Subprime market and Foreclosures

[Clocker]

I have read a few articles on the housing market. But the scenario for the most part ends up like the following example:

Homeowner has ARM, pays X amount, after ARM, payment is much higher, homeowner can not afford payment, Bank forecloses.

Well, my question is then why raise the ARM in a market where banks are loosing lots of money. I would think it is better for the banks to collect money at the rate before the variable increse than having no payments at all.

Could someone explain this?

Best,

 

[Greenman]

Some banks have decided to hold the lower interest rate if you can prove that you can't afford the increase. I'm going to guess the rates for new loans will increase to cover the difference.

 

[IronWing]

The banks are generally not the note holders anymore as they sold the mortgages to other parties. The banks act a trustees for the owners. The bank can get sued if it takes actions adverse to the trustors so banks tend to be less willing to deal than they might if they held the mortgages themselves.

 

[Clocker]

Originally posted by: ironwing
The banks are generally not the note holders anymore as they sold the mortgages to other parties. The banks act a trustees for the owners. The bank can get sued if it takes actions adverse to the trustors so banks tend to be less willing to deal than they might if they held the mortgages themselves.

I didnt know that. Thanks. But, shouldn't the trustees have similar concerns?

 

[TheTony]

ARMs within the last 5 years may have been locked in at extremely low rates. Borrowers, in many cases opted out of fixed (and still low) 5.xx% rates in order to save more $.

So, lenders should allow them to hold onto that better rate because they can't pay?

I do understand the need to stave off large numbers of borrowers defaulting, and that they'd rather have them meeting some obligation (even if at the original rate) than nothing at all and having to deal within another foreclosed property, but it still seems like they'd be having their cake and eating it, too...

I think it is important to note that some of the trouble with ARMs doesn't neccesarily stem from subprime deals. I'm sure a lot are qualified borrowers who bit on the lower rate but, because of the market or other outside factors, cannot afford their new re-adjusted rates.

 

[IronWing]

Originally posted by: Clocker

Originally posted by: ironwing
The banks are generally not the note holders anymore as they sold the mortgages to other parties. The banks act a trustees for the owners. The bank can get sued if it takes actions adverse to the trustors so banks tend to be less willing to deal than they might if they held the mortgages themselves.

I didnt know that. Thanks. But, shouldn't the trustees have similar concerns?

Yes. But it gets really ugly when the mortgages get sold, bundled with other mortgages, turned into securities, resold, and then used as collateral on other loans. A whole tower of debt is build on top of the value of the mortgages. If the banks renegotiate the underlying mortgages it sends ripples through the whole pile of debt, requiring lots of folks to writedown the value their "assets". This can trigger margin calls, requiring someone down the line to cough up cash. I can't explain it in much detail but if you search one of the financial sites like moneycentral.msn.com for the term CDO you can read up on how this works.

 

[sao123]

Originally posted by: Clocker
I have read a few articles on the housing market. But the scenario for the most part ends up like the following example:

Homeowner has ARM, pays X amount, after ARM, payment is much higher, homeowner can not afford payment, Bank forecloses.

Well, my question is then why raise the ARM in a market where banks are loosing lots of money. I would think it is better for the banks to collect money at the rate before the variable increse than having no payments at all.

Could someone explain this?

Best,

There are 2 main types of loan... fixed and adjustable.

except it isnt the banks fault... Loans are geared to make money...

ARM's are front light and back heavy (they have to be, so that the load is paid in full over the term of its life), while fixed are constant throughout the term.

The customer should be the one who chooses the fixed loan, if he cannot afford the adjustment.

ARM's should only be chosen by people who a) expect to sell the house before the adjustment period, b) expect to recieve a net sum of money and pay it off before the adjustment.

Its not the banks fault if the customer doesnt follow the guidelines.