The Glade 4.0

Find out if your loan is owned by Fannie Mae or Freddie Mac here:

http://www.arizonamortgageteam.com/arizona-loan-modification-is-your-mortgage-owned-by-fannie-mae-or-freddie-mac/

You're right, it was passed under Bush. I wasn't thinking correctly there. Blame them both.


If the balance of the principal is $200,000, then going from 7% (~$600,000 total payment) to 3.5% (~$480,000) would be just under $120,000 in savings. But you aren't talking about being under water anymore, you are talking about just good financial sense, and someone that took out the original loan at 7% is aware of the total payments to complete the mortgage at the time of signing, so this isn't some huge revelation, and certainly nothing in line with the tack you were taking with reasons to walk away.


We are talking about people buying a home, not investing in the stock market, so I could care less what economists say about risk of bundled securities compared to the actual investment in my property.

Whats more, if you want to go that route, the investment ratings were based upon the ability of the people to continue to pay their mortgages, thus providing the interest on those security investments, not on the value of the property.

Arathain,

Thanks for the link. I stand corrected on the ownership of loans by Freddie/Fannie.

I like this thread.

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When he buys the house, the house is worth $250k and that's the loan he got. Today, the house is worth say $150k and there is $200k left on the principal. Getting a government-sponsored refinance from 7% to 3.5% saves him $120k. I don't think it's unreasonable to claim that some people will be dissuaded from walking away if they can get their payment balance reduced by a similar amount to what they have lost on the value of their house.



But that's the whole point. AAA-rating the mortgage securities tells the prospective homebuyer that he is unlikely to default. The securities couldn't be AAA rated if there wasn't more than a miniscule chance of default on the mortgages that are backing the securities. The prospective homebuyer sees that similar mortgages to the one he is considering have been rolled into AAA-securities, so he concludes it must be a near-sure thing that he'll be able to pay it. That's what AAA-rating means.

FIFY:
AAA-rating the mortgage securities tells the prospective homebuyer mortgage-backed security buyer that he the securitization trust is unlikely to default. The securities couldn't be AAA rated if there wasn't more than a miniscule chance of default on the mortgages by the securitization trusts that are backing the securities. The prospective homebuyer sees that similar mortgages to the one he is considering have been rolled into AAA-securities has no idea what mortgages are rolled into which MBS's, so he would have to be an idiot if he concludes it must be a near-sure thing that he'll be able to pay his own mortgage based on what others do. That's what AAA-rating means - a gauge as to whether the securitization trust (in many cases FNMA/FHLMC), or their insurers, would be unable to pay the note - it means nothing to a prospective homebuyer.

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"Dress cops up as soldiers, give them military equipment, train them in military tactics, tell them they’re fighting a ‘war,’ and the consequences are predictable." —Radley Balko

Not to mention the notion that he up-plays the unsophistication of the average home buyer in the market, and then manages to co-ordinated that same home buyer and his/her unsophistication with the ability to untangle bundled securities to gauge the quality of his own loan in the after-market, and then furthermore asserts that act as causal to the whole damn problem.

Worst. Logic. Ever.

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Ezekiel 23:19-20 

While I agree that the rating agencies' malfeasance wasn't directly relevant to regular home buyers' decisions, it was certainly key to the ability of those buyers to get the mortgage terms that have left many of them underwater now. More to the point, though, it's pretty obvious there was a bubble culture surrounding home-buying in this country for much of the early 2000s. There were half a dozen shows like "Flip This House" on t.v., lots of people who were not sophisticated investors/buyers were purchasing multi-$100k houses with the intent of cashing out in a few years because "that's what everyone is doing" and they didn't want to miss the bandwagon, etc. Was it possible to recognize that there was a bubble underway and that it would pop eventually? Sure, but plenty of genuinely sophisticated analysts obviously didn't realize it at the time, so of course many, many regular people had no idea either. Hell, that's how a bubble works. Prudence should still dictate against making an investment one can't afford to lose, but if everyone was prudent, we wouldn't have bubbles in the first place.

I've not heard of any arm twisting to force someone to sign a mortgage contract. Well, other than that dastardly Snidley Whiplash, that is.

Unsophisticated investors always lose to the house. If you have money you don't want to lose, don't risk it.

Also, an aside... how can you state it "wasn't directly relevant" then in the same sentence state "it was certainly key"? Sheesh!

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In time, this too shall pass.

Your example is completely bogus and doesn't help your argument.

1) Someone with a principle balance of $200,000 doesn't qualify for this program if their appraised home value is only $150,000.

2) Assuming this fictitious homeowner put the minimum 5% down on the house when the loan was originated, then the appraised value of the home was at the time ~264,000. In order for the homeowner to have a balance on the principle of only $200,000 out of the $250,000 and assuming they aren't adding a significant principle curtailment to their monthly payment, they would be 13 yrs into their 30 year mortgage. That puts the time of purchase in 1998. That puts their investment well before the market peak of 2006, and well before the low interest rates in the 5% or lower range around 2005 when they could have easily refinanced for a much lower than 7% rate.

3) In order for the home to only be worth $150,000 now, there would have to be significant issues with the home itself, unrelated to the housing bust. According to the Case-Shiller Index, the average national rate of appreciation for existing homes from 1987 to 2009, adjusted for housing type/inflation changes, was 3.4%. Unless my math is wrong, that means the house in 2006 was worth $345,000. You are suggesting a 60% decline in home values, when the national average from 2006 was 33%.

Agreed; I'm just saying there's a difference between the general criticism that people shouldn't bet more than they can afford to lose and the specific criticism that people should have known the housing market circa 200X was a bad bet.


Not directly relevant to the home buyers' decision, but key to their ability to get a mortgage. In other words, individual home-buyers weren't thinking to themselves, "Hmm, S&P is giving investment grade ratings to subprime mortgage-backed securities, so it must be a good time to invest in a house," but absent those ratings, there wouldn't have been such a large subprime mortgage market for those buyers to access in the first place.

How does an investor know if he is "unsophisticated?" Unless you want to mirror something like the German system (which in general will not loan a person more than around double their annual salary) and basically assume before taking the mortgage that the house will lose significant value, under which probably 1/2-2/3rds of all American homeowners would not qualify to own the homes they do, there's always the chance of this happening. The assumption was that because the rate of default was so low, even amongst others in a similar financial situation who had taken on similar mortgages, that the odds of them defaulting was also low. The mortgage-backed securities were AAA because the rate of default was that low. On top of that, everyone thought that if they couldn't pay, they could just sell the house to pay off the mortgage and be no worse off than if they had rented for that time period. There is no way one could have reasonably predicted the crash in housing prices when securities dependent on prices rising were AAA-rated.

It's like the old saying about price in high-end stores: "If you have to ask how much it costs, you can't afford it." Well, in this case, if you have to ask whether you're a sophisticated investor, you're not.

Xequecal:

What, exactly, would be your issue with a bank that loaned on reasonably responsible terms? Wouldn't you want to bank there?

Edit: also, I'd love to know where your getting these "1/2 - 2/3" numbers (my guess would be "your ***"), why you think that should be a consideration, and why you feel 16 **** percent is an acceptable margin of error.

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Ezekiel 23:19-20 

Why would that make a person more interested in banking there (if by "banking" you mean ordinary consumer transactions)? From the consumer banking customer's perspective, all that matters are low fees, good interest rates, etc. The bank's own risk profile is irrelevant to the customer.

A bank engaged in responsible lending practices is a profitable bank. It is generally able to offer lower fees and better interest rates. Also, the solvency of a bank is a non-factor for you?

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Ezekiel 23:19-20 

Perhaps, but it's still the low fees and better interest rates I'm after. If a poorly managed bank rides the subprime gravy train for a few years and is willing to give me low fees and good rates in the meantime, what do I care that they're going to crash and burn down the road? When they do, I'll just go find another bank willing to do the same.


Not really. My deposits would be fine anyway thanks to the FDIC, and my mortgage/loan terms don't change when the originating bank sells them off to third parties (which is standard operating procedure for healthy banks too). So what difference does it make to me as a bank customer?

You're willing to wager your savings on the solvency of the FDIC?

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Ezekiel 23:19-20 

It's a far safer bet than wagering it on the solvency of a bank.

*ETA: Also, even if you select your bank based solely on that bank's own solvency, the solvency of the FDIC is still an overwhelming influence on the safety of your deposits. If the FDIC starts defaulting on payouts of insured deposits at MegaBank, Inc., it won't matter how well-managed your own bank is, because the whole system will come down anyway and drag both the good and the bad with it.

Hardly.

Do you believe that Bank of America is raising its fees, laying off employees, and selling off its few earning parcels because it is too solvent, having given out too many quality loans... Or could it be something else...

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Ezekiel 23:19-20 

After two pages of civil discourse it is nice to see this thread descend into the flaming **** bins of Hellfire finally.

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I don't think Rynar and I are having an uncivil exchange. Granted, we're probably at an impasse now, since he doesn't think the FDIC is as reliable a backstop as I do, but we identified and explained our differing views without any recourse to the flaming **** bins. Of course, it is almost Cabbage Night, so I suppose we are due for some flaming bags of poop at least.

True, I just don't think there's much cause to worry that my checking/savings account deposits at BoA are in danger. On reflection, though, I can see how avoiding the need to constantly guard against your bank nickel-and-diming you to make up for its bad bets would be an attractive feature of a smaller, better-managed bank.

How exactly is the FDIC a backstop for anything?

http://problembanklist.com/fdic-to-cove ... bets-0419/

Seriously ...

They just assumed responsibility for BoA's entire $75 trillion dollar toxic asset portfolio.

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Seems to have worked pretty well as a backstop for depositors at the 400+ banks that have failed in the last decade or so:

http://www.fdic.gov/bank/individual/fai ... klist.html