# Sub prime mortgages in the US.



## Bronte (17 Mar 2008)

I understand these loans were given to the poorest parts of society and that for about the first two years the interest rate was fixed at a relatively low rate and subsequently increased hugely causing many to default. Would it not be better for the banks to reduce the interest rates to an affordable rate on all these loans, maybe extending the term and not go to the expense of foreclosing on property that seems to be pretty well worthless? And if so why are they not doing this as all these foreclosures result in all property being devalued (Cleveland, Ohio) and more people defaulting and creating a crisis in banking. Is this too simplistic?


----------



## Afuera (17 Mar 2008)

In the US sometimes it is simply easier for someone to default on their loans than attempt to repay them. Since they have that option over there, it does not really make sense for someone to continue paying for an asset that is classified as "worthless". If people decide that there is no point in continuing paying an overvalued price for their homes then the banks are going to encounter a lot of defaults no matter what they do.


----------



## eileen alana (17 Mar 2008)

Where are all those thousands of people whose homes have been foreclosed going to live, wouldn't it be feasible for the banks to rent out the homes rather than throw people out on the streets.


----------



## Afuera (17 Mar 2008)

eileen alana said:


> Where are all those thousands of people whose homes have been foreclosed going to live, wouldn't it be feasible for the banks to rent out the homes rather than throw people out on the streets.


There's no shortage in the supply of property in the States, so those who have been foreclosed on will simply rent or buy somewhere cheaper.

Since the banks are in the business of making money I don't think your suggestion is feasable. Holding on to a pool of depreciating assets which give them a pitiful yield is hardly going to delight their shareholders.


----------



## Thomas22 (17 Mar 2008)

Bronte said:


> I understand these loans were given to the poorest parts of society and that for about the first two years the interest rate was fixed at a relatively low rate and subsequently increased hugely causing many to default. Would it not be better for the banks to reduce the interest rates to an affordable rate on all these loans, maybe extending the term and not go to the expense of foreclosing on property that seems to be pretty well worthless? And if so why are they not doing this as all these foreclosures result in all property being devalued (Cleveland, Ohio) and more people defaulting and creating a crisis in banking. Is this too simplistic?




The problem isn't that people can't afford the houses the problem is that they don't want to pay for them.
If the house is worth less than the mortgage why bother continuing to pay regardless of whether you can afford it.

The whole "sub-prime" issue is really a problem of falling houses prices not inability to pay a mortgage.


----------



## eileen alana (21 Mar 2008)

Afuera said:


> There's no shortage in the supply of property in the States, so those who have been foreclosed on will simply rent or buy somewhere cheaper.
> 
> Since the banks are in the business of making money I don't think your suggestion is feasable. Holding on to a pool of depreciating assets which give them a pitiful yield is hardly going to delight their shareholders.


 

well the empty houses that have been foreclosed on are being destroyed and stripped bare by vandalism.  Whatever about the shareholders, I have no sympathy whatsoever for these subprime sharks who call themselves banks, they have destroyed many lives and communities in the US.  
[broken link removed]


----------



## z109 (21 Mar 2008)

Bronte said:


> I understand these loans were given to the poorest parts of society and that for about the first two years the interest rate was fixed at a relatively low rate and subsequently increased hugely causing many to default. Would it not be better for the banks to reduce the interest rates to an affordable rate on all these loans, maybe extending the term and not go to the expense of foreclosing on property that seems to be pretty well worthless? And if so why are they not doing this as all these foreclosures result in all property being devalued (Cleveland, Ohio) and more people defaulting and creating a crisis in banking. Is this too simplistic?


Yes.

The banks packaged up the loans and sold them on in the form of mortgage backed securities. The banks retained a portion of the revenue for themselves as servicers of the mortgage.

The banks then recognised the revenue from the servicing and the bond sales.

So to reduce the interest rate, the banks would have to get agreement of the bondholders and recognise the revenue loss to previously booked profits.

To complicate matters, mortgages were vertically sliced, so that a bit of each mortgage went into different MBS, that were sold to different investors.

Calling it a mess doesn't begin to describe it.

By the way, it wasn't just poor people who took out adjustable rate mortgages, just about everyone did it. And not just in America, in the UK, Spain and Ireland. Think to yourself, what is an adjustable rate mortgage? It's a fixed period at one interest rate that resets to a different variable rate once the fixed period is up. Know anyone in Ireland who took out a 2 year fixed when rates were 2ish percent? They are currently getting their new rates at double the old one. If they don't have enough equity in their house because the took out a 100% mortgage or because the price of their house has fallen or because they have been paying interest only for the first two year or because of all three, they won't be able to refinance with another lender offering a discount rate or a low rate based on LTV. So they will be a bit stuffed.

Mostly the problem has been that people in the US bought houses when interest rates were low at prices they couldn't afford when interest rates returned to a normal level. There is an element of fraud involved, but until recently people weren't walking away from their houses simply because of negative equity. However, in the last quarter of last year this started to happen and people (I have a terrible temptation to call them folks, but then that would be calling them terrorists!) began to walk away simply because the transaction of owning a house did not make business sense. If you are in negative equity and your interest rate is resetting, it does not make economic sense to struggle with the payments. Walk away, suffer the bad credit rating, rent for a few years until your rating improves and save yourself a packet. Companies do it all the time when they walk away from deals (look at chapter 11 bankruptcy in the US sometime).


----------

