Fannie Mae & Freddie Mac - the big bailout?

[Arbitrary]

Stuck with an ARM? The Prime hasn't been this low in years. Keep guessing.

[kedwyn]

Originally Posted by Arbitrary

Stuck with an ARM? The Prime hasn't been this low in years. Keep guessing.

How are you going to refinance when most people put barely anything down and housing values are down significantly?

They aren't going to loan you 120% to value, prime has nothing to do with if you can get a loan or not. These people are upside down on their homes and can't get out and can't refinance because they owe more than the house it worth. You can have perfect credit and still not get a loan for more than the house is worth.

This is only part of the problem, there are plenty of people that had fixed rate mortgages, just too many of them and now that the economy isn't as good what might have been barely affordable 2 years ago is now under water.

[Lyrical]

Originally Posted by Arbitrary

Since June of 2006 the rate has done nothing but gone down. The housing problems started getting some real attention 3rd quarter 07. So what happened?

Because while many ARM's are pegged to prime, they have escalators in them that raise the rate the longer the term goes.

The first house I bought was on an ARM. And on the Truth in Lending Form, it clearly stated that while it was pegged to prime, if prime didn't rise every year, the interest rate would still escalate. For many ARM's, your rate is going to go up regardless of whether or not its pegged to prime.

[Arbitrary]

Lyrical claims that the reason people are in trouble is because they have ARMs. He went to Waldenbooks and learned all about ARMs and why they can be scary.

Great.

That isn't why people are fucked. Go back a couple posts and look at the numbers. The Prime is really low right now, and has been declining steadily for years. If you signed up for an ARM at any time between 2000 and today you aren't in danger of losing your home because the payments skyrocketed. They haven't.

People are losing their homes because they do not have typical ARM mortgages. People are losing their home because they have subprime mortgages with teaser rates.

Well what is the difference you ask? Subprime loans, I said in an earlier post, have a legitimate purpose. They provide people who have bad credit but are still good risks with a means to still buy a home and then fix their credit. They get fairly shitty loan now and after a few years they refinance that loan and everything is aces.

Now, subprime loans are high risk for lenders. You can talk about personal responsibility all you like, but these types of loans are well known to be high fucking risk loans. So why have so many damn people gotten them? Why would lenders make so many seemingly risky moves?

For years the standard failure rate of those loans was well below the typically accepted failure rate. I don't have my numbers in front of me but I think the standard failure rate was around 8-9% but was staying well below that at 4-5%. For investors, that's great. Those high risk deals were paying off, housing prices continued to rise, brokers made money, investors made money, the lenders made money, everyone at every step of the way was making good good money.

Well fuck, if everyone at every step of the way is making money, from the lowest little guy to the top of the food chain investment firm, let's keep doing what we are doing! The best of the bad credit risks all had houses so the net increased. Everyone wanted to get in on the action as the value of homes continued to rise and rise and rise. Soon television commercials filled the airwaves telling everyone everywhere that no matter how awful of a risk they were that they too could own a house.

But wait, a normal subprime loan is risky for the lender. Why would anyone want to make an already risky investment even worse? Well, as long as housing prices continued to increase it likely wouldn't matter, but that isn't it. These shit loans were being packaged together to minimize the inherent risk and then were sold to other investors. Why would investors buy these awful loans?

They were insured AAA rated securities. Wizardry turned shit into gold.

Once a few cracks started to appear it didn't take long for everything to start to fall apart. That 4-5% failure rate that everyone was enjoying for so long? Yeah, that didn't hold. The rate shot right back up and added scrutiny was put on the lenders. It didn't take much digging to notice the pile of shit that everything was built on. Housing prices began falling and then all those people who desperately needed to refinance can't. The dumbest of them don't even know they would have needed to do so in the first place.

[Sylverlokk]

Originally Posted by Faille

So what then is your explanation for this happening on such a wide scale? I know we all joke that 99% of people are stupid, is this just more proof of that? If so, don't we then need to change everything to help protect the great mass of people?

If it was small scale then yeah, I would say some people are dumb and know better. The fact that it is so huge make me stop and say, hang on, people are dumb and know better, but we should be doing a lot more to prevent this from happening.

As for the simple income - bills, again I don't know about the US, but here a lot of lending institutions put a lot of emphasis on the increased equity of your home, so it's ok to borrow beyond your means because history has shown that over time your house will increase in value and so you'll be this much ahead.

I'm also pretty sure that they do anything and say anything, legally, that makes sense why you can afford to buy something that you really can't.

The problem IMHO is that the US has gone from a nation that saved partially to an economy based fully on consumerism over the last 30-40 years. A balanced economy has both the push and pull aspects of it, the push being savings in banks that producers can use, and the pull being consumption of resources creating a need for new production.

Somewhere along the line two things happened. First, the pull part of the equation became more important and saving became passe, and second the limits on what acceptable interest rates are got raised by people dealing with credit cards with 20% rates on a regular basis. 20% is a lot, but many charge 24 or 28% now and then there are the quick cash loan places that have 97% interest rates. 97%!

The idea that if you crank the interest up high enough and throw out enough loans you will be bound to make money works in the short term right up until the day that just the right amount of people cant keep up. Then it all comes down.

This didn't happen overnight, its been a long term trend. I personally think the best thing to happen would be the government to not bail out anyone and let the chips fall where they may.

[Simas]

Originally Posted by Sylverlokk

This didn't happen overnight, its been a long term trend. I personally think the best thing to happen would be the government to not bail out anyone and let the chips fall where they may.

(a slight derail)

Thats the thing though. Personal responsibility or not a number of people agree we cant let the F's fail, it may not be fair but the consequences must be avoided. It turns out the invisible hand of the market cant get a finger on make believe money. As americans get more and more into debt and lax regulations allow risky investments to be passed as AAA the threat of a margin call only becomes all the more real. Add in soaring gas prices, food inflation and an american public that is already accustomed to just "charging it" as a few ways to exacerbate the problem.

It is clear less regulation is not the answer here. As it seems to often happen the best solution is diverse.

Personal responsibility is important but if people are behaving irrationally at such a high percentage then we need to take steps to curtail that behavior like we do with drunk driving. The steps need not be prohibitive, we could begin teaching basic accounting and investing classes in our public schools. We can change default options for plans, where as now you might have to opt into a 401k, which everyone agrees one should do, we can change it so you are in by default and have to opt out. Smart framing of choices and education can lead to less irrational behavior while not infringing on any personal freedoms.

At the same time we simply can not allow investments to be finagled so that they appear to pose less risk than they actually do. This needs stricter legislation.

One might object that the problem is not that the free market is failing but simply that it has not been given enough time to work. As horrible as some might find it, we must let the chips fall where they may and allow the market to learn. From the ashes a new stronger economy will arise, one that is more cynical about banks and more interested in developing new forms of alternative energy.

That very well could happen with a Laissez faire system. The problem is we cant afford self inflicted wounds in today's global economy. After all how does one not maintain a utilitarian approach to the economy? Theres no reason to let the economy break more in an effort to fix it, we can impose certain stricter regulations and better educate our people while shaping, but not dictating, their financial choices.

China and the rest of the world arent going to wait for us to learn our lesson. Simply put deregulating the economy and adventuring toward our new bottom in hopes of learning a lesson is not preferrable to immediate action through careful regulation and intelligent framing of choices.

Fuck libertarians.

p.s. VOTE BOB BARR!

[Havelock]

At the same time we simply can not allow investments to be finagled so that they appear to pose less risk than they actually do. This needs stricter legislation.

The problem with the Fs is that nobody gave a rat's ass that they were blatantly undercapitalized and posed a much bigger risk than they should have, because everybody knew the government would bail them out if the shit hit the fan. Stephen Bainbridge, among others, has been saying for years that the lack of accountability that comes from being half-public and half-private would cause big problems down the line for Fannie Mae and Freddie Mac.

[chu]

ARMs/Teaster rates etc aren't terrible when used correctly.

The problem is that people were buying the most expensive house they could afford WITH THE TEASER RATE, without thinking about affordability when (NOT IF) the rates went up.

Let both the lenders and the lendees burn to the ground along with their greed.

[Creediki]

Increasing the amount and quality of basic economic education, accounting and investing in core curriculum is something that would pay immense returns over the long run.

[Lyrical]

Originally Posted by Arbitrary

Retread of at least ten other posts in this thread.

The dumbest of them don't even know they would have needed to do so in the first place.

If they are so dumb, they shouldn't be allowed to buy an expensive house they can't afford.

[Lyrical]

Originally Posted by chu

ARMs/Teaster rates etc aren't terrible when used correctly.

The problem is that people were buying the most expensive house they could afford WITH THE TEASER RATE, without thinking about affordability when (NOT IF) the rates went up.

Many people in this thread continue to ignore this.

[Lyrical]

Originally Posted by Creediki

Increasing the amount and quality of basic economic education, accounting and investing in core curriculum is something that would pay immense returns over the long run.

I think a simple fix would be doing something like the SBA is doing right now for business purchases. Right now, if you want to buy a business, the whole deal must be evaluated by an independent professional. They have to sign off on the deal. They aren't motivated to get the deal done, they get paid whether or not the deal goes through. Maybe this could be done for those most at risk of defaulting.

When you go buy a house, you have so many closing fees. Maybe the governenment legislates that you talk to a CPA or go to an hour long class on buying. If am paying $3K in closing costs, forcing me to pay a professional another $200 for a quick consultation might not be so bad.

For alot of us, this would suck, but at least it might cut down on the problems we are having as a country.

[Burf]

The worst thing about this whole ordeal is that the people who are good homeowners and can afford their payments are getting taken down with the rest of the people who foreclosed.

When the military makes me move in a few months, I hope to hell that I can sell my house.

[Lyrical]

Originally Posted by Simas

Personal responsibility is important but if people are behaving irrationally at such a high percentage then we need to take steps to curtail that behavior like we do with drunk driving. The steps need not be prohibitive, we could begin teaching basic accounting and investing classes in our public schools. We can change default options for plans, where as now you might have to opt into a 401k, which everyone agrees one should do, we can change it so you are in by default and have to opt out. Smart framing of choices and education can lead to less irrational behavior while not infringing on any personal freedoms.

At the same time we simply can not allow investments to be finagled so that they appear to pose less risk than they actually do. This needs stricter legislation.

One might object that the problem is not that the free market is failing but simply that it has not been given enough time to work. As horrible as some might find it, we must let the chips fall where they may and allow the market to learn. From the ashes a new stronger economy will arise, one that is more cynical about banks and more interested in developing new forms of alternative energy.

That very well could happen with a Laissez faire system. The problem is we cant afford self inflicted wounds in today's global economy. After all how does one not maintain a utilitarian approach to the economy? Theres no reason to let the economy break more in an effort to fix it, we can impose certain stricter regulations and better educate our people while shaping, but not dictating, their financial choices.

China and the rest of the world arent going to wait for us to learn our lesson. Simply put deregulating the economy and adventuring toward our new bottom in hopes of learning a lesson is not preferrable to immediate action through careful regulation and intelligent framing of choices.

Fuck libertarians.

p.s. VOTE BOB BARR!

I agree. We are past a point of not intervening. I expect that we are going to see some government intervention very soon. The problem is that we all know that it might be too heavy-handed, and that the changes might affect people that should qualify for a house.

[Faille]

I'm a big supporter of more real world economical education in every country. We should know about interested rates and loans, and credit, and increasingly these days better climate preservation practices.

I don't consider myself a greenie and don't want want to turn people into that, but where I am atm there has been a drought for a long time and it's getting to critical situation, so we've been having water restrictions. The fact of the matter is that a lot of the restrictions just make sense and for the most part are very easy to comply with.

Expand that into lots of the very easy things that people can do daily and it would probably start to make a difference. I don't see it as making people go green to save the planet, but just let them know the options so they can make the choice.

Anyway, back on track, those are the things that I would like to see our education systems spending more time teaching, but are they going to be effectively taught in high schools? God knows I wasn't the best student back then so I'm not sure how much it might have helped.