1. SPS Accounts:
    Do you find yourself coming back time after time? Do you appreciate the ongoing hard work to keep this community focused and successful in its mission? Please consider supporting us by upgrading to an SPS Account. Besides the warm and fuzzy feeling that comes from supporting a good cause, you'll also get a significant number of ever-expanding perks and benefits on the site and the forums. Click here to find out more.
    Dismiss Notice
Dismiss Notice
You are currently viewing Boards o' Magick as a guest, but you can register an account here. Registration is fast, easy and free. Once registered you will have access to search the forums, create and respond to threads, PM other members, upload screenshots and access many other features unavailable to guests.

BoM cultivates a friendly and welcoming atmosphere. We have been aiming for quality over quantity with our forums from their inception, and believe that this distinction is truly tangible and valued by our members. We'd love to have you join us today!

(If you have any problems with the registration process or your account login, please contact us. If you've forgotten your username or password, click here.)

The housing meltdown.

Discussion in 'Alley of Dangerous Angles' started by Carcaroth, Aug 20, 2007.

  1. Carcaroth

    Carcaroth I call on the priests, saints and dancin' girls ★ SPS Account Holder

    Joined:
    Aug 3, 2004
    Messages:
    1,655
    Likes Received:
    5
  2. Aldeth the Foppish Idiot

    Aldeth the Foppish Idiot Armed with My Mallet O' Thinking Veteran

    Joined:
    May 15, 2003
    Messages:
    12,434
    Media:
    46
    Likes Received:
    250
    Gender:
    Male
    I think the explanation is much simpler than that. While some of what you describe does happen, the majority of people defaulting on their mortgages are defalting on ARM loans. ARM stands for "adjustable rate mortgages". The way they work is for a set period of time (usually 3-7 years) you get a "teaser" interest rate for your loan that is far below what it is be after the teaser period expires.

    The problem is that people can afford to pay the mortgage at the teaser rate, but cannot afford it once the interest rate soars upwards. In some cases the new interest rate doubles what the old one was.

    The big problem with this is that banks don't qualify people for loans based on the eventual rate hike - only at the teaser rate. The thinking is that even though a few years down the road the rates will go up, chances are the person's salary will also increase in that time, in which case they can afford the higher rate. Given the current rate of foreclosures, that is evidently not the case.

    My wife and I have an ARM loan. We signed it in the fall of 2003, and thus we still have a little over a year at the low "teaser" rate. I also fall into the category of someone who can see his interest rate double after the teaser rate expires. My current mortgage is at 4.75%, but could go as high as 9.75%. That having been said, I'm not in any danger of defaulting because 1.) I can, in fact, pay the higher mortgage rate if I had to and 2.) My wife and I don't plan on staying in our house that much longer anyway, as we need to upgrade to a bigger house to accomodate what has become 3 (and probably eventually more) people.

    This obviously begs the question of why can I do it but not other people? The answer is that my salary has risen at a higher rate than inflation. So I'm actually earning more money than I was a few years ago, not just in absolute numbers, but in buying power. Many people on the low end of the scale get very modest raises, and thus, even though their paycheck may increase a bit from year to year, the buying power of the paycheck is the same as it ever was. Thus, their income for housing when all of their other bills are paid is still the same dollar amount as it was a few years ago, and when their mortgage rates go up, it hurts.
     
  3. Carcaroth

    Carcaroth I call on the priests, saints and dancin' girls ★ SPS Account Holder

    Joined:
    Aug 3, 2004
    Messages:
    1,655
    Likes Received:
    5
    In the UK, people can switch their mortgages as and when they want to. Although some mortgages have tie-ins or penalties, with a bit of shopping about you can get a low-rate fixed mortgage for somewhere between 2 and 5 years and swap when the "teaser rate" runs out. (The lenders betting on the fact that people won't bother)

    That said, I haven't heard of it doubling except maybe in recent cases due to the hike in interest rates we've had.
     
  4. Rallymama Gems: 31/31
    Latest gem: Rogue Stone


    Joined:
    Oct 23, 2002
    Messages:
    4,329
    Media:
    2
    Likes Received:
    11
    That's an excellent article. This problem really hammers home the idea that we live in a global economy, and that the winds of fortune - for good or for ill - blow for all. There's no isolation anymore.

    AFI, you describe the surface cause but we have to scratch a little deeper. Why were consumers so willing to ignore the risks and take on unmangeable levels of debt? Why were lenders willing to shell out the money? In a similar but unrelated problem, why are credit card companies willing to grant so much leeway to students who have yet to prove either their trustworthiness or their earning capacity?

    The answer is simple: GREED. People see something they like and decide that they have to have it right away - no consideration, no saving, no analysis, just instant gratification through consumption. New clothes, a hot car, bling, or a big house... it doesn't matter what someone wants to buy, there is someone else ready to provide the goods, take the money and run. Who cares what might happen later, or to anyone else, as long as I Get Mine?

    We bought our house in 2003 and insisted on a 30-year fixed rate mortgage. Over the intervening 4 years, I've lost count of how many re-fi offers we've shredded! They never provided a rate close to what we already had. Funny how few we're getting these days...

    Conversely, my sister is now living in a 4BR house and renting out her former, more modest home. We couldn't figure out why she was buying up when her kids were starting to head off to college, and now, neither can she. She's talking about selling the new house and moving back to the other, but the financial damage will already have been done.
     
Sorcerer's Place is a project run entirely by fans and for fans. Maintaining Sorcerer's Place and a stable environment for all our hosted sites requires a substantial amount of our time and funds on a regular basis, so please consider supporting us to keep the site up & running smoothly. Thank you!

Sorcerers.net is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to products on amazon.com, amazon.ca and amazon.co.uk. Amazon and the Amazon logo are trademarks of Amazon.com, Inc. or its affiliates.