The COMING mortgage meltdown???
Written by Rob on April 15, 2008 – 3:06 pm -Mark Giemen has a helluva interesting (and scary) story on Slate on why the mortgage crisis may just be getting started. There are many choice quotes in it, but the point basically boils down to this: as home prices continue to fall, even non sub-prime borrowers are going to find it entirely in their interest to walk away from mortgages that actually cost more than the value of their homes.
I like the point he makes about Treasury Secretary Henry Paulson’s plea to homeowners that they should ‘honor’ their mortgage applications.
The problem with finger-wagging on what you “should” or “ought” to do is that, when it comes to money, you’re usually given the lecture only when it’s in your interest to do the opposite.
Bingo. When the government is pleading with people to do the right thing, the incentive in the existing market to NOT do it must be strong indeed.
I looked at buying a house back in 2005. I remember being pushed hard to look at ARM’s, but I remember having some trepidation about a loan where I didn’t even have to make the interest payments for the first year or two. Nonetheless, I can’t blame those who did bite on that offer for being greedy. After all, the lenders sign dozens or hundreds of these loans, while the borrowers may only sign one or two of them in their lifetime. It seems to me there’s plenty of blame to go around. The lenders took the quick commission, forgoing future stability for the quick buck, and the borrowers jumped at a deal that seemed too good to be true.
Tags: economy, housing crisis
Posted in Uncategorized |
April 15th, 2008 at 4:51 pm
This current financial crisis in the housing industry is a combination of multiple factors and no parties, except perhaps Wall Street firms creating leveraged derivative structures, are entirely innocent or entirely guilty in this mess. The essential point to start from is that mortgage loans are asset backed loans. The idea is that the value of the collateral pledged (the real property) is greater than or equal to the value of the money loaned.
What broke down, for reasons that can not be accurately explained briefly, is that lenders were making loans with the value of the collateral primary and the ability to make the loan payments secondary. The deal is, and has always been, make the payment or surrender the collateral. Anyone surrendering the collateral is being faithful and honest to the terms of the agreement. There is no stigma in honoring your commitment.
April 18th, 2008 at 11:49 am
All good points, I agree that there shouldn’t be a stigma with honoring your commitment, no matter how you do it. Interesting what you say about mortgages being collateral backed, sort of a good reminder I guess that the banks are losing out as well when the home values go down, at least part of the mortgages become non-secure, unbacked by any collateral. So I spose the drop in home values really aren’t doing them any favors either ….