Originally Posted By Mr X Okay, so I'm curious about what people are thinking about 2 very current issues (I'm keeping it out of worldevents for two specific reasons, 1) because I'm not looking for any debate and 2) I'd rather heard from a broad range of people, not ONLY the ones who are glued to CNN 24/7). If possible, please do NOT scroll down and read the other replies until you've replied first (in other words, just write what you think without any further research). Then feel free to read more. Please describe, in your own words and without any research, what you know about the following... 1) The Subprime Meltdown 2) The current Credit Crunch No wrong answers here, I'm just trying to get a feel for what people know about this stuff, and how closely it corrolates to the media and what they've been saying about these issues. If you have no idea about one or the other (or both), feel free to make something up (like, try and "guess" what they mean). Thanks in advance.
Originally Posted By peeaanuut I have no idea about the subprime meltdown and really could care less at the moment. I dont own a house and dont plan on buying one in the next 20 years. Not sure what you mean by credit crunch. Could you elaborate just a little bit?
Originally Posted By SuperDry 1. Sub-prime meltdown: I saw it coming, both from a distance a couple of years ago and just before it happened. Didn't have the cajones to take action and make some money off of it (part of the problem is I have a day job). Of course, the problem is much bigger than sub-prime now, as all of the folks with (previously) good credit that bought houses they couldn't afford under the assumption that prices would continue skyward indefinitely are now in trouble as well. 2. Credit crunch: That's the $64,000 question, isn't it? How will this affect the economy and financial system as a whole? I think if the potential damage was limited to homeowners that got in over their heads and unscrupulous (or blind) lenders, the Fed and the gov't would not be stepping in to provide liquidity as they are doing. They must be worried about it potentially creating more widespread problems. Will it? We'll know in the fullness of time.
Originally Posted By debtee I have read in the media, that the subprime meltdown has come about because US lenders have been lending 100% home loans to people that really can't afford them. Then they sell the debt to another company, this policy has been going on over and over again, for a long period of time. While it all keeps running smoothly there's no issues. However as the people that have borrowed this money for the home loan are stretched to their limit, one slight change in their pay or life and they are defaulting on their loan. The property is then getting sold undervalued, so the company left holding the debt is going into bankruptcy. It's now become a major issue for these lenders and the US as a whole. That's how I understand it and I hope I have it correct. No idea on question 2.
Originally Posted By Mr X Peeaanuut and Deb, not sure if you read about it but there have been issues in the credit markets (essentially where companies go to get credit as we go to banks), which got so bad that the Federal Reserve Bank had to step in and start allowing money to be borrowed from the government...that's the VERY bare bones explaination), thus the "credit crunch" where companies are having a tough time making ends meet. Worst case is going out of business, which has already happened with over a hundred companies over this. It's akin to losing your job (source of income), not being able to pay your bills, and that whole downward spiral, only on a company/industry level (I'm sure SuperDry could clear it up if I'm missing something). But if you haven't heard about it, no need to reply I suppose...I know everyone has heard SOMETHING about "subprime" at this point...the credit market situation is a direct result, actually, and a much bigger problem (as if affects more companies, many of which didn't actually do anything "bad" to get themselves into this mess).
Originally Posted By fkurucz 1) People with dodgy credit were allowed to take out mortgages they had no hope of repaying. At first this caused a building boom that had to parallel since the end of WW2. This in turn has led to wide scale foreclosures. Virtually all housing markets are flooded with unsold inventory, but now there are few buyers, causing tremendous downward pressure on prices. In many cases some markets have already seen price drops in the double digit range. Many homeowners, especially those in high appreciation markets had been using their houses as ATMs to enable luxury level spending (I wonder how many people financed stays at the GC in Anaheim or the GF in Orlando this way). The ATM is now out of order, and consumers are having to scale back their free spending ways. 2) Because of the massive levels of foreclosures there is now a great deal of uncertainty over the real value of financial instruments sold to investors that were used to finance mortgages. Because of this uncertainty, it has become difficult for consumer lenders of all types (mortgages, credit cards, etc.) to obtain funds to lend to customers, therefore they have raised underwriting requirements substantially and only the most risk free customers are able to borrow money.
Originally Posted By Mr X **Then they sell the debt to another company** Deb, you're on the right track...because THIS is where it leads into the "credit crunch" part...one company buys it, then another, then another who packages all these loans together to form an "investment" which people then invest in not really knowing "exactly" what their investment contains. Now that subprime is a mess, people are re-thinking these "investments" and noone wants to buy them anymore (duh), and so the companies can no longer "sell off" their obligations to others in order to fund operations. Again, the very simplified version and I'm sure I've missed some stuff.
Originally Posted By Mr X Anyone seen CapeCodJoe lately, by the way? :O I think he might have been standing around eating an ice cream cone at ground zero when this all blew up. Hope not!
Originally Posted By SuperDry The one thing I'd add is a follow-on to debtee's comment: <<< While it all keeps running smoothly there's no issues. However as the people that have borrowed this money for the home loan are stretched to their limit, one slight change in their pay or life and they are defaulting on their loan. >>> That's all true and that's bad enough, but it's actually a lot worse than that. In some areas of California, the median home price approached 10x the median annual income. Standard lending practices dictate that you can borrow up to about 3x your annual income for a mortgage. So, how could someone possibly make payments on a mortgage 10x their annual income? One way that was all too common was to put essentially all of their after-tax income toward the mortgage payment. That means all other expenses (including basics like groceries and clothing) went on credit cards. Not a problem as long as housing prices keep going up, as every 18-24 months they'd refinance their home mortgage, taking some of the appreciated equity as "cash out" and paying down the credit cards. Then the cycle started again. All's well and good as long as housing prices keep going up. But if they don't, then disaster strikes, and note that this is true even if there is no disruption in one's life, job, or income.
Originally Posted By vbdad55 1. sub-prime meltdown - also saw it coming as I have a friend who owns a multi state mortgage brokerage. WHen he told me the staggering % of people taking; no interest / ARM / reverse mortgages etc the last 3 years or so I was stunned. The majority of these people were not 'speculators' looking to flip houses in 18 months - they were people who were told they could afford the American dream when they really could not. Also they were told that not only could they afford a house - but 500K - no problem - maybe more. Now people who have worked hard and managed to buy a home etc- are also getting hit because there are so many foreclosures and people 'dumping' houses - that the resale market sucks. The issue I really have is so many people made SO much money handing out these loans - and they will likely not suffer at all. I do really feel sorry for people who saved their down payments, qualified for a real mortgage - and because of job losses from off-shoring every white collar job they corporations can to Brazil and China and India - now find themselves behind the 8 ball. But it's hard to tell them from those who decided that they could live like drunken sailors on shore leave for a few years and it would all still turn out OK. 2/ Credit Crunch. I already posted in another thread how some of the credit companies have it coming to them, and should take a huge financial bath to return to sanity. Issuing lines of credit of $25K to someone making $40k a year. Sending 'checks' to people like my college age daughter who has worked a total of 10 weeks in her life ( summer job this year)- and offer a 0% repayment for the first 6 months ( then 18.99% !!!!!!! ) - There is a word for this behavior but it would get admin'd. I must receive 15 - 20 offers per month ( and many from Countrywide who is crying poor right now) - to refinance my home and how much money I can save per month - open a $100K line of credit for low interest and no closing costs etc etc.... While I absolutely believe that every person has a responsibility to behave rationally and not live $50K - $100K a year beyond their means - when companies offer hiuge credit to those they can run a model on and determine the odds of getting it back are slim and none - they deserve some of what they get also. While I am happy the feds are looking at trying something - I have a solution for them Take every line of credit out there ( credit cards - home equity loans etc) - and make the interest 0% or no more than 2% for the next 36 - 48 months and everyone has to pay off their loans or declare bankruptcy. If you pay off your loans - no more 125 15% 20% etc credit card rates -have them capped at prime + 2%. Grocery stores turn a profit on a 2% margin - so can Visa - MC and the rest. The credit industry has killed people for years - and mainly poor people. Time for that to stop. I am not a fan of large gov't - but maybe the feds offer a credit alternative at a very low rate - and the line of credit is a set % of income / ability to pay. No more people carrying 15 credit cards - or more. Out of the box thinking is needed in this area
Originally Posted By debtee I'm glad I was on the right track, I was a bit scared to post in case I made a fool of myself! I do know that Australia seems to be following the USA in all area's. A few years ago you could never get finance so easily here, we only had the big 5 banks and that's it. They controlled eveything and if you couldn't get a loan through them, then start saving! Now with all these other institutions popping up you can get a 100% home loan, even have your parents guarantee their home for yours. OMG that's Scary! We are going to get defaults from this too!
Originally Posted By SuperDry <<< Many homeowners, especially those in high appreciation markets had been using their houses as ATMs to enable luxury level spending (I wonder how many people financed stays at the GC in Anaheim or the GF in Orlando this way). >>> Or DVC purchases for that matter.
Originally Posted By Mr X **I'm glad I was on the right track, I was a bit scared to post in case I made a fool of myself!** Thank you for posting! No need to worry, I'm not looking for intellectual answers so much as impressions of what people think of this stuff.
Originally Posted By LuLu >>Please describe, in your own words and without any research, what you know about the following... 1) The Subprime Meltdown 2) The current Credit Crunch<< 1) I'm not sure what "specifically" constitutes a subprime loan, probably means loans to folks who can't afford them, however in my mind the debacle that's unravelling includes any no-money-down, zero or negative amortization, or other home loan schemes cooked up recently (some from perfectly legitimate lenders, or at least they once were). This has been a long time coming - I know I've been trying to warn people of buying a home or getting this type of loan (for most, the only way they could afford a home) for a couple years, anyway. I'm concerned about how the government (meaning we, the taxpayers) are going to bail folks out, but I'm afraid it will be too huge of a disaster if nothing is done. I believe that the real estate problems in general (beyond solely the subprime issues) will negatively affect the overall economy for some time (regardless of what's done). 2) Credit crunch I guess refers to increased difficulty in obtaining loans. While this is definitely hurting the housing market (and probably others), I say "It's about time!!!"
Originally Posted By debtee We have friends that live in LA. They bought their three bedroom house three years ago. At the same time in Sydney we bought our four bedroom house. We all paid roughly the same amount for our houses. It was great, we all shared in the joy of owning our homes together. Speaking to them last week they are extremely concerned about the value of their home. They both earn high incomes and are secure in their jobs( well as secure as you can be in a job ) however several houses in their street have been sold due to people defaulting on their loans caught up in this subprime meltdown, Sold for much less then what was paid for them, this in turn has lowered the prices in their area. At some point it could become a situation where they have a mortage for a home that is not worth what they paid for it. Compare to us where our home has steadily increased in value over the last three years. Sydney is the most expensive real estate in Australia so we are comparable to LA on that level. This could just as easily happen here and who's to say it isn't going to in the future? I hope lessons are leared from this and some common sense prevails soon.
Originally Posted By Inspector 57 <<Please describe, in your own words and without any research, what you know about the following... 1) The Subprime Meltdown 2) The current Credit Crunch>> Okay, since you seem to be seeking responses from as wide a range of people as possible, I'll embarrass myself by responding. 1) The Subprime Meltdown I haven't a clue. But, FWIW, the question does vaguely remind me that I have long marveled that Carl Greenspan seemed to singlehandedly exert more control over the state of the United States than did the President. 2) The current Credit Crunch No clue. I only hope that -- if this is a far-reaching thing -- the company to which I've entrusted my retirement funds will be savvy about it. There, X. Please don't castigate me for my ignorance. I posted this to help you.
Originally Posted By Mr X lol...thanks Inspector. I hope that company you are trusting is worthy of your trust, anyway! Lulu, speaking strictly from a technical standpoint a "subprime" loan simply refers to a loan that charges more than the prime rate of interest. In general, people with excellent credit and secure well paying jobs qualify for the prime (best) rate. The term has sort of morphed though, obviously, and now refers mostly to the loans that should NEVER have been made and can never be paid off (assuming the debtor doesn't win megabucks or something)...but there are other loans that aren't even considered really "subprime" that are starting to implode, meaning the situation isn't "contained" as they claimed it was a couple of months ago. **At some point it could become a situation where they have a mortage for a home that is not worth what they paid for it.** A very real possibility. And scary, because at that point a lot of otherwise responsible people will simply walk away and let the place default (the alternative being financial ruin).
Originally Posted By Mrs ElderP 1. The subprime meltdown: It seemed obvious to me as far away as 3 years ago that eventually all the ARM mortgages I was seeing were going to adjust up, way up and lots of people were going to be in a world of hurt. Here in S. Cal. where very, very few people could buy a house on "traditional terms" (30 yr, fixed rate, 20%+ down, payments 33% max of income) Everyone it seems was doing *something* crazy w/their mortgage. Heck, the most financially cautious people I know stretched themselves into a refinace (so they could change a 30yr fixed into a 15yr fixed). I do know that owning a house shouldn't be the end all be all of the American Dream. Just like a tradtional 4yr college education, it isn't for everyone. 2. The current Credit crunch: I don't fully understand the larger implications on a national and international scale, and won't comment on the actions of various national banks. I do know that good mortgages do make money for people who back them and sooner or later, and I'm betting sooner rather than later, the consumer credit crunch will loosen and many people will be able to get mortgages again. (In the meantime the credit *card* industry has not let up on the stream of ads it sends to my post office box!!)
Originally Posted By RoadTrip <<A very real possibility. And scary, because at that point a lot of otherwise responsible people will simply walk away and let the place default (the alternative being financial ruin).>> That is no more justified than the bank deciding they want the house back from the buyer if there is a big run-up in prices. You puts down your money and you takes your chances. Nothing is guaranteed... just like the stock market.
Originally Posted By vbdad55 <Nothing is guaranteed... just like the stock market. < exactly - however history shows in the long term they would do fine ( California recovered fromt he last time this happened) - but everyone wants what they want now -- the problem with a lot of issues we face - immediate rewards I like the point about the banks taking back their mortgages - what if they did that a year or 2 ago in markets like California / New York etc.-- there'd be anarchy.... what makes it different ?
