please explain sub prime mortgages and foreclosures

Can someone explain to me exactly what happened?

im having trouble understanding it in a debate

banks gave too much faith to low income families and told them to write any salary, they gave it to them, then cross references yrs later and boom foreclosures happened......right?


Can someone plz explain it to me in somewhat detail?

Explanation:


A financial trap for anyone in an overbloated and over valued real estate system.


Cheers!!!

edited because post double posted.


Cheers!!!

[edit on 2-10-2008 by RFBurns]

The banks lent money to people that were not really in a situation to take on that responsibility (sub prime)...

They bought into the loan as the lenders set an interest rate on the loan that was "do-able" from the borrowers stand point...(ARM - adjustable rate mortgage)

Then the loan 'adjusted' to a higher rate...so say a home owner was paying $1600/month on the mortgage...well, when the loan adjusted after a few years, the monthly rate went from $1600 to $2400 (hypothetical here); leaving the borrower in a situation where they could no longer afford the mortgage - hence, foreclosure!



hope that helps...

reply to post by chapter29


So basically I was correct right?

reply to post by ModernAcademia

So basically I was correct right?

Yes...but to fully understand the situation, you should look into predatory lending and why it happened in the first place.

The origination of this cluster f@$! is quite a story in itself...there are so many different culpable parties to this mess....good times - NOT.

Originally posted by chapter29

Can you go into more detail

i'm interested to grasp a better understanding

[edit on 2-10-2008 by ModernAcademia]

borrowers were also of the belief that when these loan rates adjusted, they'd be able to refinance or sell for a profit as the value would definitely be more than when they bought it.

wrong.

the market dropped, they owed more than what the place was worth and now they can't sell anyway.

so the banks are holding loans that are worth less than the original loan amount.

Ok,
I will try here.

POLITICS & Greed caused this crisis.

Lending standards were lowered to "help" the low-income. Political organizations such as ACORN were involved in "re-allocating" money from assistance to political activism (one example) and they of course "helped" their favorite politicians to make sure the money kept rolling in.

Also, since the standards were lowered... Greed came into play, over-valuation of property and predatory lending practices became the norm. Then of course the "tenant" cannot afford the mortgage when the rate goes up and goes into foreclosure. The banks refuse to move these people into a fixed rate because they are forcing a bailout and it is not in their best interest to provide fixed rate loans in this situation.

So all of this "false credit" has inflated the money supply as money is "created" when debt is "created".

This is kind of hard to explain but let me try...Debt creates money out of thin air kind of... it is like speculation, they are speculating that in the future someone will have money to pay for something now.. but the money doesn't exist now as it hasn't been made yet. I probably am not explaining that well but I hope another member can put it into better words.

Now that the debt is technically "shrinking" due to default (the 200 k worth is now 120k let's say and 80k just went poof back to oblivion) and the fake money is now gone without something to replace that 80k example of "credits". So on the books, this mortgage has lost 40% that cannot be replaced unless this property can be sold again for 200k to come out even.

Confusing... but then investors sunk money into "mortgage futures" and now the futures went down.

Think of investing in oil futures at 100 a barrel and oil goes down to 60 a barrel... 40% loss. As this "money" was only paper because it was a futures piece of paper, you lost your 40 % of your paper money.. The futures market is betting on what crap will be worth in the future when it is taken out and sold.

This is how the mortgages worked and all of these banks and insurance companies were invested heavily in these similar mortgage futures. So now that real estate is adjusting down and foreclosures are up, all of this created money has now gone away.

Kind of like buying gold and silver paper (not the coins or bars). Your most probably buying paper gold that doesn't exist yet. It is a future in a way as large dealers are selling you "paper gold" that is "over subscribed".

In other words, a company has 100 tons of bullion but have sold a million tons of "gold paper". Kind of the same thing here.


[edit on 2-10-2008 by infolurker]

i'll throw in my 2 cents here.

being a real estate broker in the nineties, i specialized in reselling HUD foreclosures. the hud program on resales had no appraisal requirements. to purchase the home, the down payment requirement was 50% of that required on a regular FHA loan. interestingly, the highest foreclosure rate for FHA was from the previously foreclosed fha homes. also the price of these homes went for sometimes 30% more than an identical home next door. the reason for the higher price, was that the people bidding did not have enough down payment money for a conventional mortgage. so, easing credit demands(low down payment or ez-qualifying) leads to increased demand and therefore increased pricing.

the private companies started offering ez qualify high loan to value ratios. demand skyrocketed and so did prices. as these properties started to foreclose and these lending practices diminished, so did the demand.

also the repeal of Glass Stiegal allowed bankers to now enter new territories. the fancy mortgages were packed into new financial offerings and pawned off overseas. there was bad-risk in these loans to begin with. unfortunately, the wave of real estate speculation pushed up prices, so that people with good credit had to pay more; and, also a wave of speculators entered the market. (flipping)

eventually, even the prime mortgages were in trouble (FNMA) since the underlying asset became upside down or worth less than the mortgage. (no more ez financing to keep the price high) people will walk, especially on second homes.

hey, if i knew it was coming. you can bet the private lenders saw it coming as well. unfortunately, they were making too much money off of packaging loans to care. man, i used to have to fight hard to get a mortgage for credit worthy clients in the nineties.

then the wave of 120% loan to value loans and the like. people started turning their home into a cash register.

reply to post by ModernAcademia


I'll give examples to help. My background i am a current mortgage broker making the transition to mortgage banker do to state laws and regs. ive been doing loans for 8+ years. (may i add honestly and ethically with no clients in foreclosure)

!. The media and My political coherts want you to believe it's ACORN. A. acorn is a rip off to buyers, read the fine print on there loans. Not for profit

Market example: suzy works at wal mart and makes $1000 a month, steve is a painter and makes $1500 a month. They have average credit say a 600 middle score. (paid some bills missed some others but current on all at the time) They find a house they want to buy, the payment is $1800 a month so they dont qualify. But...........they can do a stated income loan. They love the house and no one verifies there income so to qualify suzy says(with coaching from the lender) i make $3000 a month and steve make $4000 now we qualify. Here come broker pitch of refi later take cash out till you can afford it.

Sorry i'm being quick but specific questions can really help. I've got your answers. O ya the $2500 combined for the borrower is gross not net.

reply to post by Crakeur


Amen, i feel so bad as i field these calls daily. Good news as of yesterday there is an FHA option for those individuals.

If you or anybody else knows someone in this situation have them call an FHA approved Lender i.e. Bank or broker. The media has not been covering it but it's there.

reply to post by anotherdad


A larger role for the Federal Housing Administration. The FHA will be allowed to insure up to $300 billion in new 30-year fixed-rate mortgages for at-risk borrowers in owner-occupied homes if their lenders agree to write down loan balances to 90% of the homes' current appraised value.

By Les Christie, CNNMoney.com staff writer
Qualified borrowers must live in their homes and have loans that were issued between January 2005 and June 2007. Additionally, they must be spending at least 31% of their gross monthly income on mortgage debt to be eligible for the program.

Based on that new appraised home value, the FHA lender must determine how much the original lender has to reduce the original mortgage, so that it will reflect 90% of the home's market value.

If the original lender agrees to the writedown, the new lender buys the old loan and takes over the reworked mortgage.

Plus, they'll agree to pay the FHA 100% of any profits they realize from higher home prices if they sell or refinance within a year. So if the original loan principal is $200,000 and the home sells for $250,000, the borrower will owe the FHA $50,000, minus costs.

After a year, borrowers will share 90% of the profits with the FHA. The percentage keeps dropping in 10% increments to 50% after the fifth year, where it stays.

CAREFUL TO READ ALL THE CONS WITH THIS LOAN PRIOR TO AGREEING TO IT.

Another important issue at play in the subprime crisis (and a major chunk of our current economic meltdown) is an item known as Mortgage Backed Securities, or "MBS" for short. The practice is known as securitization.

The above posters have explained subprime, ARM, and other non-standard mortgage types fairly well.
(if you really want your hair to stand on end, option ARM mortgages are going to cause some serious high pucker factor here in the next couple months)

Anyways.
Not only were banks and brokers using non-standard mortgages to get people in houses, but banks found they could make a helluva profit if they did a little dance called securitization with their mortgages.
In fairly simple terms: banks would take a stack of mortgages, let's say 100 of them. Of the 100 mortgages, maybe 40 of them would be "good" mortgages with the borrowers having excellent credit and being very likely to pay the loan back. Another say 40 of the mortgages were "midgrade" mortgages; maybe the borrower has only average credit, maybe they just barely came in over the income requirement. These mortgages are at a mild risk of not being paid back. Then you have 20 mortgages consisting of subprime, ARM, option ARM, balloon, interest-only, etc; these are the bottom of the barrel. These have a very high risk of not being paid back (default). Each of these different types of mortgages is called a "tranche" in this context.

Now, the bank bundles up all these different tranches into a group. Because of the number of "good" and "kinda good" mortgages, they are able to have this group of 100 mortgages rated as a good credit risk. These bundles become Mortgage Backed Securities, or MBS.

Since real estate has been a fairly solid place to invest for a long time, these MBSs became popular in the investor market for their steady, high returns. To put it simply: the bank can sell off the rights to payments homeowners make at a profit to them, which turns into even more of a profit for investors. As homeowners make their mortgage payments, the investors gain profit.

As long as homeowners are making their payments, everyone up the chain continues to make money. When homeowners stop making their payments, though, all the sudden investors are losing money. Some percentage of default is expected on MBS investment in a normal economy and because there are so many mortgages involved the loss from normal default is negligible.

Now, the real Charlie-Foxtrot comes into play when we move back a couple steps to what I said about these MBSs being rated a good credit risk. Investors were easily misled because they weren't aware of the sheer number of "toxic" mortgages they had effectively paid for.
When the housing bubble burst, and when the subprime mortgage tranches (which were the first to go) started to go into foreclosure, all the sudden these "safe" investment vehicles began to go south. As more subprimes defaulted, investors (and investment firms) started to hemorrhage huge losses.

As the subprimes really got into the worst of the defaults, the "kinda good" tranches started to default as well due to prevailing economic conditions. The losses continued to mount.

That puts us about where we are now; the subprimes have failed along with the other "worst of the worst" and the midgrades are starting to fail now. The next domino in line are option ARMs; this huge batch of mortgages will begin to default in full force early in '09 and are expected to peak in '10. This will mean even more money lost for those stuck with the MBS investments.

Think Government pressured Affirmative Action and Diversity.

It's that simple!

reply to post by anachryon


Well said. Heres a great/funny video on it.

www.break.com...