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Subject: Simple sub-prime fix? rss

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Neil Carr
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My extended education with economics continues...

So I wonder, why can't the government simply make a law that will cap the interest rate on all subprime loans?

Just write a law that says to the effect: If you have a home loan with a fixed variable rate then it now has a fixed rate of X.

Now in listening to that great NPR/This American Life primer on the whole problem they explain that these loans were chopped up into little slices and so you can't actually get the home owner and the loaners all into the same room to renegotiate, and thus everyone's hands are tied.

I'm sure the above fix I suggested isn't possible because something with contract law would make it so the law is unconstitutional, as you can't get all of the people together for a legal renegotiation.

But... why not just pass an amendment? If it will prove to be unconstitutional, just make the fix constitutional. Hammer the square peg into the round hole and be done with it.

Just pass an amendment that everyone with a sub-prime only has to pay... what 3% interest. That way people save money, might stay in their homes longer even if jobs are lost, etc. The people who hold the loan will whine, but they are still getting something with their investment.
 
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J
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Wow, I really wish I had been much more financially irresponsible, so I could have a 3% mortgage too! We really do reward irresponsible behavior, don't we?

Mismanaged and reckless corporations get cash bailouts while clueless homeowners living beyond their means might get "rewarded" with low interest fixed-rate loans. I can assume all of us suckers who buy what we can afford and make safe investments are going to be footing the bill... shake

(This is not at attack on the OP, more a criticism of the "big picture")
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Ken
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Or just pass a law that states the mortgage service company has the right to renegotiate loans regardless of the ownership but must exercise all due care to protect ownership interest. Then you don't need individual approval from all of the securities owners.

Why not just cap 'em? Well, I don't have a sub-prime loan, haven't missed a mortgage payment in 23 years, and keep current on my other debts. Why should some piker that took out a 125% interest-only ARM that started at 8% and is now into double-digits get a benefit for making bad choices while I do stupid things like make my payments on time? How is that fair to those of us that behave responsibly?

The problem with the sub-prime market wasn't necessarily that the interest rates stunk, it's that the borrowers often had little ability to repay the loan regardless of the rate (that's why the rate was high - they were high risk borrowers). Any hiccup in employment, any unexpected expense, any change in circumstance put that at significant risk to default. They shouldn't have gotten the credit in the first place.

So I'm all for making adjustments that will let people keep their houses and make their payments. But I'll tell you it positively drives me nuts to hear that they may have debt forgiven (can I do that on my mortgage? I've even been paying it!) or interest rates better than mine. They signed for the credit, they should either repay it in full, go into foreclosure, or declare bankruptcy. If that means restructuring to a 45 year fixed-rate note, fine.

Eliminate personal responsibility for personal choices, and things don't get better. They generally just set us up for the next round of stupidity.
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Keith Boleen
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To make a law that would cap interests rates would go against everything that is a free-market system. The ecomomy is very bad right now, but it will get better.
 
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J
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perfalbion wrote:


Why not just cap 'em? Well, I don't have a sub-prime loan, haven't missed a mortgage payment in 23 years, and keep current on my other debts. Why should some piker that took out a 125% interest-only ARM that started at 8% and is now into double-digits get a benefit for making bad choices while I do stupid things like make my payments on time? How is that fair to those of us that behave responsibly?



Ken, can we please get back to disagreeing?
Thanks!

 
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Kenneth Bailey
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The Interest Rate is supposed to be based on the risk to the person lending the market. A sub-prime loan would go to a person that represents a higher risk to the bank making the loan and therefore the interest rate should be higher. If a law were passed to cap the interest rate, then you wouldn't have people that would lend to these people or in order to make up for their eventual losses they may charge a higher rate to other people (sort of like how insurance is slightly higher to rural people so that urban people don't have to pay even more).

 
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Ken
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jarredscott78 wrote:
Ken, can we please get back to disagreeing?
Thanks!


I disagree with this response entirely, wholeheartedly, and unreservedly.
 
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Ken
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mikoyan wrote:
The Interest Rate is supposed to be based on the risk to the person lending the market. A sub-prime loan would go to a person that represents a higher risk to the bank making the loan and therefore the interest rate should be higher. If a law were passed to cap the interest rate, then you wouldn't have people that would lend to these people or in order to make up for their eventual losses they may charge a higher rate to other people (sort of like how insurance is slightly higher to rural people so that urban people don't have to pay even more).


#1 - I'd presume that the cap would only affect loans already written.

#2 - The people who got these mortgages probably shouldn't have gotten any mortgage - they were bad credit risks.

#3 - They wouldn't get credit today regardless of any caps due to the market conditions and tightened underwriting requirements.

The sub-prime market always struck me as a sham designed to get people who shouldn't be borrowing into loans they couldn't afford and/or didn't make any sense for them to sign for the overwhelming majority of the loans written.
 
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Eric "Shippy McShipperson" Mowrer
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Just heard on the radio the other day that 60% of all home owners that have had their monthly payments reduced due to government action are behind again... ALREADY.

You think 3% loans are going to solve the problem? The problem isn't the % interest on the loans. The problem is the people who got the loans in the first place. I'd like to see a study of how many of them drive cars newer than 2006 and have TV screens larger than 50 inches. I'm guessing it will be a very high percentage on that one as well. And here we sit, wracking our brains trying to find a way to save them.

Here's a different solution. They can declare bankruptcy, lose the house, and live in government funded "project" high-rise housing until they're back on their feet again.

I can't comprehend any suggestion that involves ABSOLUTELY NO ACCOUNTABILITY OR CONSEQUNCES for their actions. Please explain to me how this would be fair to the rest of us.

I'm not saying we shouldn't bail out the "too big to fail" corporations, but we can send the CEO's packin, after they've payed every penny they own, sold all of their houses and cars, and declared bankruptcy. SOMEBODY has to take responsibility for all of this. The people who are LEAST likely to be responsible are the ones shouldering the burden in every single ridiculous bail-out plan I hear coming out of Washington or anywhere else, it seems.
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Dwayne Hendrickson
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How's this for an idea. When you're playing Puerto Rico and you get a bunch of Coffee plantations but you don't buy a coffee roaster, you can still ship coffee, even though there isn't any room on a ship. Oh, you can also sell tobacco, even though you didn't grow any.

I think that would even out the game and make it a lot more fun for everyone.
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Kenneth Bailey
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That's the thing that bothers me about this whole thing. We gave hundreds of billions to financial companies without blinking an eye, without demanding accountibility from the executives who led us into this mess, without any sort of guarantees on their part that if we give them this money they would free up the credit market. But when the auto industry comes calling, we demand all of that and then some. I think the difference is in who each affects. The Auto Industry affects mostly blue collar folks that probably don't contribute to campaigns and the Financial Industry affects white collar folks that do contribute.

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Kenneth Bailey
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perfalbion wrote:

The sub-prime market always struck me as a sham designed to get people who shouldn't be borrowing into loans they couldn't afford and/or didn't make any sense for them to sign for the overwhelming majority of the loans written.

I don't have a problem with the sub-prime market. It gets people into homes that probably couldn't otherwise. Where I have a problem is when the interest rates don't reflect the risk involved and the banks don't do their due diligence to make sure that there is a reasonable chance of getting paid off. The other place where I have a problem is when they started using the sub-prime market to get other people into homes they had no business trying to get in the first place.

But all of these are reactions to the fact that housing prices have inflated greater than people's ability to pay them.
 
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Why are we trying to prevent foreclosures?
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The Unbeliever wrote:
Why are we trying to prevent foreclosures?


Yeah, there'll be tons of good deals on forclosed houses for all of those people who were responsible enough to hold off on buying a house until they were financially prepared. They may even get one a year or two earlier than they had hoped because some other jerk was impatient and greedy and overspent himself and now his house is on the market at a discount so that the greedy bank can make at least some of its money back on the bad loan it gave out.
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Ken
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mikoyan wrote:
I don't have a problem with the sub-prime market. It gets people into homes that probably couldn't otherwise.


Your last sentence is the problem that I have with the sub-prime market - they couldn't get into a house under "good" underwriting rules. That's why it's bad to work to get them into a house that they own. Low/no equity, bad credit, etc., how is loaning someone a couple hundred thousand dollars under those conditions a good idea?

You don't have a right to own a house. You have a right to do so if you can pay for it.
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Neil Carr
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Well, yes... there is the whole argument over fairness and whether anyone ought to be bailed out. I guess I'm just wondering about practical solutions to the problem, ones that I haven't heard about in the press.

This question came about when the other day I was reading a news report saying that the sub-prime mess was still the core engine that was sending the economy as a whole into this recession/depression. So then I thought, "well, why not get at the root of the problem!"

I suppose if there is any "fairness" argument to be made, it is more coming from the innocent person on the sidelines who ends up losing their job because the economy is tanking. Depending on their situation they might say, "what the heck, give the people their fixed rate if it stabilizes things so I can keep living my life in peace."

Anyway, the morality isn't really the question I'm interested in, we've been hashing that out for months now and everything that can be said has probably been said. I'm just curious about how technically the problem can be fixed. The attempts so far haven't done much, but are there other sweeping and dramatic things that congress could do to fix things? Is there something that Obama could do with the stroke of a pen on his first day that could steady things out? He's going to push for the infrastructure bill, but that's going to take a long time to achieve fruition.

Think Hollywood style legislation, something sexy and dramatic that'll have an effect like you're just flicking a switch.
 
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Ken
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echoota wrote:
Well, yes... there is the whole argument over fairness and whether anyone ought to be bailed out. I guess I'm just wondering about practical solutions to the problem, ones that I haven't heard about in the press.


The practical solution is to have people feel some pain so they don't do it again. The sub-prime crisis wasn't "the cause" - the business cycle was due to start turning down any time, the sub-prime crisis likely made it worse for us because it threw new factors into the mix. But the economy was due to sour in 2008-9 just due to natural business forces of expansion/contraction.

There is no quick fix. It's a part of our economic life.
 
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Kenneth Bailey
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perfalbion wrote:
mikoyan wrote:
I don't have a problem with the sub-prime market. It gets people into homes that probably couldn't otherwise.


Your last sentence is the problem that I have with the sub-prime market - they couldn't get into a house under "good" underwriting rules. That's why it's bad to work to get them into a house that they own. Low/no equity, bad credit, etc., how is loaning someone a couple hundred thousand dollars under those conditions a good idea?

It's not a problem if house prices keep climbing (which they were) but once the business cycle takes over and house prices go the other way, it is a problem. I think the other problem is that it wasn't made clear that interest rates would go up. People were lured in with the teaser rates and didn't pay attention to the rest. But that is their fault.
 
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Eric "Shippy McShipperson" Mowrer
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At least if Obama convinces congress to go the "infrastructure" route we will end up with new infrastructure, which has gotten pretty out of date since the new deal and post WWII push.
 
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Dwayne Hendrickson
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perfalbion wrote:


The practical solution is to have people feel some pain so they don't do it again.


The feds can drop one point offa your interest rate for each finger they are allowed to cut off of your dominant hand.

There, how's that for pain and a constant reminder of your stupid mistake?

Also, when you go in to get a loan in the future, people with fewer fingers will be easy to spot and won't be getting stupid loans.
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Ken
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mikoyan wrote:
It's not a problem if house prices keep climbing (which they were) but once the business cycle takes over and house prices go the other way, it is a problem.



Which is precisely why you don't extend them a loan with a thirty year term...
 
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I hate to say it, but not everybody who got these loans knew what they were getting into. I personally don't own a home and never had a mortgage. So in many ways I wouldn't know what I was getting into when I do want to buy a home. I am smart enough to do some research before hand. However, at the moment, even I would not know what was appropriate in the process of getting a loan.

Unfortunately, most people do not have the ability to research and would depend on real-estate agents and bank loan officers to provide them information. However, real-estate agents are highly motivated to sell, leaving loan officers. Unfortunately, for a variety of reasons, banks were allowing loans that were not good risks to go through. Now we're seeing the effects of bad decisions banks made for the most part. (Of course allowing all of these high risk loans for homes helped drive the real estate market thus inflating home prices beyond what they should have been).

While I agree some individuals may be responsible for getting themselves into their situations, most people would not have chosen to get in the positions they are in and I suspect did not even realize it was a possibility. So again, I blame the banks for the most part.

 
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echoota wrote:

Just write a law that says to the effect: If you have a home loan with a fixed variable rate then it now has ...


A fixed variable rate?

A fixed variable rate?

See I have said it twice and even shifted the emphasis and it still doesn't make sense to me. It just reminds me of the Blue Brothers - Country and Western.

Here we have two choices in loans, fixed or variable. You can have one or the other and even switch from one to the other, but the loan is never both of them at the same time
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Jorge Montero
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All of this happened because the market had a pretty weak grasp on risk. Both lenders and borrowers didn't have the faintest idea of where the market was going, and therefore got themselves into situations that, had they gotten a real risk estimate, they'd have never gotten into.

An HVAC salesman that came to give me an estimate for a new furnace was bragging about how he had just bought a very large house on a variable rate interest-only loan, and was laughing by my choice of a fixed rate mortgage. 'The housing market will continue to go up', he said, 'so I get all the advantages of investing in real estate without having the income to support a 30 year mortgage on a 6 bedroom house. He had no idea of the actual risk levels. Would he have been so smug if he knew there was a non-trivial chance of home prices going down dramatically in the next two years?

Everyone has the right to get themselves into a any loan that someone is willing to give them, but it's hard not to see how the mortgage industry could not see something like this coming, and yet let people get themselves into pretty fragile positions.

Would we praise a financial adviser that told a 60 year old man to put all his retirement savings into stocks? Because that's what we saw when, in the middle of a bubble, with interest rates at record lows, people were led to believe that adjustable rates were the way to go, in the worst possible situation to purchase an ARM.

Still, I believe the sub-prime crisis is not really the biggest problem we face today. The mortgages themselves weren't really large enough to cause the big crash: It's all the things that were layered on top of them, like CDSs, that turned a painful economic situation into a disaster.
 
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