Just because some folk's houses are worth less than they paid - or less than they owe, how does that affect their ability to pay?
Well, it doesn't. It seems to be affecting some people's willingness to pay - even if the loan payment amount has remained unchanged. The old story behind most foreclosure's was that the borrower lost his / her job or there was some other unanticipated dent in the cash flow picture. Most people kept trying to keep / catch up, knowing that they had been building equity and that was likely to continue if they kept paying and kept their credit rating intact. With the promise of equity (profit) gone, we're seeing many people choose to stop paying. That explains some of this mess.
Then we have the people for whom the loan payments did change. Not just the ones who did an adjustable - after all rates haven't moved that much - but those who went with (some say , they were sold) a one or two year buy-down type of arrangement. One where the rate was 1% or 0%.
In some deals the rates adjusted after the intro period to a level several points higher than a typical mortgage - even if the prevailing market rates were the same or lower than they were at the time of the loan's origination. I
n some arrangements the deal included negative amortization. This is where a piece of the interest payment that isn't paid each month is added to the amount financed and the actual amount owed grows over the period.
People did this sort of thing because they were counting on; their ability to refinance at the end of the easy period, the continued appreciation in their home's value, the continuation of other low criteria (easy credit / creative) programs.
Creative financing made it easy to buy a house and spend a ton. We could see these things happening. All this drove demand and prices higher - which helped to make the story about "get in any way you can and deal with deferred consequences", look even more sensible.
So the big nasty isn't about people losing jobs or being strapped with unexpected cash flow problems. It's not that the economy is so bad. Nope - While changes in circumstances happen as they always did, we now have the fact that the borrowers don't have the incentive to hang in there, plus the forecast market conditions didn't come true. The conditions went the other way. Loan origination fees and commissions at every level - from the broker to the lender, to those who packaged bundles of loans into securities to be bought and sold, fueled the notion that this was a good idea because there was money to be made.
Folks with resources will refinance and find a way to deal with it, but the one's who were put together, sold on the story, or just not smart enough to consider the downside, will not pay. We'll see most of these loans blow up.
Once the people who are going to punt have punted, the prices will be lower and the criteria for borrowing will be adjusted. Our homes will be worth less than they were during the easy loan frothy period. This will take a while - probably a couple of years. We'll have to get used to the idea.
All this might seem obvious. After all, it's been talked about enough.
Well, it doesn't. It seems to be affecting some people's willingness to pay - even if the loan payment amount has remained unchanged. The old story behind most foreclosure's was that the borrower lost his / her job or there was some other unanticipated dent in the cash flow picture. Most people kept trying to keep / catch up, knowing that they had been building equity and that was likely to continue if they kept paying and kept their credit rating intact. With the promise of equity (profit) gone, we're seeing many people choose to stop paying. That explains some of this mess.
Then we have the people for whom the loan payments did change. Not just the ones who did an adjustable - after all rates haven't moved that much - but those who went with (some say , they were sold) a one or two year buy-down type of arrangement. One where the rate was 1% or 0%.
In some deals the rates adjusted after the intro period to a level several points higher than a typical mortgage - even if the prevailing market rates were the same or lower than they were at the time of the loan's origination. I
n some arrangements the deal included negative amortization. This is where a piece of the interest payment that isn't paid each month is added to the amount financed and the actual amount owed grows over the period.
People did this sort of thing because they were counting on; their ability to refinance at the end of the easy period, the continued appreciation in their home's value, the continuation of other low criteria (easy credit / creative) programs.
Creative financing made it easy to buy a house and spend a ton. We could see these things happening. All this drove demand and prices higher - which helped to make the story about "get in any way you can and deal with deferred consequences", look even more sensible.
So the big nasty isn't about people losing jobs or being strapped with unexpected cash flow problems. It's not that the economy is so bad. Nope - While changes in circumstances happen as they always did, we now have the fact that the borrowers don't have the incentive to hang in there, plus the forecast market conditions didn't come true. The conditions went the other way. Loan origination fees and commissions at every level - from the broker to the lender, to those who packaged bundles of loans into securities to be bought and sold, fueled the notion that this was a good idea because there was money to be made.
Folks with resources will refinance and find a way to deal with it, but the one's who were put together, sold on the story, or just not smart enough to consider the downside, will not pay. We'll see most of these loans blow up.
Once the people who are going to punt have punted, the prices will be lower and the criteria for borrowing will be adjusted. Our homes will be worth less than they were during the easy loan frothy period. This will take a while - probably a couple of years. We'll have to get used to the idea.
All this might seem obvious. After all, it's been talked about enough.
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