Sub-prime Bail Out

[TheMercenary]

I have to agree, it is not quite fair. Someone should reduce my rate as well.

Subprime bailouts: Chump check
Responsible loan payers are crying foul about the breaks that delinquent borrowers are getting.
By Les Christie, CNNMoney.com staff writer
November 5 2007: 1:22 PM EST


NEW YORK (CNNMoney.com) -- Not everyone is happy about mortgage lenders' latest efforts to help troubled borrowers.

Take Teresa Nelson. Instead of going for an adjustable rate mortgage with its lure of low initial rates, she opted for the security of a 30-year fixed at 7.10 percent for a house she bought in Pinellas Park, Fla. in December, 2005.

"I was well aware of what an ARM meant, and was staying far away from those snake-oil pipe-dream promises," Nelson said. "I also wasn't shopping for a short-term, big payoff investment - I was looking for my home, until I retire."

But many delinquent subprime borrowers who went for low teaser rates that shot up to unaffordable levels are now paying lower rates than Nelson as part of a new round of foreclosure prevention packages. And she doesn't like it.

For example, one subprime borrower had a riskier hybrid adjustable rate mortgage (ARM) with a rate of just under 7 percent that was going to reset in December to 10.5 percent. But last month, as part of a new bailout plan from Countrywide Financial, the lender gave him a rate reduction to 5 percent on his loan, saving him hundreds of dollars a month.

Nelson feels cheated and has little sympathy for people who she believes weren't as careful as she was. "Everybody was seeing dollar signs," she said, "and let their greed get the better of them. So, no. No bail-out, no assistance with my tax dollars. Not one red cent."

The rest: http://money.cnn.com/2007/11/01/real...ion=2007110513

[glatt]

I tend to agree. Screw them. They chose this path.

But what happens to the economy on the whole and to my job specifically if all these people go broke?

[Kitsune]

Originally Posted by glatt

But what happens to the economy on the whole and to my job specifically if all these people go broke?

Let them go broke. We absolutely need a total reset in this market and have for years, now. The longer we keep this crap afloat, the farther we'll have to fall in the end.

[lookout123]

what exactly do you see as a "total reset" and what are the benefits/consequences?

[Kitsune]

Originally Posted by lookout123

what exactly do you see as a "total reset" and what are the benefits/consequences?

Sane loans and prices that aren't artificially inflated to astronomically high prices by easy/free money. A normal growth in real estate and calm reactions on behalf of all parties -- lenders, buyers, and sellers. No more "free money" mania if enough investors learn their lesson.

If the government bails loans out, we'll see this problem extended and the inevitable could possibly be more damaging. We have years of ARM resets remaining before this is all over and done with, so any bailout that happens now is a drop in the bucket of a much larger problem, anyways. Besides, banks aren't going to take the fall and lawmakers will see to that.

Consequences include lots of burned out vehicles. Strange.

[Perry Winkle]

If you signed a contract for a fixed rate mortgage and the mortgage company lowered your rate, wouldn't that be breach of contract? (Not that anyone would sue them for it.)

[Perry Winkle]

Originally Posted by Perry Winkle

If you signed a contract for a fixed rate mortgage and the mortgage company lowered your rate, wouldn't that be breach of contract? (Not that anyone would sue them for it.)

Unless, perhaps, you could get out of your mortgage and keep your house in that case . . .

[Perry Winkle]

Nonetheless, Fed watchers should resist the tendency to put all events into a simple or a morally plausible narrative. Monetary policy is a largely technical subject, and its ups and downs don’t usually fit into the kinds of emotion-laden stories that human beings apply to daily life. The “us versus them” tag registers in human memory, but monetary policy is not always or even usually about moral issues. As Freud famously noted, sometimes a cigar is just a cigar.

Financial market news, which is by nature unpredictable, suffers from distortion when it is crammed into the form of a simple story. Unlike most well-structured narratives, the zigs and zags of daily profit and loss defy simple categorization in terms of moral precepts.

In the case of subprime mortgages, many investors did not foresee the risk of collateralized debt securities. In response to this crisis, the Fed has been trying to keep a steady hand and prevent a credit crunch. We don’t yet know how well the Fed has succeeded, or how well it could have done in the first place. And the storm has not yet fully passed.

Of course, such an account of recent financial history sounds mundane and offers less human conflict. It’s less like the stories that people have gossiped about for thousands of years and thus will have less traction, even if it is a better guide to monetary policy issues.

That's from this MR post by Tyler Cowen.

Basically your moral outrage doesn't matter to policy-makers. At least that's what I get from "smart people."

[lookout123]

Those who don't pay their bills have always gotten the sweet deal. Lenders when faced with receiving $0 or 50-80% of what the contract entitles them to will always choose the option that gives them at least something. It isn't just your mortgage either.

If you owe $5000 at 9% and you make your payments every month right on time, try calling the company and ask them if you can get a break on the rate. The answer will be no. Miss a payment and your rate will jump to somewhere around 24%. If you call and ask them to return you to your old rate and you'll get laughed at.

Now skip your payments for 7 months. You will have compounded 24% interest on that $5000 + late payments every month. BUT if you call that company and explain you can't afford to pay that, most of them will offer to wave all late charges, drop your rate down to 5-6%, and bring your account current if you can make some sort of a payment today and agree to make your payments from that point on.

If that doesn't seem like a good enough deal don't pay them for 13 months. By that time they will have sold the paper to an agency at a discount. Talk to the agency and offer to pay the account in full - for a discount. They will offer you somewhere in the area of 30-40% discount just to get something out of you. The longer you wait, the lower it goes.

So if we go back to the start, you used $5000 of someone else's money. You can make all the payments and maintain a positive credit score, probably paying well over $7000 to pay it off, by the time it is all paid off. Or you can sacrifice a few points on your credit score and pay them $2-3000 in a year or so. That's the way the cookie crumbles.

The point is the lenders aren't "helping" the borrowers, they are trying to salvage their own finances by preventing the mortgages from going into default, which effects the lender's own credit rating and ability to conduct business. Poor, poor business decisions over the last 6 years forced this issue.

[Clodfobble]

Originally Posted by lookout123

So if we go back to the start, you used $5000 of someone else's money. You can make all the payments and maintain a positive credit score, probably paying well over $7000 to pay it off, by the time it is all paid off. Or you can sacrifice a few points on your credit score and pay them $2-3000 in a year or so. That's the way the cookie crumbles.

Sure, but next time, they won't be able to get a loan at all, whereas I still will, right? That's what I tell myself to keep from weeping, anyway.

[lookout123]

you'd be surprised how often someone can do that and still get a loan. and the people who start the process with intent get quite a few credit lines set up before they quit paying.
i worked with a guy who had replayed the whole process on a very very grand scale every 7-9 years since about 1970. lived in a big big beautiful house, drove fine german automobiles, had tons of cash, and every toy you could think of and the only things he actually paid for were the house and cars.

do well with small credit lines. get bigger credit lines. keep balances low, get more and bigger credit lines, start taking cash out of a couple of the credit lines in small increments, make minimum monthly payments. keep pulling cash out start using credit for living expenses, stockpile cash. low low balances in checking accounts. big home safe. get new car. keep making payments on everything. get new house. next year start making payments for each credit line using another credit line. now you've gone a year without spending actual money, only credit. miss a payment. send in enough to catch up. miss another payment, catch up again. get offers for consolidation loans. accept biggest one, who cares about interest rate? no intent to pay. DON"T close paid off credit cards, pull out more cash make minimum payments on everything. do this until debt to income ration is too far out of whack to qualify for anymore loans, then start missing payments. wait 6 months, file BK.

get $300 credit card the next day. start process all over again. takes 6-9 years start to finish. New BK laws mean that the same people will keep doing this, but instead of BK they will contact creditors for reduced settlement. Average schmoes who got in over their heads before life smacked them a nasty one are the only ones hurt by new BK laws.

BTW - this guy made in excess of $200,000/year and was a complete douche.

[Big Red]

sorry to burst your bubble but the banks have taken a major hit when you look at since the first of the year you have had over 150 banks implode.
educate your self on implode.com

its hell of alot bigger problem than what the average person thinks.

[lookout123]

what is there? i'm not getting anything? but you mean 150 mortgage companies, not banks right?

[TheMercenary]

I just don't buy the idea that we need a taxpayer bail out for many of these people or lenders. The lenders need to fold and get out of the business, the people who bit off more than they could chew should pay up. Anyone with any sense would avoid ARM's like the plague. Sure there are some people who need a bit of help or let them reapply, but don't just drop their rates to 5% out of the blue, that is not fair to people who have a fixed rate percent.

[DanaC]

The societal effects of largescale repossessions on defaulted mortgates also need to be considered.

I recall during the recession in the UK in the 1990s, the housing market ran into serious trouble and so did the employment situation. Large numbers of people defaulted on mortgages and had their homes repossessed and put back onto the market at the slumped price that had become the norm, or were under so much strain to pay what they could not afford that they put the keys through the door and walked away. The result of that was a sharp increase in the number of people (often families) who became technically homeless. A whole culture of 'bed and breakfast' families began.

Now, on the one hand those people could possibly be seen as less culpable than the sub-prime borrowers as theirs was the result of a market slump rather than poor finance decisions. On the other hand, the societal effects of sharp, sudden rises in homeless and temporarily housed familes (often involving the temporary or permanent break up of those families) is not lessened by the culpability of the borrowers.