Mortgage Bailout

[Seether]

Actually you are very incorrect. I am currently in the process of obtaining my real estate license, and from the book.

"However, if any money remains from the foreclosure sale after paying the debt and any other liens, expenses, and interest, these proceeds are paid to the borrower"

The problem with the current subprime market is that many lenders were providing loans of over 100% loan to value which created inflated principals which caused larger payments etc.

[adios]

No that's not what's happening. The problem is that the real estate boom in many parts of the U.S. led to people haing negative equity in their homes when prices fell in some areas. In short some people bought at the top. Many of the borrowers with low credit scores (sub prime borrowers) will walk away from such situations when they don't have a lot of money tied up (made low downpayments) and have lowsy credit scores to begin with. Couple this with buying Adjustable Rate Mortgages (ARMs) that wratcet up in an increasing interest rate evironment and the payments become unbearable. With a decent amount of positive equity they'd sell and get out from under the payments.


IMO the concerns about the increase in sub prime defaults is overblown. Their is so a great deal of misunderstanding on how the mortgage industry works in this country. I've posted about this before might want to go back to a post I made about the Congressional bailout possibility awhile back. I think there is distinct possibility that this one will get through Congress but less than 50-50. Congress can't even pass a minimum wage bill which most of the country wants from what I can tell. If they can't get bills passed that people are very favorably disposed towards, I guess the odds have to be less than 50-50 for this bailout.

[MtSmalls]

A constructive mortgage bailout isn't about making the sub-prime borrowers or lenders whole, but about limiting the damage from a market collapse.

Foreclosed properties sit vacant, with little or no maintenance done for the six plus months that the foreclosure process takes. Once that process is complete, it can be months more before a new owner takes possession, especially in a soft market. This brings the property values of the whole neighborhood down.

Now place just two or three of these type properties on each block. Vacant properties are also magnets for everything from drug dealers to simple vandalism.

[pvn]

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A constructive mortgage bailout isn't about making the sub-prime borrowers or lenders whole, but about limiting the damage from a market collapse.

Foreclosed properties sit vacant, with little or no maintenance done for the six plus months that the foreclosure process takes. Once that process is complete, it can be months more before a new owner takes possession, especially in a soft market. This brings the property values of the whole neighborhood down.

Now place just two or three of these type properties on each block. Vacant properties are also magnets for everything from drug dealers to simple vandalism.

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How is bailing out lenders, so they can continue to profitably make sub-prime loans, going to help this problem? If people can't afford the house, it doesn't matter if the lender gets bailed out or not, the property is still going to sit vacant all that time. And if the downside is being absorbed by the government for free, the lenders have little incentive to stop.

[morphball]

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Not when the borrower hasn't put up a down payment and doesn't have any assets. If the property doesn't sell above the purchase price at auction, in addition to any transaction costs, this is a loss for the bank.

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Banks usually lose money on foreclosures, even when down payments are involved.

Aah, bailing out stupid people, it never ends.

[AzDesertRat]

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Aah, bailing out stupid people and companies, it never ends.

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[pvn]

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Aah, bailing out stupid people and companies, it never ends.

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Same thing, stupid companies are run by stupid people. [img]/images/graemlins/smile.gif[/img]

[ScottieK]

Banks want money, not houses. Buyers at a foreclosure auction know that the bank must sell the house at whatever they can get. Banks typically take a big hit when selling collateral on a mortgage or any other loan. Even if the bank manages to recover 100% of the money outstanding on the loan, as stated above, proceeds above that must be paid to the borrower. It's all downside for the bank. Just a rerun of the 1980's.

Which is great. History repeats itself. Stupid banks making stupid loans to borrowers who have almost no chance of making payments once they increase above the "attractive" terms originally offered. Buyers eat it up in an overhyped market (dot-com stocks, tulips, etc.) and sink whatever money they have into something, hoping to get rich quick. When the bottom falls out, only the ones who got out early win.

The reason for the bailout is to avoid or lessen the impact of a recession. Ever since the Great Depression, the government has given banks a too-big-to-fail status. They insure deposits and are ready to intervene in order to prevent a bank panic. However, a point made in the article says that bailing the banks out now may just encourage more predatory lending. Obviously, banks didn't learn the lesson of twenty-some odd years ago. Fiscally responsible taxpayers are left to foot the bill. Again [img]/images/graemlins/frown.gif[/img]

ScottieK

[tomdemaine]

You've mixed up cause and effect.

[adios]

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A constructive mortgage bailout isn't about making the sub-prime borrowers or lenders whole, but about limiting the damage from a market collapse. ...



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I actually agree with the reasoning you're offering here. The bailout is about limiting the damage. Whether or not this will head off a market collapse is open to debate IMO but that's the idea behind it. The risk of a market collapse in some places is higher than others but I have my doubts regarding the liklihood that it will happen. Definitely could be convinced otherwise though.