Sub Prime

glyn · 10-31-2007, 09:26 AM

Saw a TV report on how the sub-prime fiasco has affected just one city (Cleveland OH) in America. There have been over 10,000 foreclosures. The empty homes are mostly boarded up. All are offered for sale at auctions. Those that don't get sold are often vandalised. The police conduct the evictions and hate having to do so. One policeman conducted 90 in a week. The city pays the police costs. This is a disgraceful state of affairs. It appears that agents were paid huge commissions for selling the sub-prime mortgages, so they took little care in advising people. The Banks were clearly thriving - they take the mortgage payments and get the houses back to sell again. The abandoned areas become magnets for criminals and ultimately the City will have to pay an estimated $2 Billion to get the houses cleared. Now look at the rest of America. How much will it cost to put right? How many people are now homeless? The whole episode is a disaster. The Banks are greedy beyond belief, and they wouldn't recognise a decent principle if they were ever to find one.

**Shek** · 10-31-2007, 10:11 AM

Quote:

Originally Posted by glyn

The Banks are greedy beyond belief, and they wouldn't recognise a decent principle if they were ever to find one.

The banks took a risk, and they are paying for it, with some spillover effects. This wasn't a free lunch for the banks at all.

However, I'd also call the people taking the loans from the banks just as greedy. They wanted to live beyond their means, and they used these loans from the banks to do that. It takes two to tangle, and so the responsibility needs to be laid at the feet of both parties in the transaction, not just the banks!

glyn · 10-31-2007, 10:49 AM

[quote=Shek;421740]The banks took a risk, and they are paying for it, with some spillover effects. This wasn't a free lunch for the banks at all.

We have the drama of the Northern Rock bank in the UK. They were foolishly greedy, and were granting loans like there was no tomorrow. The government had to step in to prop them up as their customers were all trying to close their accounts. The directors of the bank went against every established principle in banking in their rush for profit.

However, I'd also call the people taking the loans from the banks just as greedy. They wanted to live beyond their means, and they used these loans from the banks to do that. It takes two to tangle, and so the responsibility needs to be laid at the feet of both parties in the transaction, not just the banks!

I can grant you that much, but the agents selling the mortgages were (at best) economical with the truth. After the initial fixed interest rate (which could be as little as 6 months to 2 years) a much higher rate cut in. Some monthly repayments were doubled. No wonder people couldn't manage. IF the agents or the banks had done their jobs properly all this would have been explained to the borrower. It wasn't. There doesn't appear to be much ethics involved in that industry. Many innocent and blameless people are without a home AND have tarnished their credit rating.

dalem · 10-31-2007, 12:39 PM

Back when I bought this house (my first) my lender made one effort to get me to go as big as I could afford at the time. I told him "no thank you" and happily took on a mortgage I could afford at half of my then income.

Which was smart because I'm now making about half of what I was making then.

It was easy - the guy said "I can give you more money than you can afford to pay back" and I said "No thanks." I have no sympathy for anyone who crossed their fingers and hoped it would work out, either lenders or lendees.

-dale

**Ironduke** · 10-31-2007, 13:58 PM

I think the main problem is that housing is simply overpriced. Look at the huge surge in home prices below (adjusted for inflation).

My opinion... housing should cost half of what it does.

braindead · 10-31-2007, 14:08 PM

great , I´m 1 1/2 months away from signing my first real estate deal , buying a flat in my hometown . In last 5 years real-estate prices have gone up 250% but at least i´m getting the one at 60% of it´s current asking price . If considering that real estate prices are over-inflated , that should be a fair price .

glyn · 10-31-2007, 14:22 PM

Quote:

Originally Posted by Ironduke

I think the main problem is that housing is simply overpriced. Look at the huge surge in home prices below (adjusted for inflation).

My opinion... housing should cost half of what it does.

I bought my present property in 1989 for (notionally) £189,000. In fact I was downsizing from a town house so it was a swap with cash adjustment in my favour. It is now worth silly money more akin to telephone numbers - between 4 and 5 times what I paid. I paid the deposit on my daughters house after she got married, on the strict understanding that she was to get a repayment mortgage. Her house has trippled in price during those 12 years and I am pleased to say that they have been paying in extra monies and the house will be theirs entirely in a few years time.

dalem · 10-31-2007, 16:56 PM

I'm not a fan of completely paying off a fixed mortgage. A 30 year fixed is the cheapest price anyone will ever see for money, so I borrow at 6.3% and invest to earn 8%.

If I had a cash windfall and could pay off my house (HAH!), I still don't know that I would. I'd have to look at the numbers at that point.

-dale

glyn · 10-31-2007, 17:40 PM

Quote:

Originally Posted by dalem

I'm not a fan of completely paying off a fixed mortgage. A 30 year fixed is the cheapest price anyone will ever see for money, so I borrow at 6.3% and invest to earn 8%.

If I had a cash windfall and could pay off my house (HAH!), I still don't know that I would. I'd have to look at the numbers at that point.

-dale

Each to their own. I like the idea of paying it off over the shortest timescale by a repayment mortgage. In the UK it was traditional to have an endowment mortgage over 25 years until people found that due to changes in the tax rules the amount realised over the term was insufficient to pay off the mortgage - even the more expensive "with profits" endowments. A lot of people were hurt that way.

**Ironduke** · 10-31-2007, 18:07 PM

It's good for the people who own a house when the value of the property goes up -- their assets have grown. But is it realistic? My dad's house cost $140,000 in 1995, but now it is assessed at well over $300,000. There have been some improvements, such as a deck and other things, but an increase of $200,000? Ludicrous, that is simply ridiculous beyond belief.

Houses are the new internet stocks. Adjusted for inflation (assuming no improvements), my dad's house should have a value of $190,000. Tack on $20,000 to $30,000 for improvements, at MOST. This is where housing prices should be. Adjusted for inflation, without improvements, most homes should see little or no appreciation in value. There are no adequate explanations for this degree of appreciation, such as demand.

glyn · 10-31-2007, 18:41 PM

Quote:

Originally Posted by Ironduke

It's good for the people who own a house when the value of the property goes up -- their assets have grown. But is it realistic? My dad's house cost $140,000 in 1995, but now it is assessed at well over $300,000. There have been some improvements, such as a deck and other things, but an increase of $200,000? Ludicrous, that is simply ridiculous beyond belief.

Houses are the new internet stocks. Adjusted for inflation (assuming no improvements), my dad's house should have a value of $190,000. Tack on $20,000 to $30,000 for improvements, at MOST. This is where housing prices should be. Adjusted for inflation, without improvements, most homes should see little or no appreciation in value. There are no adequate explanations for this degree of appreciation, such as demand.

I agree, but what can be done about it? In the UK we are told that 3 million new homes need to be built in the next decade to accommodate the rising tide of immigrants. The cost of land for a building plot is substantial and rising. In the US I would imagine plots are cheaper. A plot in a prime area is bound to cost more than one which is not. The old mantra 'Location, location, location' further complicates the issue. For someone like myself (and I should imagine most in my age group) the ridiculously inflated prices only make us asset rich, not cash rich! The only way would be to downsize yet again, and I don't want to do that as I am in the location that is ideal for me.

**Parihaka** · 10-31-2007, 18:53 PM

Quote:

Originally Posted by Ironduke

It's good for the people who own a house when the value of the property goes up -- their assets have grown. But is it realistic? My dad's house cost $140,000 in 1995, but now it is assessed at well over $300,000. There have been some improvements, such as a deck and other things, but an increase of $200,000? Ludicrous, that is simply ridiculous beyond belief.

Houses are the new internet stocks. Adjusted for inflation (assuming no improvements), my dad's house should have a value of $190,000. Tack on $20,000 to $30,000 for improvements, at MOST. This is where housing prices should be. Adjusted for inflation, without improvements, most homes should see little or no appreciation in value. There are no adequate explanations for this degree of appreciation, such as demand.

Agreed, we have the same problem here, with two factors driving it. Firstly easy credit where you could basically borrow what you like coupled with no capital gains tax has made housing a very attractive speculative investment.
A lot of baby-boomers have taken their savings and borrowed to buy and rent out housing, relying on house price increases driven by demand.
Over the last 6 years this has given them an average increase of 15% per year. When we bought our house 6 years ago it was valued at 400,000 for the property plus a spare section. Now our house excluding the section is valued at 700,000. It's insane, I expect at least a 30% reduction over the next two years, as the speculative bubble has already broken with the now 8.5% official cash rate and the fallout from the sub-prime affair in the US tightening credit worldwide.

sappersgt · 10-31-2007, 19:14 PM

Quote:

Originally Posted by glyn

I bought my present property in 1989 for (notionally) £189,000. In fact I was downsizing from a town house so it was a swap with cash adjustment in my favour. It is now worth silly money more akin to telephone numbers - between 4 and 5 times what I paid. I paid the deposit on my daughters house after she got married, on the strict understanding that she was to get a repayment mortgage. Her house has trippled in price during those 12 years and I am pleased to say that they have been paying in extra monies and the house will be theirs entirely in a few years time.

I ponied up the down payment for my son at the start of this year. The increase in prices make it more difficult for young people to buy real estate than it was in my youth. The current tax law make home ownership one of the best investments he can make.

Quote:

by dalem
I'm not a fan of completely paying off a fixed mortgage. A 30 year fixed is the cheapest price anyone will ever see for money, so I borrow at 6.3% and invest to earn 8%.

If I had a cash windfall and could pay off my house (HAH!), I still don't know that I would. I'd have to look at the numbers at that point.

-dale

I was in mortgage banking for 13 years before retiring. Todays mortgage rates are hard to beat. I had several clients refinance their paid for homes and invest the money in tax free bonds in order to take advantage of the mortgage interest tax shelter. The was a proposal to eliminate the mortgage tax deduction but it didn't pass. The results would have made the subprime debacle pale in comparison.

wabpilot · 10-31-2007, 19:51 PM

When I retired from the airlines I took the lump sum settlement and rolled it into a IRA. (Legal and tax free. I paid a lawyer a bunch of money to make it so.) We sold our home in in Virginia for $279,000 after the realtor's take.

We bought a home in North Raleigh, NC because it was reasonably close to where our daughter was stationed and because I had a corporate flying job there. We paid $305,000 for our new house. The old house was paid off before we sold it, so we only had to mortgage $86,000. It's tough to get a mortgage that small! (Don't laugh, I almost had to dip into our savings and investment fund because all the mortgage places laughed at our pitiful little application.) I finally got a mortgage though through the Naval Credit Union.

We sold the house in 2006 for the insane amount of $499,900. After the realtor took her cut, and we paid off the mortgage we had roughly $383,000 left over. That almost, but not quite, made up for the hit our investments took as a result of 9/11. Still that was insane appreciation. Never in my homeowning life have I ever made that kind of appreciation in so short a time.

dalem · 10-31-2007, 20:56 PM

Quote:

Originally Posted by sappersgt

I was in mortgage banking for 13 years before retiring. Todays mortgage rates are hard to beat. I had several clients refinance their paid for homes and invest the money in tax free bonds in order to take advantage of the mortgage interest tax shelter. The was a proposal to eliminate the mortgage tax deduction but it didn't pass. The results would have made the subprime debacle pale in comparison.

In this layman's opinion, that's the whole point - where is the cheapest money to be had? Fixed-rate mortgages are the closest to a money tree any of us normal folk will ever get.

-dale

10-31-2007, 09:26 AM	#1 (permalink)
glyn *Military Professional* Join Date: 09-15-06 Location: Penzance, Cornwall UK Posts: 6,886	Sub Prime Saw a TV report on how the sub-prime fiasco has affected just one city (Cleveland OH) in America. There have been over 10,000 foreclosures. The empty homes are mostly boarded up. All are offered for sale at auctions. Those that don't get sold are often vandalised. The police conduct the evictions and hate having to do so. One policeman conducted 90 in a week. The city pays the police costs. This is a disgraceful state of affairs. It appears that agents were paid huge commissions for selling the sub-prime mortgages, so they took little care in advising people. The Banks were clearly thriving - they take the mortgage payments and get the houses back to sell again. The abandoned areas become magnets for criminals and ultimately the City will have to pay an estimated $2 Billion to get the houses cleared. Now look at the rest of America. How much will it cost to put right? How many people are now homeless? The whole episode is a disaster. The Banks are greedy beyond belief, and they wouldn't recognise a decent principle if they were ever to find one. __________________ Semper in excretum. Solum profunda variat.

10-31-2007, 14:08 PM	#6 (permalink)
braindead Lost in Translation *Senior Contributor* Join Date: 11-30-06 Location: estonia Posts: 1,481 Country:	great , I´m 1 1/2 months away from signing my first real estate deal , buying a flat in my hometown . In last 5 years real-estate prices have gone up 250% but at least i´m getting the one at 60% of it´s current asking price . If considering that real estate prices are over-inflated , that should be a fair price . __________________ If i only were so smart yesterday as my wife is today

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10-31-2007, 10:49 AM	#3 (permalink)
glyn *Military Professional* Join Date: 09-15-06 Location: Penzance, Cornwall UK Posts: 6,886	[quote=Shek;421740]The banks took a risk, and they are paying for it, with some spillover effects. This wasn't a free lunch for the banks at all. We have the drama of the Northern Rock bank in the UK. They were foolishly greedy, and were granting loans like there was no tomorrow. The government had to step in to prop them up as their customers were all trying to close their accounts. The directors of the bank went against every established principle in banking in their rush for profit. However, I'd also call the people taking the loans from the banks just as greedy. They wanted to live beyond their means, and they used these loans from the banks to do that. It takes two to tangle, and so the responsibility needs to be laid at the feet of both parties in the transaction, not just the banks! I can grant you that much, but the agents selling the mortgages were (at best) economical with the truth. After the initial fixed interest rate (which could be as little as 6 months to 2 years) a much higher rate cut in. Some monthly repayments were doubled. No wonder people couldn't manage. IF the agents or the banks had done their jobs properly all this would have been explained to the borrower. It wasn't. There doesn't appear to be much ethics involved in that industry. Many innocent and blameless people are without a home AND have tarnished their credit rating.

10-31-2007, 12:39 PM	#4 (permalink)
dalem Lord High Hullabalooster *Senior Contributor* Join Date: 11-23-04 Location: Columbia Heights, MN Posts: 8,737 Country:	Back when I bought this house (my first) my lender made one effort to get me to go as big as I could afford at the time. I told him "no thank you" and happily took on a mortgage I could afford at half of my then income. Which was smart because I'm now making about half of what I was making then. It was easy - the guy said "I can give you more money than you can afford to pay back" and I said "No thanks." I have no sympathy for anyone who crossed their fingers and hoped it would work out, either lenders or lendees. -dale

10-31-2007, 16:56 PM	#8 (permalink)
dalem Lord High Hullabalooster *Senior Contributor* Join Date: 11-23-04 Location: Columbia Heights, MN Posts: 8,737 Country:	I'm not a fan of completely paying off a fixed mortgage. A 30 year fixed is the cheapest price anyone will ever see for money, so I borrow at 6.3% and invest to earn 8%. If I had a cash windfall and could pay off my house (HAH!), I still don't know that I would. I'd have to look at the numbers at that point. -dale

10-31-2007, 18:07 PM	#10 (permalink)
Ironduke Burgomaster Join Date: 08-02-03 Location: Minneapolis Posts: 6,972 Country:	It's good for the people who own a house when the value of the property goes up -- their assets have grown. But is it realistic? My dad's house cost $140,000 in 1995, but now it is assessed at well over $300,000. There have been some improvements, such as a deck and other things, but an increase of $200,000? Ludicrous, that is simply ridiculous beyond belief. Houses are the new internet stocks. Adjusted for inflation (assuming no improvements), my dad's house should have a value of $190,000. Tack on $20,000 to $30,000 for improvements, at MOST. This is where housing prices should be. Adjusted for inflation, without improvements, most homes should see little or no appreciation in value. There are no adequate explanations for this degree of appreciation, such as demand.

10-31-2007, 19:51 PM	#14 (permalink)
wabpilot *Military Professional* Join Date: 12-05-03 Location: Commuting between Dresden and Ft. Worth Posts: 558 Country:	When I retired from the airlines I took the lump sum settlement and rolled it into a IRA. (Legal and tax free. I paid a lawyer a bunch of money to make it so.) We sold our home in in Virginia for $279,000 after the realtor's take. We bought a home in North Raleigh, NC because it was reasonably close to where our daughter was stationed and because I had a corporate flying job there. We paid $305,000 for our new house. The old house was paid off before we sold it, so we only had to mortgage $86,000. It's tough to get a mortgage that small! (Don't laugh, I almost had to dip into our savings and investment fund because all the mortgage places laughed at our pitiful little application.) I finally got a mortgage though through the Naval Credit Union. We sold the house in 2006 for the insane amount of $499,900. After the realtor took her cut, and we paid off the mortgage we had roughly $383,000 left over. That almost, but not quite, made up for the hit our investments took as a result of 9/11. Still that was insane appreciation. Never in my homeowning life have I ever made that kind of appreciation in so short a time.

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