Interesting new mortgage scheme

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Zute
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Interesting new mortgage scheme

Post by Zute » Wed Jan 19, 2011 4:33 pm

http://www.sciencedaily.com/releases/20 ... 141719.htm

I had to ponder it a moment, but yeah, it makes a certain amount of sense. Certainly it would be better than mass defaults.
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Fyyr
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Re: Interesting new mortgage scheme

Post by Fyyr » Fri Jan 21, 2011 4:00 am

Having the ability to assume mortgages would have defrayed the bulk of the defaulted mortgages.

But government prevents you from doing so. It's the law now.

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Zute
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Re: Interesting new mortgage scheme

Post by Zute » Fri Jan 21, 2011 10:23 am

Fyyr wrote:Having the ability to assume mortgages would have defrayed the bulk of the defaulted mortgages.

But government prevents you from doing so. It's the law now.
How so? Who wants to assume a mortgage for a house that's underwater?

This scheme is actually quite brilliant.

Let's say I take out a mortgage for 200,000 and I pay down the balance to 170,000. During that time I've accumulated 30,000 in equity in my house, the bank has 30,000 plus interest in their pockets. Then the housing market crashes and my house is only worth 170,000. The bank adjusts the loan to 170,000. I've lost my equity (temporarily perhaps) but my payments will be lower and I can possibly afford to continue living there. The bank hasn't lost anything as long as I continue to pay. If I sell the house they collect the remaining balance and don't lose anything.

If I keep the house and housing prices recover, the house value is adjusted up again and my payments would be as they were originally and I get my equity back.

The only time the bank loses is if the market value drops below the amount you've paid into it so far and you decide to sell. Actually, if one could assume a mortgage, then THIS could even help with that. The new buyer simply assumes the mortgage for the current value, knowing the mortgage balance could go up (and thus equity) if housing prices recover. Hmmm... there must be a problem with this, it sounds too good.

But if the last scenario happened, it seems like the bank's losses would probably be far less than they are for a foreclosure where they're stuck with the burden of unloading a devalued house. That's gotta be expensive.
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Tudamorf
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Re: Interesting new mortgage scheme

Post by Tudamorf » Fri Jan 21, 2011 12:50 pm

Zute wrote:Hmmm... there must be a problem with this, it sounds too good.
Of course there's a problem.

It's essentially "equity loss insurance" that will have to be subsidized by all of the borrowers.

It's going to be used by smart real estate investors picking up properties in a declining market for a reduced rate -- not families who have proven themselves too dumb to even gauge what type of house they can afford.

You shouldn't penalize responsible borrowers just because other people were stupid and irresponsible.

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Zute
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Re: Interesting new mortgage scheme

Post by Zute » Fri Jan 21, 2011 4:44 pm

I don't see how this is subsidized by other borrowers? If my house goes down 30,000 it's my equity that is lost (and possibly the banks). There's no insurance here at all. It's gone, at least until the market recovers. It could stabilize the market too. If people's principal is adjusted downward, it keeps them from selling and glutting the market... or even worse, glutting the market with foreclosures.
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Re: Interesting new mortgage scheme

Post by Tudamorf » Sun Jan 23, 2011 4:42 pm

Zute wrote:I don't see how this is subsidized by other borrowers?
Right now, there are serious consequences to walking away when you are under water, that prevent people, especially non-poor people, from doing it.

If you remove those consequences, you'll give a lot of rich people incentive to play the market, and everyone else is going to have to bear the cost of that.

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Zute
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Re: Interesting new mortgage scheme

Post by Zute » Mon Jan 24, 2011 2:22 pm

Still not following your reasoning. Walking away from the mortgage doesn't mean anything different. This modifies mortgages such that you have no incentive to walk away from them.
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Re: Interesting new mortgage scheme

Post by Tudamorf » Wed Jan 26, 2011 2:13 pm

Zute wrote:Still not following your reasoning. Walking away from the mortgage doesn't mean anything different. This modifies mortgages such that you have no incentive to walk away from them.
People who aren't already hopelessly broke have strong incentives not to walk way from properties under water.

If you walk away, your credit rating is essentially gone, and depending on the state and situation, you could still be personally liable for money the bank loses.

The people who walked away from mortgages were poor, broke people who were too stupid to learn to live within their means. Your plan won't help those people. It will help a lot of rich investors, who will use it to bet against the market through mortgages, secure in the knowledge that any loss will be covered by your equity insurance.

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Re: Interesting new mortgage scheme

Post by Fyyr » Thu Jan 27, 2011 5:50 pm

Zute wrote:
Fyyr wrote:Having the ability to assume mortgages would have defrayed the bulk of the defaulted mortgages.

But government prevents you from doing so. It's the law now.
How so? Who wants to assume a mortgage for a house that's underwater?
The priced would never have fallen to where homes were that far underwater. And an assumed loan does not reset property value, does it?

In 2007, no one knew that homes would drop to half or lower of their present value. (if you look back at my posts of that time, I certainly hoped that they would).
Why did they drop? NO qualified buyers. To keep the price inflated.

Anyway, my father assumed a loan of a home before I was born. Government regulations prevents it now.

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