The coming financial crisis

Started by Butchers Bill, August 09, 2007, 05:05:33 PM

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DutchBird

Well,

what is happening now is unregulated capitalism run rampant (with hedge funds as the prime examples).

And for those saying that people who never should have had a mortgage/loan in the first place are getting what they deserve, well that IS a bit one sided. There was (is) a whole market to entrap people with loans and mortgages. It is a complete marketing industry. What do YOU think all the credit card commercials and commercials with buying on credit are all about?

Many people succumb to the lure. A whole lot of people do not even have the intelligence to fully comprehend all the fine print and legal matter involved in such loans. They trust/believe what they are told. Hell, most financial experts are unable to come up with the financial wizardry on which hedge funds thrive...
You have New York, we have Amsterdam
Just 15,000 Dutch beat out 90,000 Americans

With Timmy, one of three things is going to happen. Somebody is going to get hurt - it's either going to be him, an opponent, or one of our players.

hbionic

Another angle is that the Majority (the middle to lower classes) traditionally cannot qualify for credit under traditional requirements i.e., minimum of a middle FICO score of 720 or more....have 5 to 10% down, money for closing costs and 6 months reserves. I think only a small percentage of the population has that.

It's economic segragation.

These loans opened the doors for many families that otherwise had no chance to achieve the 'American Dream' of owning property.

Most people, especially the masses are uneducated. Many of the uneducated are ignorant about credit. One of the most important things in life they don't teach in school...yet....it can keep you below the line forever. Credit. People don't know how to establish, maintain, protect, extend and build their credit. It's just something they know is probably zesty...and that's sad.

Interest only loans are/were loans typically for investors who were flipping a home or were looking to hold on to the property short term (3 to 5 years). It just so happened that the market blew up...and the banks needed business so they opened up these loans. Stated income, 100% financing with little to no document verification, low FICO scores, etc. ....it opened up the flood gates for those who couldn't otherwise. I'm happy it did. I'm happy for the people that had a chance.

Living expenses, gasoline, food prices, job losses, rate hikes.....all of this contributed to the downfall. Some understand that it is a cycle...and it will eventually come back up. It may take  5-10 years for the cycle to be going towards the peak again...but all in all, the economy caught up with those people. Hopefully they can regroup and try again.
I said watch the game and you will see my spirit manifest.-ILLEAGLE 02/04/05


Seabiscuit36

I'm in IGY's boat.  Mrs Biscuit and I are currently in a townhome and looking to upgrade.  The problem is the market. Our townhouses are going for 10k-20k less than they were a year ago.  I'm not sure if we should hold out to sell or just sell, live with my parents and wait for the market to go to shtein then buy dirt cheap.
"For all the civic slurs, for all the unsavory things said of the Philadelphia fans, also say this: They could teach loyalty to a dog. Their capacity for pain is without limit." -Bill Lyons

Eaglez

Quote from: Diomedes on August 09, 2007, 10:38:35 PM
Quote from: Eaglez on August 09, 2007, 08:03:06 PMWho takes out an interest-only mortgage?

More to the point, what idiotic bank extends credit to the kind of idiot who would take such a loan?  It takes two to tango.  If you want to get the personal responsibilty umbrage cranking, make sure to direct at least half your energy against avaricious, short sighted idiotic banks.

Sure, a lot of financial institutions over-valued the ability for those borrowers to pay back their loans. I don't know what they were thinking marketing such instruments. They shoulder some blame for extending this type of payment structure to people who shouldn't even entertain it.

However, like I said before, Americans think they should be able to live above their means without any repercussions. I'm sure many of those interest-only mortgages were taken out on newer properties by people who were already over-extended in terms of income. They saw "interest-only" and thought that they could worry about it later instead of now. Many of those individuals probably had a few car loans, revolving debt, etc.

And I absolutely believe that financing agreements need to be clearly written and the legalese eliminated. All the terms that the average person has no idea what it means just hamper economic growth and vitality by reducing efficiency and impeding the attainment of complete information. There needs to be more transparency so that borrowers know exactly what they are getting into. My fear is that those same individuals will know what they are getting into, and still choose that path anyways expecting a bail-out subsequently if they bottom-up.

And homeownership should be encouraged and loans readily available to homeowners -- but only if they are financially able to take on that ownership without over-extending themselves. A lot of people saw those interest-only loans and instead of getting the affordable 200-250K home they went out and got the 350-400K home. Just plain idiotic.

The mentality has to change now. The instant gratification of having now and worrying about it later is toxic.

Wingspan

Quote from: Seabiscuit36 on August 10, 2007, 07:56:23 AM
I'm in IGY's boat.  Mrs Biscuit and I are currently in a townhome and looking to upgrade.  The problem is the market. Our townhouses are going for 10k-20k less than they were a year ago.  I'm not sure if we should hold out to sell or just sell, live with my parents and wait for the market to go to shtein then buy dirt cheap.

If you can afford two mortgages at a time...i would consider renting it out until the value climbs back up.

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Rome

The rental market is just as horrendous as the purchase market.  Nevermind the interest and principle payments.  People can usually afford those.  What's killing this market is the taxes and insurance every homeowner has to pay.

For instance, in this market you have hurricane issues, right?  Okay, first of all insurance companies are refusing to insure homes in hurricane prone zones.  Therefore you have to get state-funded windstorm insurance.  Instead of paying say 500 bucks per year for that insurance the state is charging like 2,500 dollars. 

Then you have the tax problem.  We have a homestead program in this state that permits you to deduct $25,000 from your assessed value which lowers your tax bill about 500 bucks.  However, investment properties aren't subject to that deduction.  Also - there's a constitutional amendment that states that your taxes can only be raised 3% per year (SAVE OUR HOMES) if it's your homestead.  Who then pays extra to cover the tax shortfall?  Yep - investors.

As a result of owning the house I live in for eight years my tax bill is roughly $1,900 per year.  I've benefited from the homestead and tax relief for years but if I sold my home the new owner would lose my deductions and be forced to pay at the market value rate.  In short, his taxes would zoom to over $5,000 per year instead of the $1,900 I pay.

If you're an investor there's no way you can afford that.  He'd have $1,500 per month in principle & interest, another $300 per month in insurance and another $400 per month in taxes.  That's a nut of $2,200 per month on a property that would rent for $1,500 per month tops!

All that equals death in the investment market.  You can't be upside down unless you're recouping your money via appreciation on the house and that's just not happening anymore.  When homes were appreciating in value 10-20% per year, investors were happy to absorb the month-to-month loss in cash flow.  Now they're not and that's why the real estate market is in total free-fall.

Cerevant

#36
Ok, so help me out here - People take out interest-only loans on the assumption that housing prices will continue to grow are stupid.  Makes sense to me.

So, if this is the case, why is the fed operating at a deficit and continuing to borrow on the assumption that inflation and growth of the GDP will keep the relative debt constant considered good financial policy?

BTW, in the last couple of weeks I've seen prices in Canada drop to be more consistent with the current exchange rate.  This is the first time I've seen this happen in the last 2 years, in spite of the fact that the exchange rate has fluctuated more than 10%.  Apparently, the folks up here don't think that the USD is going to recover any time soon.  The irony is that this will probably kill the Canadian economy, which has relied on being the cheap NA manufacturing center.  If the dollar continues to drop you may see unemployment go down in the US since it won't be so attractive to move those auto plants north.
An ad hominem fallacy consists of asserting that someone's argument is wrong and/or he is wrong to argue at all purely because of something discreditable/not-authoritative about the person or those persons cited by him rather than addressing the soundness of the argument itself.

Seabiscuit36

The problem in the US was these ARM rates and no interest loans were being pimped by new Mortgage companies that were popping up over night.  I had my mortgage company try to sell me on one of those loans, the guy was really trying to pimp it, and i had to put him in his place.  But you can easily see how people/customers with no financial background would hear a lower monthy mortgage amount and take that, not thinking that the rate would increase and their monthly bill could triple. 

For me, its a good thing since assloads of houses which would normally be out of my ranger should be hitting the market in the next year. 
"For all the civic slurs, for all the unsavory things said of the Philadelphia fans, also say this: They could teach loyalty to a dog. Their capacity for pain is without limit." -Bill Lyons

Phanatic

Marketing and sales guys can be total scum of the earth. When Mom and Pop go looking for a house and get a slick marketing pitch from guido the salesmen... and fall for it... that sucks.

Then there are buyers that live for today and let tomorrow take care of itself. I know a few of those and they get what they deserve in the end normally anyway.

In the end though. You can't fire the buyer.
This post is brought to you by Alcohol!

Eaglez

Quote from: Cerevant on August 10, 2007, 08:53:59 AM
Ok, so help me out here - People take out interest-only loans on the assumption that housing prices will continue to grow are stupid.  Makes sense to me.

So, if this is the case, why is the fed operating at a deficit and continuing to borrow on the assumption that inflation and growth of the GDP will keep the relative debt constant considered good financial policy?


Because individual home owners have grossly incomplete information while sophisticated economists and financial professions can make better educated predictions of how markets will react and how growth and inflation will pan out. It's an information gap. I think it would be dubious to suggest that someone who makes a living analyzing data and other market indicators is no better off than someone who is buying a house for the first time, is unsophisticated in finances and economics, sees that he is approved for a home loan, and wants as much as he can for as little as he can pay for it and worry about the long-term implications later -- if at all. Like I said, it is indicative of the instant gratification, want-it-now mentality that has to stop.

And I think the people who do take those interest only mortgages banking on an increasing housing market are usually doing it in a whim, and not thinking of the long term implications or really having any slightest clue as to what they are doing. It sounds cynical, but I chalk it up to stupidity. If I had to apportion fault, I would put most of it in the home owners for not educating themselves and some of the bank for approving some of these nitwits and offering such a financing structure to begin with.

In terms of the sub-prime market, the whole crisis surrounding that seems to be pretty mild. The sub-prime market only makes up approximately 14% of the mortgage market. Of that 14%, only 13% are late on payments. And only approximately 0.6% of all U.S. mortgages are in foreclosure, which is up only a tenth of a percentage point from last year.

Also, since sub-prime mortgages are taken out on less expensive property, there are estimates that the foreclosures on the sub-prime market only account for approximately a 7 billion dollar loss in net worth to those mortgagors. With household net worth in the U.S. estimated at $53 trillion, the sub-prime foreclosures account for .01 % of net U.S. household wealth.

So I don't think it is anything to be too concerned about. I'm more concerned about what Bill was talking about with the hedge funds and also with a lot of the other financing instruments like interest-only mortgages giving people the false notion that they can live outside their means for an indefinite period of time.




PoopyfaceMcGee

So, where's the best place to stash my retirement savings?  Pork bellies?  Cattle?

Diomedes

There is considerable overlap between the intelligence of the smartest bears and the dumbest tourists." - Yosemite Park Ranger

Geowhizzer

Quote from: FastFreddie on August 10, 2007, 03:01:37 PM
So, where's the best place to stash my retirement savings?  Pork bellies?  Cattle?

From the sounds of it, the mattress.

methdeez


Butchers Bill

This article is saying it will take 16 more months for the mortgage mess to play out:

http://www.msnbc.msn.com/id/20216643/

I am sticking with 24-36 months personally.
I believe I've passed the age of consciousness and righteous rage
I found that just surviving was a noble fight.
I once believed in causes too,
I had my pointless point of view,
And life went on no matter who was wrong or right.