TheCatSite.com › Forums › General Forums › IMO: In My Opinion › Sub-prime mess...
New Posts  All Forums:Forum Nav:

Sub-prime mess...

post #1 of 10
Thread Starter 
When I'm not on TCS I've been researching things like the Sub-prime mortgage mess. Now here's the deal I think I've finally made a decision about it.

1. There should be no government bail out. This doesn't teach banks the lesson that they need to learn.

2. The lesson in the above mentioned point is: Don't loan money to people who can't pay you back.

The banks got themselves into this mess and the banks can get themselves out of it. If they are really and truly concerned they will go in and reset the loans and re-word the way these loans reset.

Because of this mess my husband and I can no longer buy a home with out 20% down. This was hard to hear until I realized that that wasn't a bad thing. I'm going to have immediate access to equity if I need it when I buy my home, and also my rate on my home is going to be a lot less than my neighbors.
post #2 of 10
Luckily, for me, my credit score has improved enough, that I can get a conventional mortage and going with the VA, means that I don't have to come up with a down payment, mortgage insurance and I only pay a maximum of $500 in closing costs.

A lot of the blame rests on the buyers, too - they bought more house, than they could afford. I KNOW how much I can afford in monthly payments and am going with a manufactured home and acreage. With payments of about $600 per month, that's just a bit more than I pay in rent, now.
post #3 of 10
I agree with both of the above. Yet there are side-effects not confined to the banks and mortgage companies that made the risky loans and to the buyers who bought more house than they could afford without think of the interest rate adjustments ahead. I'm speaking of the credit crunch. Because of the fear of an unknown number of defaults lying ahead, creditors are not lending money to perfectly good and solvent borrowers. And I'm speaking of more than loans to individuals for homes. Businesses borrow money all the time to fund their short-term cash needs because receipts from customers vary and don't always cover their immediate cash needs. If lenders don't loan money, then what can these businesses do? And if they can borrow money, because the sources of money are so tight interest rates will be higher. And that's a cost of doing business that's passed on to the customer.

So the psychological fall-out of the sub-prime mess extends way beyond the sub-prime market to perfectly good borrowers and the consequences of this could be an economic slowdown - a recession. Businesses cut back because they can't borrow to fund operations, people don't buy houses because they can't get a loan at a decent interest rate. That's the real reason that the government has lowered interest rates and loosened credit and proposed some changes to tax laws. They want to be sure there's enough money available at reasonable interest rates for those creditworthy borrowers so there's minimal impact on the economy. And so if people do have to default they don't get hit with a double-whammy due to tax laws.

I think that so far, this situation has been handled fairly well. There will be consequences to the Fed's actions, but in the short-term a credit crunch catastrophe has been averted, and the economy keeps chugging along. Unfortunately, history shows that these excesses happen from time to time, and any time something goes too far in an abnormal direction, there's a painful reaction to bring things back in line. We've learned our lessons now about lending practices; I wonder what the next will be?
post #4 of 10
Thread Starter 
Quote:
Originally Posted by coaster View Post
I agree with both of the above. Yet there are side-effects not confined to the banks and mortgage companies that made the risky loans and to the buyers who bought more house than they could afford without think of the interest rate adjustments ahead. I'm speaking of the credit crunch. Because of the fear of an unknown number of defaults lying ahead, creditors are not lending money to perfectly good and solvent borrowers. And I'm speaking of more than loans to individuals for homes. Businesses borrow money all the time to fund their short-term cash needs because receipts from customers vary and don't always cover their immediate cash needs. If lenders don't loan money, then what can these businesses do? And if they can borrow money, because the sources of money are so tight interest rates will be higher. And that's a cost of doing business that's passed on to the customer.

So the psychological fall-out of the sub-prime mess extends way beyond the sub-prime market to perfectly good borrowers and the consequences of this could be an economic slowdown - a recession. Businesses cut back because they can't borrow to fund operations, people don't buy houses because they can't get a loan at a decent interest rate. That's the real reason that the government has lowered interest rates and loosened credit and proposed some changes to tax laws. They want to be sure there's enough money available at reasonable interest rates for those creditworthy borrowers so there's minimal impact on the economy. And so if people do have to default they don't get hit with a double-whammy due to tax laws.

I think that so far, this situation has been handled fairly well. There will be consequences to the Fed's actions, but in the short-term a credit crunch catastrophe has been averted, and the economy keeps chugging along. Unfortunately, history shows that these excesses happen from time to time, and any time something goes too far in an abnormal direction, there's a painful reaction to bring things back in line. We've learned our lessons now about lending practices; I wonder what the next will be?
From what I've been reading we may see a new tech bubble forming. I may sell off my Google shares in the next few months if I see some market changes in that area.
post #5 of 10
The other factor in all of this was the ratings companies. They did not represent these bundled mortgage investments as the extremely risky investments they were. So a big part of the panic is that banks and other investment entities didn't even know how much these investments were worth. And the investments' worth affects the reserve rates (that is, the amount of cash on hand to support withdrawls) that the banks are suppose to keep.

There is blame with both the buyers and the mortgage sellers. On the sellers' side, there were blatant, fraudulent selling of complicated mortgage instruments, bait-and-switch type deals. Also, since these brokers immediately sold the mortgages right away, they didn't have to worry about future ability to pay or that the buyers really didn't understand what they were getting.

But on the buyers' side, they should have understood what their payments would be when these ARMs started to adjust. And like katl8e said, a lot of them bought too much house for what they could really afford. When my husband and I were looking for our present house, we could have gone with twice the house, but we made sure that we could cover the mortgage on one salary. It was a good thing too because he ended up going a year without a job.

When I was in high school, I had a Consumer Math course which was an optional course. It taught all sorts of things like how compounding interest worked, mortgages, etc. I think it should be a mandatory course.

Still, these riskier mortgage instruments do have a valid market. But they were way too sophisticated and over-sold to people who shouldn't have had them.
post #6 of 10
Quote:
Originally Posted by lookingglass View Post
I may sell off my Google shares in the next few months if I see some market changes in that area.
You never know ahead of time when the top is, so a good strategy to protect you from losses is to sell just enough shares to cover your original cost. From then on, whatever the stock does, you don't lose your original principal. As an example, if you bought 100 shares of ABC at $50 for $5000, then if and when ABC reaches $100 you can sell 50 shares for $5000. The net cost of the remaining shares is zero.

(transactions costs ignored)
post #7 of 10
Quote:
Originally Posted by katachtig View Post
.... So a big part of the panic is that banks and other investment entities didn't even know how much these investments were worth. And the investments' worth affects the reserve rates (that is, the amount of cash on hand to support withdrawls) that the banks are suppose to keep. ...
Exactly. Then have to increase their loan loss reserves, which means they have less to lend, which equals credit crunch.

Quote:
Originally Posted by lookingglass
we may see a new tech bubble forming
There is already a new bubble forming, but it's not in tech, it's in basic materials and commodities. Bubbles repeat but almost never in the same area.
post #8 of 10
Gary and I have been negative on the home builders since - sometime in the fall last year. We got vociferous about it early Spring. We also recommended (on Feb 15) to our account base that they sell the subprime lenders.

What we've been looking at is exactly what you're talking about: people's purchasing power. Personal disposable income less personal consumption expenditures and residential investment expenditures.

This number has been negative in six of the past seven years. There have only been 7 other years that this has been the situation since 1929. Two of those were during the Great Depression; three were just after the end of World War II; the next was 1955, the last was 1999.

This has happened because Americans have been borrowing against their homes. And the lenders lent the money. The real problem now is that with this credit source drying up, there will be less cash available for consumers to use.

The banks knew what those loans were worth - with given risk assumptions. Change that default rate, and the values change dramatically. That's the new problem. The risk premiums dramatically negatively impacting the value of those loans.

What we're seeing now is the very disturbing trend of consumers having to choose between mortgage payments and credit card payments, evidenced by default rates between the two seesawing.

As to the comment on the basic materials and commodities bubble comment:

For the past decade, Gary has been very "pro" resource-based economies (Australia, Canada, Russia - the countries that can get the products to market). The currency valuations indicate he's been right (not as many of our accounts think he's so crazy anymore). The Canadian dollar is currently worth $1.0368 US dollars!

...The reason behind Gary's analysis is somewhat complicated, but for people like me it basically can be boiled down into one word: China. China is going to have a middle class the size of the U.S. in the not-to-distant future, and right now it is the driver of the world economy. India's not far behind.

We would argue that the basic materials and metals - and gold - aren't a bubble. The economy of the U.S. and Europe slowing down may minorly affect them, but India is the largest per capita user of gold in the world, and it's growing like a weed. They may even surpass China for a quarter this year. India may gag for a bit on the latest spike in gold, but given that the country has managed to take every hike since 2000 with only short set-backs, we would expect the same to happen now.



The G7 already decided Central Banks weren't going to dump gold like they did in 1998 and 2000 to artificially depress the price, and industrial use of gold has risen along with tech and aerospace applications.

Oil is volatile because of the political issues - that's always there. But China's demand for oil has made it the second-largest consumer in the world. China surpassed Japan in oil consumption in 2003. Take a look at this:



Some analysts are out there predicting $110 per barrel on crude. Right now we don't see that happening (barring political problems that may be a real issue) - but the falling dollar in and of itself is going to make the actual cost of oil more to us here in the U.S. We think the weaking global/U.S. economy is going to impact demand for oil and thus we see this spike as temporary.

But long term? If China's demand continues, the predictions by the IEA are that China will consume 30 million barrels a day (the US consumes 20 million a day now). The IEA also predicts that without new energy policies, the world’s oil demand will grow by 50% by 2030 and gas demand will double. Obviously the real issue is the ability to refine the oil we pull out of the ground - that will determine the long term price.

But back to the original question: Bail out the banks? Government intervention hasn't ever worked. There are always repercussions, and we always end up paying for them. They delay the inevitable. Even Greenspan doesn't like the new Superfund being set up by JP Morgan, Citigroup and Bank of America.

Right now, people with discipline and good credit are paying for the mistakes of those who spent what they couldn't afford. But I also believe that many did not understand the problem they were getting into, and I don't know whether the blame lies with the consumer or the lender. To me it's kind of like the hot McDonald's coffee - is McDonald's to blame that someone scalded themselves with hot coffee? Or are they supposed to warn us that the coffee is hot?

I grew up in a family that held the motto "buyer beware." Others didn't.

Laurie
post #9 of 10
No bubble is ever seen as a bubble when it's just beginning.

The growth in China cannot continue at the pace at which it's been occurring these last few years. It's just insane. China IS already a bubble and when that bubble pops, it'll pop the basic materials bubble as well. I don't know when that will happen, but I'm going to get real cautious after the 2008 Olympics. There's a lot of distortion going on in Chinese society, business, economics, and culture that's being contained in the run-up to the Olympics. Distortions that cause stresses that are going to have to be readjusted, and that's probably happen after the Olympics with a major "Asian contagion" much worse than the last. But after that's worked out, if the Chinese government doesn't overreact, if Western economies don't react with protectionism, then the future looks very bright. That's a lot of ifs; there may be a lot of pain.

I think oil's making a run for $100 and it's going to bounce there and head down. My reasoning: you remember back in the spring and early summer gas prices went up and down on a daily basis depending on the price of crude oil. However, since crude oil went through $75 gas prices haven't budged. There's been a $15 advance in crude oil with no effect on gas prices. This is telling me that $15 is solely speculative buying and has nothing to do with supply & demand. I think if oil hits $100 the longs are going to take their profits and run, thus driving the price back down, probably back to around $75.
post #10 of 10
Thread Starter 
Quote:
Originally Posted by LDG View Post
Gary and I have been negative on the home builders since - sometime in the fall last year. We got vociferous about it early Spring. We also recommended (on Feb 15) to our account base that they sell the subprime lenders.

What we've been looking at is exactly what you're talking about: people's purchasing power. Personal disposable income less personal consumption expenditures and residential investment expenditures.

This number has been negative in six of the past seven years. There have only been 7 other years that this has been the situation since 1929. Two of those were during the Great Depression; three were just after the end of World War II; the next was 1955, the last was 1999.

This has happened because Americans have been borrowing against their homes. And the lenders lent the money. The real problem now is that with this credit source drying up, there will be less cash available for consumers to use.

The banks knew what those loans were worth - with given risk assumptions. Change that default rate, and the values change dramatically. That's the new problem. The risk premiums dramatically negatively impacting the value of those loans.

What we're seeing now is the very disturbing trend of consumers having to choose between mortgage payments and credit card payments, evidenced by default rates between the two seesawing.

As to the comment on the basic materials and commodities bubble comment:

For the past decade, Gary has been very "pro" resource-based economies (Australia, Canada, Russia - the countries that can get the products to market). The currency valuations indicate he's been right (not as many of our accounts think he's so crazy anymore). The Canadian dollar is currently worth $1.0368 US dollars!

...The reason behind Gary's analysis is somewhat complicated, but for people like me it basically can be boiled down into one word: China. China is going to have a middle class the size of the U.S. in the not-to-distant future, and right now it is the driver of the world economy. India's not far behind.

We would argue that the basic materials and metals - and gold - aren't a bubble. The economy of the U.S. and Europe slowing down may minorly affect them, but India is the largest per capita user of gold in the world, and it's growing like a weed. They may even surpass China for a quarter this year. India may gag for a bit on the latest spike in gold, but given that the country has managed to take every hike since 2000 with only short set-backs, we would expect the same to happen now.



The G7 already decided Central Banks weren't going to dump gold like they did in 1998 and 2000 to artificially depress the price, and industrial use of gold has risen along with tech and aerospace applications.

Oil is volatile because of the political issues - that's always there. But China's demand for oil has made it the second-largest consumer in the world. China surpassed Japan in oil consumption in 2003. Take a look at this:



Some analysts are out there predicting $110 per barrel on crude. Right now we don't see that happening (barring political problems that may be a real issue) - but the falling dollar in and of itself is going to make the actual cost of oil more to us here in the U.S. We think the weaking global/U.S. economy is going to impact demand for oil and thus we see this spike as temporary.

But long term? If China's demand continues, the predictions by the IEA are that China will consume 30 million barrels a day (the US consumes 20 million a day now). The IEA also predicts that without new energy policies, the world’s oil demand will grow by 50% by 2030 and gas demand will double. Obviously the real issue is the ability to refine the oil we pull out of the ground - that will determine the long term price.

But back to the original question: Bail out the banks? Government intervention hasn't ever worked. There are always repercussions, and we always end up paying for them. They delay the inevitable. Even Greenspan doesn't like the new Superfund being set up by JP Morgan, Citigroup and Bank of America.

Right now, people with discipline and good credit are paying for the mistakes of those who spent what they couldn't afford. But I also believe that many did not understand the problem they were getting into, and I don't know whether the blame lies with the consumer or the lender. To me it's kind of like the hot McDonald's coffee - is McDonald's to blame that someone scalded themselves with hot coffee? Or are they supposed to warn us that the coffee is hot?

I grew up in a family that held the motto "buyer beware." Others didn't.

Laurie

Laurie,
Thank you SO much for posting that! It makes me realize that paying off credit card debit and loan debit BEFORE I buy a home was a smart choice. Also, it gives me more hope for my investment future.

I've always followed Greenspan's advice. Diversify.
New Posts  All Forums:Forum Nav:
  Return Home
  Back to Forum: IMO: In My Opinion
TheCatSite.com › Forums › General Forums › IMO: In My Opinion › Sub-prime mess...