What Portion Of The Subprime Mortgages Actually Go Into Default?

[ThomWV]

I know several young people who have got themselves homes in the last couple of years because of the foolishly lax credit that has been handed out recently. The folks I'm talking about (3 couples and 1 single lady) would never have been extended credit in the old days.

None of these people has defaulted. They have have some very lean months, but they make their payments as close to on time as they can. Those homes are the only thing they have worth mentioning and they aren't about to lose them. To be honest about it I doubt that they could actually rent a place for any less than they make in payments so the idea of deserting their loans would never occur to them - they couldn't live any cheaper anywhere else.

So I've really been wondering just what all this subprime loan crisis is all about. You'd get the impression that every one of them is headed for a certain default with the national economy crumbling as it happened - I don't see it happening. That said the small group of people I know may very well not be representative of anything. So tell me, just how many of these 'economy-killer-loans' actually failing?

[rzemanfl]

1. When the house is no longer worth what you owe on it why

bother? That day is coming soon for lots of folks.

[PeaceNikki]

3. That only happens in 2 cases

1) You borrow against equity that isn't there

2) You are in a "non-appreciating" area

[rzemanfl]

6. A lot of the "equity" over the past few years was smoke and

mirrors driven by cheap credit. There are plenty of places in Florida where ten or twenty percent down a couple of years ago may mean a negative equity now. Were you around in 1982-84 when mortgages were at 15 or 16 percent if you could find one?

[Gormy Cuss]

10. Or your area is experiencing a negative appreciation (market correction) and the value declines

That's when borrowers end up with underwater mortgages -- owing more than the current market value of the house. In areas with overly exuberant appreciation and many borrowers buying with little equity stake a downturn in the local real estate market traps homeowners to one of three choices: staying in place with the current mortgage, 2) refinancing for the revised lower value and ponying up the cash to pay off the difference, or 3)defaulting.

[Zynx]

21. Or both combined,

You take out a mortgage for 100% of the value of a $500,000 house that was never realistically worth that, no down payment because in a lot of markets you didn't need one. It was worth maybe $400,000. So you are already $100K in the hole if you have to sell it at real market because you were dumb and paid a speculative price for your place to live.

Don't do stupid things like that, by the way. Renting won't wreck your life. Being massively underwater on your home will.

Then the market starts depreciating as well. Real estate *never* corrects to fair value; it always corrects far lower. So not only is your house no longer worth $500,000 - while you owe payments as if it was - it probably isn't worth $400,000 either. And it could well take 10 months or more to sell the house.

In California, it could easily only really be worth $225,000 once you finally sell it. That's a 50% correction, and there are parts of California that need more than that, just based on the incomes.

Now, you might rightly say "that's bullshit" about making payments on the $500K that no longer exists, but good luck refinancing in a credit crunch and shedding $250K in debt while you're at it. You don't have $250K in cash.

In the meantime, you still have full carrying costs of a house, which is something amatuer real estate speculators never figure in. There's a reason pros like Trademark don't want to hold a house more than 30 days total. You pay tax, you pay utilities, you make mortgage payments.

When real estate actually depreciates, it flips the entire system upside down and is very ugly.

[murloc]

17. why bother?

Usually to bother is pretty simple...Rent would cost more than the mortgage that they are paying.

In those cases, even though the home is not appreciating and is negative equity, you are essentially renting at a discount and tax break. Plus there is the future possibility that the house will appreciate.

Now when rents get cheaper subprime mortgage payments are higher than rents..watch out.

[Katherine Brengle]

34. I don't understand this - how would rent be more?

I guess it depends on where you live and how far into paying off your mortgage you are, but our rent is like 30% of what my BIL and SIL pay on their mortgage.

Yes, our apartment is a bit smaller than their house, but it's not a huge house.

[Fresh_Start]

2. It doesn't have to be 100% or 50%......

10% is more than enough to cause a major financial catastrophe.

[displacedtexan]

4. One layoff, one catastrophic illness, one hurricane or tornado...

could wipe anyone out if they're barely getting by right now.

Plus, they probably won't be able to sell quickly if they need to.

It's bad out there right now and getting worse.

[qanda]

20. One broken pipe, leaky roof or car repair

Can cause people to lose their way. I know it's bad-- there are so people that I know who are struggling.

[Bitwit1234]

5. These must be awfully expensive homes.

In my area there are really nice homes for 75 to 100 thousand. The monthly payment with PTI amounts to no more than 600 to 700 dollars. And that's a lot cheaper than rent. If they couldn't swing the mortage how could they afford to rent with renting 900 up.

[rzemanfl]

7. Where or in what decade are you living? n/t

[ThomWV]

9. That is exactly what I mean

Around here you could not possibly rent a decent 3 bedroom place for much less than about $700 a month. Not one of the people I mentioned paid more than $75,000 for their homes. It would not matter if the apraised value of the places dropped down to what they originally paid or even less, they still would be best off staying right where they are and making that payment - and so they do.

My point is that even though it may have been risky to extend the loan in the first place in fact the people who took them out are not some sort of swindlers out to rip and run. They may be broke but they are responsible and they work their hearts out to do it right, make their payments, and hope for better times tomorrow.

[Katherine Brengle]

32. There's a huge difference between a $75 K home and a $300K home.

Except, the same house could cost either depending on where you are.

Where I live, there is not a house, not a shack, for $75-100K. A SMALL condo in a semi-decent area will go for $125-150K, no yard, no garage.

A small house, 2 bedroom maybe with one bath and a small yard - $250-300K.

And it just goes up from there.

[Zynx]

19. Do you live in Montana? Those prices sound about right for there.

In Pasadena, you have insanity like 1500 square foot suburban houses that were "worth" $900,000+.

California doesn't pay wages to justify that, by the way. Not by a long shot.

[ThomWV]

23. West Virginia - and one of the more expensive parts of the state

If my home was in Marin County, California I would be worth more than Bill Gates.

[Katherine Brengle]

31. You can rent around here for $600-800 but you won't be getting a mortgage on an average sized house

for less than $200,000 - and that's low-end. A nice house is going to cost you upwards of $300K, for a 3 bedroom with a smallish yard and MAYBE a garage.

And those payments are not going to be $600/month - a lot of people are lucky to pay twice that.

[Hugin]

8. The majority of people who are in trouble are the speculators...

Who thought if things got rough they'd just sell it and get their money back.

Don't be fooled into thinking it's mostly people who shouldn't have bought a home to live in.

[Epiphany4z]

11. In my area

Investors/speculators where gobbling up homes ...when we where house hunting we ran into more foreclosure investment properties than regular sales in our price range..80-$120.. many of the investor properties had some wonderful updates in them while they let things like $20 grand in foundation work wait.and there it sat after foreclosure still waiting....anyway my family was probably one of the high risk home loans ...I am glad I got in when we did ...and equally glad that I insisted on a strait up fixed rate

To many people thought they could FLIP THAT HOUSE ..at least in my area that is how it looks.

[ben_meyers]

18. In the Phoenix market

40% of the real estate transactions in the last 2 years were "investors" that had watched to many late night infomercials. The vast majority of foreclosures and walk aways are now those same fools. I plastered their butts with disclosures and warnings, but happily took their money. I told my past clients and contacts to not buy at these inflated prices, and I'm telling them now not to sell unless you absolutely have no choice. The market has started to stabilize and is even up a bit since May, and some real bargains are starting to show up. Not for speculation, for homes to live in.

[enid602]

12. ARM's

A lot of the ARM's were lent not to sub primers, but rather to people with high incomes and excellent credit who simply couldn't get their McMansions any other way.

[Gormy Cuss]

13. Can't get that number, but the at-risk estimate is over 2 million subprime mortgages.

Regionally there are some areas with high rates of default (20-25% of subprime notes)and in those areas it may cascade because with a high number of properties on the market, the market price tends to decline rather than appreciate and those who are staying on top of their payments may see their equity disappear. That makes it more difficult to refinance to a cheaper mortgage.

[rucky]

14. about 12%

http://www.latimes.com/business/la-fi-subprime10aug10,1,5662596.story?coll=la-headlines-business

That's enough to shut the door. Long story short, the bankers who fund the loans package groups of them and sell them on the bond market. The CDO's packaged with subprime loans in it have been downgraded to junk and taking the "A-paper" with it.

It's the panic behind the scenes that's really causing the meltdown - moreso than the borrowers themselves.

[ThomWV]

24. That was the point I wanted to bring out

The thing about panics is that cooler heads make great profits when they occur. A Panic is not a systemic problem (though panics may be) and so what goes down will come back up - and down, and up, and down and whatever it will do, but it won't crash. A systemic problem such that the majority of those loans wouldn't go on continuing to be satisfied would be a much different matter, and apparently even with 1 in 8 loans (presumably primarily the speculators) potentially failing the world goes on.

[rucky]

26. during the subprime bonanza...

home ownership reached 70% in America and nearly 50% among African Americans. It'll come back in one form or another. In the meantime, there are FHA, VA and even Freddie Mac loans available that do not require a FICO score to qualify.

[EnricoFermi]

15. I used to work for a major subprime lender

They would call people to rough them up over the phone, threatening them. This was truly nasty stuff. If someone was late and they could hear the noise of a TV in the background, they would yell at them telling them to sell the TV. "I know you have money to pay, I can hear your TV!" This was one of many tactics. I would compare it to bookies. The people on our end were pressured quite severely to force the money out of people, in true fascist style. I'm sure none of them had ethics classes, and I felt sorry for them being under the whip of the company.

As programmers, we were given the task of implementing the back end of a new program for the adjustable rate mortgages. In true propaganda like fashion, it was sold as a beneficial program, giving the impression that it was to help them and save them money in the long run. It actually raised their rates, costing far more and making lots of money for the company. The attitude among the programmers was that this was a stupid program, and anyone willing to accept it was obviously not very intelligent and quite gullible. Needless to say, most of the people I worked with voted for Bush in 2004 and it was a very conservative environment. The program went through anyway, and I am not sure how many people went for the bait, because I quit, partially due to this program, but largely due to the ethical concerns I had for working in this environment.

When their stock crashed, I celebrated. These companies deserve absolutely no bail-out whatsoever. They are a wickedly evil group of profiteers that exist solely to take money from the poor and profit substantially. If money should go anywhere, it is to those people attempting to pay their mortgages who were manipulated by these companies into going for a scam. I would even go as far as to say that the subprime collapse was deliberate, especially given the new bankruptcy legislation going through just prior to their downfall.

[rucky]

25. Pump & Dump

screw the poor.

then the vultures swoop in and buy back the properties for pennies on the dollar.

You know how to confirm if it's deliberate or not? Watch what FHA does with their guidelines.

[SoCalDem]

16. People nowadays get scared very easily..They have never had a home loan with 15.8% interest

like WE did back in '79 (I think).. Interest rates were INSANE..

Interest rates have been artificially held down so that MORE housing could be built..gotta keep those plates all spinning..

It could not go on indefinitely, though, and sooner or later it will all unwind..

[Zynx]

29. However, the 70s interest rates are a historical abberation.

The long term interest rates on treasury bonds tend to average around 4-4.5% Current interest rates are what can largely be expected over the long haul. We will have spikes where they get higher, but current interest rates are more the norm than the exception over the history of the country.

[pscot]

22. One of the big lenders reported

that they plan based on an anticipated overall default rate in excess of 2 percent. This is from a story on CBS financials webb site. Sub-prime defaults were currently running at around 11 percent, but the overall rate was still below 2 percent. I have no link and I'm quoting from memory, but those were the numbers as I recall them.

[Zynx]

28. 2% is managable. If it climbs towards 4-5% then that's real trouble.

Subprime always has higher default rates in the bust cycle as they were more marginal risks in the first place. If the overall rate approaches 5% that is real serious trouble.

[Jim Warren]

27. "Teaser Rates"

[Rosemary2205]

30. People really need to stop comparing mortgage payments to rent.

Rent also includes all the other costs associated with that piece of real estate. If one takes a mortgage (P&I only) close to their rent payments then they are likely not going to have the income for Taxes, insurance, maintainance and repairs of the home. Even if the PITI is close to the rent payment there's still the maintainance costs, which can really add up quickly.

Quite frankly, if the size of new homes (and price) being built in my area are any indication, buyers are stupidly buying at the very edge of their ability to pay. Purposely putting one's self in a "paycheck to paycheck" situation is just stupid. Now I realize even a small home in a bad part of town in some particular markets is all but unaffordable for most of the people living in that area....but I don't think this is the rule all over America.

[Katherine Brengle]

33. This is an excellent point --

when you rent, you don't have to worry about things like property taxes and homeowner's insurance and repair money and all that jazz.

We pay $600/month for a fairly nice apartment in a nice safe building with a deck and a garage. That's it. If something goes wrong, we go downstairs and knock on the door and the owner pays someone to fix it.

Obviously there are benefits to home ownership, but personally, I enjoy not having to worry about those things.