus check in a couple of months.
Of course, noting this is a bad thing means I am some sort of pinko-commie leftard. After all, this is capitalism! The market will sort things out! Mr. Doyle gambles and lost!
Jimmy the Greek
Actually your last sentence covers it perfectly. This Guy refinanced close to 4 years ago. He could have taken out a fixed rate mortgage when he refinanced. He could have cut to one anytime after that. He didn’t. You’re not saying we should bail out a guy with a home worth 3/4 of a Million Dollars and a six figure salary, are you?
PhoenixRising
Oh, man.
“Now I am caught. I can’t sell my house. I’m having a hard time refinancing. I’ve avoided bankruptcy for months trying to pull this out of my savings.”
At what point does this story–I made economic choices based on irrational hope that mine was the one house on my cul-de-sac that hadn’t lost 25% of the so-called value that I was allowed to borrow against it–officially walk up behind the other housing narrative–calculating borrowers are sending in jingle mail instead of payments when they have the money, the jackanapes–and kill it dead with one shot to the heart?
Mr. Doyle, who I do feel sorry for deep in my former-Republican heart, gambled. He bet that the nice people at Countrywide wouldn’t lend him money that they couldn’t recoup by selling his house, and that therefore HE could make the same choice if required. Turned out that they were wrong about whether something that couldn’t go on, would.
Predatory lending: it’s not just for the unbanked anymore.
John Cole
I am saying that there are a lot of people who did this and this mess is going to get a helluva lot worse.
There are no innocents here, and there will be lots of victims.
4tehlulz
Remember, only borrowers are allowed to suffer the consequences of their choices. Financial institutions, however, must be insulated from them at all costs.
/Republican
Billy K
So which is more powerful, “The Invisible Hand” or The MUP?
NonyNony
If he files for bankrupcy then, yes, in some manner we will be bailing him out.
These sorts of things don’t happen in a vaccuum, they reverberate through the whole economy. Even if you made all of the “correct” decisions about getting fixed rate loans, no second mortgage, not overextending your credit, etc., you are still going to feel the effects of folks like this who made the “wrong” choices – whether we’re talking about individual consumers or the banks making those bad choices.
That is, of course, why regulation is important. It isn’t important to protect YOU from YOUR stupid choices – it’s to protect ME from YOUR stupid choices. The banks have proven themselves to be unable to regulate themselves and protect consumers from bad choices (both their own and the consumers), so now they need to be regulated.
And, if it’s better for the economy as a whole to have a rational “bail out” of homeowners and banks who have made bad choices then I’m all for it – I’d rather not see the whole economy go into the toilet just so I can have my schadenfreude and laugh at the fools whose banks are collapsing or the fools who are losing their homes.
Zifnab
Not on a six figure income. We’re only stimulating people making $75k or less. Oh! Oh! Unless you are unemployed, elderly, or disabled. The Senate bill was supposed to help you out, but it fell one vote short. Who’s Vote?
Besides, none of this really matters because we live in the age of personal responsibility. If Mr. Doyle can’t make his mortgage payments, perhaps he shouldn’t have installed those granite counter tops. He should quit his bitching and Suck. It. Up.
Billy K
FIX’Ded!
Zifnab
Sadly, it’s not that easy. Most of the ARM plans came with a catch that made you pay a steep fee – sometimes 10% of the original mortgage rate – to escape the mortgage early. So if you take out a $100k loan at 5% today that resets to 9% in five years, you still need to shell out $10k extra to refinance. Of course, that’s in the fine print and if you didn’t bother to read the fine print you are a moron who deserves to get bilked.
Screw you, rich guy. I live in a two room shack in lower Manhattan and the head lice that cohabitate with me always force me to pick up the other end of the rent. And I do just fine, cause I’m an American. If Mr Doyle thinks he can just sit around on his Michael Moore-esque liberal fat ass and mootch off the government, he’s got another thing coming.
Walker
The problem is that easy credit has been hiding a lot of issues in our economy for a long time. Many people needed to scale back their lifestyles a long time ago. But they didn’t because they were offered all this easy money. Regardless of whether this is the borrower’s fault for not living in their means, or the lenders fault, for making such obviously questionable loans, unwinding this is going to have major, major effects on our economy. Consumer spending is over 70% of the GDP. Think about what is going to happen once people can no longer easily obtain credit to consume.
The other issue is what happens when the mentality of this country shifts back to saving. For a long time the Federal Reserve has been in support of inflationary policies intentionally designed to discourage saving (I am not a Ron Paul supporter — this is just one of the few things he says that is correct). If you put money in a bank, you are effectively throwing money away because you will learn less on interest than you lose from inflation. If the country becomes pro-savings, this will become increasing unpopular. But making monetary policy less inflationary will have even more significant effects on our economy.
Caidence (fmr. Chris)
Now, see here. When I come into these threads and say these people overextend themselves, I get beat about the head with a rucksack.
I fully expect to see you to get your ass handed to you as well.
And where the hell are you? Around Wall Street? Where is this lice infestation? I’m staying the hell away.
The Moar You Know
Mr. Doyle did gamble and lose. However, the deeper issue here is that this is a gamble that he never should have been allowed to make.
Yeah, he’s going to pay for it. As are all of us; the credit meltdown is not going to leave those who made smart choices and took no risks untouched…far from it.
Can’t wait to see a restoration of sanity in banking and lending laws, and a return to sane business practices by lenders.
Faux News
Housingpanic blog covers this issue quite well.
PS: Faux News firmly believes in the invisible handjob of the market.
The Other Steve
Yeah, because the lenders don’t lose anything!
You know it’s cheaper for the lender to refinance the loan at 6% than it is to foreclose.
RSA
I’d feel more sympathy for Mr. Doyle if I hadn’t read this, later in the piece:
He’s a good example of someone using his house as an ATM, having withdrawn $465,000 over the past dozen years. The 2004 refi hurt him, but that was after almost a decade of doing the same thing successfully.
Caidence (fmr. Chris)
Whoa, dude. Easy there. I’m innocent, my family is innocent.
My pappy kept his head down, and he taught me to keep my head down. Anytime I said things like “b-b-but I should be able to keep a car in da citie!” he always shut me down and never let me walk away with the hope I couldn’t afford to keep
This mess was completely avoidable by the victims themselves, but they got snagged because nobody taught them something deeply important: A poor guy in America still lives an awesome life in comparison to the rest of the world; stop over-paying for shit you don’t need.
You don’t take out an ARM to send your kid to college. You send them to State U. and tell them they have to work hard for the recognition they pine for.
The guilt lies with the viral belief that self-indulgence is a reasonable goal, instead of a luxury. If you can wrench free of that, you can ride out moderate market corrections like this.
The Other Steve
Yeah. I think a lot of borrowers seriously screwed themselves. But what I’m still amazed at is that the lenders allowed this to go on.
And I work for a lender. These guys were sitting around saying “Nobody could possibly have anticipated housing values declining!”
The Other Steve
Caidence – So you are saying the lenders have no responsibility for loaning money they know couldn’t be paid back?
Jamey
Had two options: Fixed rate or adjustable. Chose the former; the latter seemed too scary: What if I lost my job and had to take a lower-paying one? What if some unexpected expense came up after my interest rate had gone up? (In 2003, when I refinanced, rates really had no where to go BUT up — and most people knew it).
No sympathy AT ALL for the people who gambled and lost. Face it, owning a house is not necessary; it is a choice. A lot of people bought houses without the means to afford them. Sorry, but that’s hard cheese. Try renting. Save up enough down payment. Take a fixed rate loan. Maybe soon, when all the house-buyers who over extended themselves are forced to liquidate; when credit tightens up so that only those qualified to leverage the purchase of a $400k+ asset that may or not appreciate; when people wake up and stop treating the equity in their houses like a vacation fund; that’s when housing prices might roll back to where average wage earners can purchase them without having to resort to financial sleight-of-hand.
Everybody should have a home. Owning a house is a choice, and it’s not the right choice for a lot of people.
Dave
Doyle used his house to gamble and lost. I find it hard to feel bad for the guy. I work in the banking industry as does my father-in-law and we could tell stories all day long about people who come in over and over again to refinance their homes, take the equity out and then blow it on vacations, boats, stock market gambles and the like.
And it’s a perpetual cycle because these people get addicted to the spending of cash they can’t really afford to spend. And you can tell them over and over again it is a bad idea. But if they want to do it and meet the requirements, you can’t stop them. Until the market inevitably collapses and then they’re screwed.
I feel for the people who got suckered into buying a home they couldn’t afford. I don’t feel bad for people like Doyle who could afford their home but their own greed put them in a bad position.
Wilfred
If nothing else, capitalism is predictable:
Wait till defense spending gets cut and Lockheed starts to lay people off.
zzyzx
The last sentence is what interests me. How have we entered a world where someone with a six figure income can’t afford to send his daughter to college at the same time as people can’t get jobs without some sort of a degree?
The tuition of my undergraduate school has doubled in the 16 years since I graduated. Something has to give there. It’s why people have 40K in student loan debts these days.
jenniebee
We have redefined “personal responsibility” as meaning that IT developers and cocktail waitresses ought to be able to see into the economic future better than economists and hedge fund managers do, and we are in danger of “personal responsibility-ing” ourselves all into the poorhouse.
Sorry, but what he did – keeping good credit and using it to pay his kid’s tuition – that’s not some wild speculative scheme, it’s just what people do to live in this country. And EVERYBODY’S doing it, in some way or to some extent. Those folks who “should have known
their placebetter” and who bought a first home on terms they’d only be able to keep if the market did what the Fed Chairman said it would – they were doing what was in a lot of ways the very responsible thing (getting a mortgage and paying it is a great way to improve your credit, doncha know). These actually were responsible decisions on an individual level – what makes them disastrous (and not only disastrous to the economy as a whole, but creates the risk for the individual) was that too many people were doing the same thing. But if you refrain from taking out that loan because if too many people do it, the system will break – well then your kid doesn’t go to the college that could make her career. And how is that “responsible?”Sick and tired of hearing from the people who went with a fixed rate that anybody who didn’t ought to go sleep in the gutter where they belong; let’s see how much good that fixed rate does you when you’re out of a job because the pressure from the housing market sinks the whole economy.
You want to lay this down on somebody and demand some personal responsibility? Try calling down Alan Greenspan – the man who was supposed to have been spotting this thing when it got started and working out the risks. All he’d have had to do was raise interest rates as we were coming out of the dot-com collapse. And he’s supposed to know better about high-finance than an IT developer at Lockheed Martin.
The Moar You Know
Good catch, RSA. My point still stands, although my sympathy for this douche has now evaporated.
Lenders let him do this. Does anyone really think the fallout from the several million idiots like Mr. Doyle who used his house as a ATM machine is going to be limited to just those folks and the fools who lent them money?
Not bloody likely.
RSA
I believe TOS about lender shortsightedness, but I think the comment above is interesting too: I wonder how many people who went into an ARM actually realized that they were taking a gamble? I’d guess relatively few. They probably thought they were just paying for their house, even if it was a complicated and hard-to-understand financial instrument (or whatever you might call it) that they were using. “It’s not like playing the stock market!” Well, yes, in many ways it is.
Original Lee
1. It’s a loan Mr. Doyle shouldn’t have been allowed to take, but it was one he was encouraged towards taking because of the way our current system of financing higher education for our children works.
2. We all pay for this joint mistake, even if we’re trying to be financially prudent. This is why the consumer credit mess is getting bigger – the banks are trying to make up for their bad judgment by using their credit card units as cash cows, but Daisy only has so much milk.
3. The trade deficit is not helping matters at all. Neither is the national debt.
J. Michael Neal
It’s the fault of the Chinese. Blame Hu Coodanode.
Caidence (fmr. Chris)
First of all, if they knew, THEY WOULDN’T HAVE OFFERED. They lose money on defaults!
Second of all, where did you take that from? This has nothing to do with lenders. It has to do with a moron with a lovely job most people would kill for, and he took out a mortgage so his kid could go to college?? Unless this man goes completely schizoid in front of a ledger, there’s no explanation for that. Better options:
1.) Send the kid to state school. Average in-state college price 10K/yr. Average private: 35K/yr. Difference: NONE!!
2.) Pay more for a fixed rate in the first place. You NEVER go for an ARM. I understand, though, that some people don’t know these things.
3.) Worst case: you don’t mortgage the house, you sell the house. He wanted to have his cake and eat it too.
He was greedy and got burned.
Just because you’re doing it for your kid doesn’t make it all flowers.
NonyNony
zzyxx –
To be “fair”, I would bet that this guy felt the need to send his kid to a fairly high-priced private school. Prestige, you know.
It’s kind of like how everyone needs to have a car, so you’d think that the guys making six figures would be able to get one without a car loan. But they don’t buy the Honda they could pay cash for and drive off the lot with – they go to the Lexus dealer and take out a loan to get the prestige.
Or how everyone needs to have a house. The guy making six figures could try to get the same little house out in the burbs that the family making 50K a year needs to get a loan for. But instead, he’ll take out a big loan to get the half million dollar house.
Same thing with college. Everyone needs a loan, even the guys with the big money wou you’d think could pay for it out of pocket. Because if you can afford to pay for the place out of pocket it isn’t prestigous enough.
The Moar You Know
jenniebee: You should have read the rest of the linked article. He took out almost a half-million dollars over a decade, refinancing every year. That’s not responsible behavior by any stretch of the imagination. Your points are all proper and correct (very much so), but that’s not the situation Mr. Doyle is in. The way to cash out your equity is to sell your house, not get a loan against its theoretical value!
Walker
I think this is disingenuous. While it is only anecdotal evidence, there are many stories floating around by (former) mortgage workers on how standard due diligence procedures have been eliminated, and that lenders were counting on constant refis (aka Ponzi financing) keeping borrowers afloat.
The Other Steve
Last I checked it took two parties to make a mortgage. A lender and a borrower. Why do you keep insisting the lender has no responsibility?
I honestly don’t have a problem with this correction, and I work for a lender. Things were overinflated.
But this notion that lenders have no responsibility, is just an example of how fucked up some people are and how they don’t understand Capitalism.
RSA
To be fair, I think that the question is whether the difference is worth an extra $25K per year. Depending on the school and the student, maybe, but for most probably not.
Face
There are innocents, John. If I walk into a bank for a mortgage, I expect them to be honest about stuff I know little about. Many people were told they could refi before the rates jumped. This was flat-out bullshit. They couldn’t refi. How were they to know this, if they’re not experts in banking?
Walker
Which these days would be as much as he paid for the house in 1995. Housing prices are way, way out of wack with incomes. This is why I get really nervous when Hillary starts talking about programs to “make housing more affordable”. What she really means is “keeping the Ponzi scheme alive by allowing more people to get in at the bottom without prices collapsing for those who have already invested”. Because if she really wanted houses to be more affordable, she would just let the damn prices drop.
The Other Steve
All of our automated decisioning systems assumed that house values would continue to increase.
The underwriting decisions were handed over to computer programs, and everybody involved stepped away from responsibility for their decisions.
Look at Dave, the ignorant fuckhead earlier in the thread.
Because that’s not true. He’s trying to get out of taking any responsibility for his decisions. Banks change their lending standards all the time.
But the banks got greedy, and figured if they didn’t loosen their standards they would lose all the business to the competitors.
The Other Steve
In all fairness, I think that most of the problems were caused by the brokers and institutional lenders. Not the banks and such themselves.
A lot of these brokers were only interested in their own commission, and talked people into shit they didn’t need.
I also blame realtors for a lot of this as well. They are leeches. An entire class of society that does no work and expects big paychecks.
Walker
As an academic who has worked in institutions of many different types (Catholic, State, Ivy League), I second this. It is not true that there are zero differences between institutions. The question is whether you can take advantage of these differences (e.g. some resources, such as undergraduate research, are only available to the top 5% of students or so) or whether they are worth the difference in price. But it is not true that all schools are created equal.
Some of that is a matter of the quality of education. But some of it also has to do with the job opportunities available. At smaller schools I had to beg and crawl to get employers to look at my students; now (at a much higher profile school) they beg me. I didn’t change — the school did.
The Moar You Know
Walker: you seem to be correct. Good friend of mine worked in that industry for a while. Apparently, the more risky the loan, the higher the percentage, and….the higher the commission paid to the guy who wrote the loan.
It’s all been done with a wink and a nod (their employers certainly knew what was going on, but as long as the money kept rolling in no one was going to say jack shit).
And now we’re all going to pay; hell, I’ve lost $60,000 in book value on my house in the last year alone! I’m not that concerned about it, I plan on living here a long time, but tell me that losing $60,000 in potential equity doesn’t sting.
Caidence (fmr. Chris)
What the hell are you talking about? There is no such notion as “responsibility” in the domain of Capitalism.
In pure Capitalism, your motivation is — entirely — your money. Lenders have interest in the transaction because they intend to make a profitable business. If they fail to vet their transactions thoroughly, they fail to make their earnings targets, and then the venture collapses under the lack of ballast.
If you want to talk about “responsibility”, then talk about government. Talk about community.
But there’s a difference between self-responsibility and community-responsibility.
JWeidner
I don’t know just how much this will wind up helping, but BofA, Citigroup, Countrywide, JPMorgan Chase, Washington Mutual and Wells Fargo are all announcing a plan to help at-risk borrowers with all types of mortgages (not just subprime). Basically, they’ll suspend foreclosures on seriously overdue homeowners for 30 days, and try to work out more affordable loan terms.
Walker
None. All it will do is slow the rate of descent in the prices, making the problems last longer. Prices have to correct. It is that simple. We have to return to normal LTVs.
RIght now prices are completely out-of-wack of where they should be. Where I live I can buy a 3/2 house with no lawn for over $225k, or I can rent a 3/2 farmhouse on 10 acres with an apple orchard for $900/month. Guess which one I do.
jenniebee
Exactly.
What, did you think that Megan McArdle really has the brains to have gotten into Harvard without having all those prep-school imprimaturs all over her? Or that she has some kind of penetrating insight into economics that would have scored her a gig at the Atlantic if she’d come out of U Indiana, with U Indiana kind of contacts and all the WOW impress-your-peers-and-employers factor that comes with a degree from a flyover state school?
Caidence (fmr. Chris)
It should help. The banking industry knows it’s in their better interest to take their eyes off of the quarterly earnings report, because if they don’t they won’t have an industry in which to set up shop in a couple of years.
So the government will take their foot off the legal pedal, the bankers will take a year to fix the leaky roof, and borrowers will be treated like humans for short period of time.
Hopefully this will smack some sense into the borrowers.
And the lenders? They get to keep looking for jobs >:3
jenniebee
Let’s comfort ourselves that – for a while at least – we should get a break from all the homeowner whining that their personal property taxes are going up because their houses have doubled in value.
Instead, we all get to figure out how to finance school systems now that personal property values are collapsing.
Whee!
Caidence (fmr. Chris)
Chin-up, chap.
Yes, the prices have to correct. The overlooked part is that people don’t have to lose their houses in order for the prices to correct. It’s not like there’s a waiting-list for houses these days; housing prices are falling remember?
If the industry gives some safe haven, then the prices can go where they have to, families can keep their houses, workers can keep going to work, paychecks keep getting cashed, budgets say inflated, and demand doesn’t bottom-out so hard.
This is much better than nothing.
My fear is: it was orchestrated by the Bush Administration.
Walker
Yes. That is going to be a real problem. Did I mention that the $225k house in my area comes with a 3% property+school tax?
jenniebee
Good point – housing vacancy rates are staggering, actually. Rental vacancies are substantial as well, but kicking people out of owned homes would soak those up pretty fast and send ownership prices into a tailspin. Sending renting rates higher and ownership prices lower sounds good until you remember that the folks who could take advantage and get into their own home don’t have the credit for it anyway…
RSA
I was going to say that you could buy that first house with a $900/month ARM :-) but I see that that’s unrealistic. . .
Charity
I feel compelled to point out that my husband went to state colleges for both undergrad and post-grad. My father-in-law likes to say that, between Hubby’s scholarships, his lower tuition, and part-time jobs, he actually made money on the deal.
Oh, and my husband’s an economist.
College is what you get out of it. If your kid’s gonna stay up till 4 a.m. and sleep through his history class, he may as well do it on $15K a year instead of $45.
Walker
That is true. But not all colleges offer the same resources. Colleges that provide students with more resources allow students to get more out of college — provided that they use the resources. At my current institution I have grants and resources that allow undergraduate students to publish papers with me. I did not have these resources working at a small Catholic school.
As another example, I am alumni interviewer for Dartmouth. One of things that has happened in the interview process is that they are very interested in how the students make use of the resources they were given. A student at a small school who made the most of what he/she was given is given often preference over a student from a wealthy, resource rich school that just sailed through. The reasoning is that Dartmouth wants students that show off the resources they provide to separate them from other schools.
Walker
Wow. Just read my last post. My grammar was horrible. I should either not admit things like interviewing for Dartmouth, or else I should stop trying to work and post at the same time.
liberal
I don’t know why some people upthread think the issue of responsibility is some kind of dichotomy.
The lenders and the brokers were a bunch of conniving bastards and deserve all the sh*t that falls on them. (Unfortunately, I don’t see how the brokers are going to suffer; they’ve already pocketed the commissions.)
But this guy in particular I have no sympathy for.
That being said, due to the collateral damage to the economy being done here, it’s important to have more regulation going forward.
Bailing lenders and borrowers out…to the extent it can be avoided, it should be. By bailing out borrowers, you’re increasing the values of homes, which effectively takes money from those of us who were waiting to buy.
There’s no reason that any lender should be bailed out until after all their equity is wiped out.
Oh…and don’t get me started on that asshat Greenspan. For his hypocrisy regarding Social Security alone (chaired commission in 1983 that instituted changes so that the Trust Fund would accumulate, and then later started acting all coy as to whether the bonds in the TF had any meaning), he can rot in hell.
liberal
Caidence (fmr. Chris)
Just because supply isn’t clearing rapidly at current prices doesn’t mean that current prices should be supported at their current level by bailouts.
Bailing out borrowers should be held to the minimum required to avoid overly extensive collateral damage to the rest of the economy. Otherwise, it’s a transfer of wealth to those who own from those who don’t.
liberal
I think Dean Baker has some kind of plan that would keep owners in trouble in their houses as renters.
Walker
By some definitions, that is all a “homeowner in trouble” is.
liberal
Of course, that’s putting it too mildly. The lack of regulation in the mortgage sector was criminal.
jenniebee
I have no doubt that the quality of information dispensed at any State university is the equal of the quality found at any private school. But the wisdom behind this:
is as true today as when Austen wrote it. At college, one accumulates a store of information so as to make one somewhat dangerous in business and an amusing bore over drinks. One also makes acquaintance and connections and acquires a university label, and those things open doors if they’re good enough and don’t if they’re not. So yes, you can yammer away based on something you read in Soc 101 whether you went to Yale or State U., but if you went to Yale, you’ll be doing your yammering at much posher parties.
Punchy
lemmie finish that for you–that a fucking banker is supposed to be the de facto expert whom you trust and listen to when they sell you a loan. Sorry, shithead, but I trust experts to speak truthfully when they give me advice on a subject that I know nothing about. If those experts are manipulative, greedy fucks, then it’s not my fault when I get screwed.
jenniebee
And they probably all are, but when every expert in complex field stands to make a profit off of your rank ignorance, who exactly is left to teach non-experts good from bad?
RSA
Why, the market, of course! (At least, if you ask those Goddamned experts.)
LiberalTarian
Interestingly enough, the AAA bond market ended up playing the subprime mortgages, and lost their fucking shirts.
It might have been good schadenfreude to watch the helicopter crash … if I wasn’t so busy trying to get out of the way of the randomly flying, high velocity, dis-encoptered blades.
Note: schadenfreude is misspelled so often Google doesn’t correct you for spelling it wrong. Wild, huh?
McMartin
Maybe average, but he was in Northern California. The University of California’s prices were over 20K/yr back when I was there and they’ve jacked up tuition significantly at least twice since then.
grumpy realist
Article in the last Economist about a report which looked at how things changed at the banks after mortgage collateralization was introduced–did it mean that they were sloppier with their due diligence on loans they granted?
Turns out surprise, surprise, that yah, they were much worse.
Requiring that banks and other lenders keep some skin in the game seems to be the best preventive mechanism around.
(And I went for a 15-year fixed because I like to minimize risk, didn’t want to pay the extra interest with a 30-year, and nobody was able to explain any advantages with the ARM/interest only/whatever. Heck, no one was even able to explain them sufficiently!)
Dave Ruddell
I’ll take issue with this one. I just bought my first home (a condo) and took a five-year variable rate mortgage at prime -60 basis points. Now, first off, I’m in Toronto, and the Canadian lending market hasn’t had the meltdown that the US has had. Also, at the urging of my mortgage broker, I’m making monthly payments as if I was paying the higher, fixed rate, the excess going straight to the principle. Finally, my mortgage allows me to convert to a fixed rate anytime I want if I start to get antsy. Given the strength of the Canadian dollar of late, and the large cuts that the Fed has made to rates in the US, I don’t expect the Bank of Canada to raise rates any time soon, and they are likely to go down.
This is a long way of saying that a variable rate mortgage can be just fine, so long as you’re aware of what you’re getting into and act responsibly.
The Other Steve
Ok, then. So you are saying it’s perfectly ok for a borrower to simply walk away from the house when they are upside down on the mortgage.
Why didn’t you just say so?
The Other Steve
That is a rather unique feature. Adjustable rate mortgages here in the US generally require you to refinance. Many times if you try to refinance in the first 3-5 years, there is a pre-payment penalty. Regardless of that to refi requires you to pay closing costs of several thousand dollars.
I’m at 5.6% in a 30-year, and I’m staying there.
Dave Ruddell
Just so I’m clear, if I want to go to a fixed rate, I have to pay whatever the fixed rate is at that time; right now I’m paying 5.15% on the variable, and the fixed is 5.79%. I actually asked my broker, can I go fixed after the first day? Sure you can; no penalty, just let us know. Of course, if rates shoot up to (say) 6.79% for a fixed, I’ll be stuck with that. I understand that this conversion to fixed is quite common in Canada.
OTOH, we have no 30 year rates here; the longest you can find is usually 10, which means that for most people, your rate will change (usually several times) over the life of your mortgage, even if you go for fixed. If I could have got 5.6% for 30 years (well, I’m amortizing over 20), I damn well would have locked that in.
Justin
I could be wrong, but I think that if you lock in your fixed rate mortgage at %5.79, then it stays there for the life of the mortgage. That’s the point of “fixed rate”. The only way it could change would be if you refinanced.
Tax Analyst
Slightly OT, but with regard to re-fi’s – if you have done so and default on your loan you will be subject to “Cancellation of Debt” income for the difference between your Principal Balance and the Fair Market Value of the property. Although no one in Government or the Lending business appears to want to speak to this I have found no exclusion provision for Cancellation of Debt income in the so-called “Mortgage Relief Act”. Each provision that purports to aid those in foreclosure clearly specifies at some point that it pertains only to the “Original acquisition and improvements”. Original acquisition loans are generally called “Non-Recourse”…the loan is secured by the property and the borrower has no responsibility beyond that. Once you re-fi, however, you generally (99%+)enter the ranks of the “Personally Liable”…you now have a “Recourse Loan” – You are responsible for the difference between the Principal Balance and the FMV…and will likely receive a Form 1099-A with the bad numbers and news. Yes, that amount is taxable income and it’s not subject to preferential Capital Gains Tax Rates, either.
I do Tax Research for a Service Bureau that supports Tax Preparer’s and our phones have been burning up with calls about this in the last few weeks.
TenguPhule
At this point my retirement plan consists of guns, ammo and a can opener.
Everything over that is gravy.
Dave Ruddell
Just wanted to say, that if ARMs work that way down in the US (with that whole refinancing penalty thing), I take back having an issue with the comment from Caidence (fmr. Chris); seems like a pretty stupid thing to me.