About ARMs and legs

[cryowizard]

http://fe3.news.re3.yahoo.com/s/afp/20070325/bs_afp/useconomypropertypolitics
http://www.washingtonpost.com/wp-dyn/content/article/2007/03/22/AR2007032201973.html

What is up with people worrying about "lending practices" and "sub-prime mortgages" to the point of trying to get the government involved?

What I don't get is why should anyone give a shit about people who can't read fine print.

If you are taking out a mortgage, especially an ARM, and dont know how it is going to go payment-wise -- you fucked up!

If you have shitty credit and people just all of a sudden give you a mortgage at a lower-than-normal rate, and you don't bother wondering what's up -- you fucked up!

Two million people apparently fucked up. Bad for them, I agree. So what are we going to do -- have taxpayers compensate them for their own stupidity?

Same goes for the lending companies -- if they were giving money to people with flimsy financials, they were wading into risky waters. They deserve to go under like a fucking rock -- it's just a result of bad business.

What I really don't want to hear is "bailout". It's sad to see people lose their homes, but one should know about the origins of free cheese. If it looks too good to be true -- it probably is, and as sad as losing one's home may be, no other person should have to give up his own money to bail out someone who made a financial mistake.

Comments

[rkatsyv.livejournal.com]

I agree wholeheartedly, but I'm amazed at how many people don't share that view and beleive that things that are fundamentally unfair could and should be done for the supposed "greater common good".

[mhmeln-57.livejournal.com]

X number of people will lose their homes to banks. Banks will need to offload the homes, because banks are in business of banking, not home-owning. So banks need buyers. Meanwhile, many lenders go bankrupt - so we have a shortage of lenders (and buyers) and an over-supply of homes. Prices on homes drop. Banks don't make their profit (or even suffer losses). Some more banks go into bankruptcy. Oh, in addition, you have a homeless problem because there aren't enough rentals to support people who lost houses. Rental prices start climbing up, and people can afford housing even less - you get social problem of criminals and homeless. The entire banking system and social welfare system collapses, and only YOU stand strong, because you read the fine print. Get a medal and stop whining.

Bail-out is not for individual people. Yes, they are benefiting, but they are the unintended beneficiaries. The intended beneficiary is the economic system where we need people to keep buying things and keep borrowing to buy those things.

[rkatsyv.livejournal.com]

Those foreclosed homes will not disappear, someone else will buy them (if home prices drop and the rent rises there will be no shortage of investors) and just as much housing will be available to New Yorkers as there was before the crysis. And rent will not rise above the level that renters are able to pay, because lendlords need income, not empty apartments. So there will be no rise in homelessness, just property changing hands, which is a normal feature of a free market economy. People will "keep buying things and keep borrowing to buy those things". Just different people. So free market economy does not need bail-outs to keep running (not to mention the fact that these bail-outs come ultimately from taxes, extracted at the expense of that same economy).

[mhmeln-57.livejournal.com]

Oh, that worked REALLY well during the great depression, before any concept of "bail-out" was ever used. Why would they even bother with the New Deal, if everything was going so smoothly, one third of the country was unemployed but some others (the different people) could continue to buy things?

The purpose of government is to govern society, not permit a handful of people to corner all property. So far, no "free market" economy has been able to sustain itself in the times of famine, war and social unrest. And the reason "New Deal" was introduced, as well as banking regulations, social welfare and other "oh, so taxing" programs was to prevent the poor and unemployed from coming into your apartment and taking by force your bread and buttermatzo and ...more matzo. i bet you'll wish they would just tax you rather than axe you.

[cryowizard.livejournal.com]

Come on now.

We're not in the depression.
We don't have famine.
We are not at war (not here anyway).
We dont have any grand social unrest in the country.

We are talking specifically about that 1.19% of "sub-prime" mortgages that may fail.

Sub-prime means there is more risk involved than usual, mostly on the side of lenders. But the lenders went greedy. They played the game and lost. In this (http://www.cbsnews.com/stories/2007/04/03/earlyshow/contributors/daveramsey/main2641252.shtml) article the host says he had a guy who makes $7,000 a year and they still qualified him for a mortgage. What do you expect??

The people who played also lost -- they either wanted free cheese, or didn't realize they were walking into a financial trap. In both cases it is their responsibility to deal with the consequences, not the taxpayers.

This thing will hurt the housing market a little bit -- slightly less buyers and slightly more homes on the market. So what? The housing prices have been rising like crazy for years. If there will be a correction - so be it, this is the market.

There is nothing catastrophic about this. Read this (http://knowledge.wharton.upenn.edu/article.cfm?articleid=1691&jsessionid=a830674255da2b701aa1): this is a subprime lending industry crisis and the market is already correcting itself.

No matter what, the bailout is the worst option, since it sends a message that you can be completely careless with your finances and then the Good Uncle Sam will bail your stupid ass out with other people's money.

If the government wants to enact a law that makes the fine print bigger so that people understand better what they are getting themselves into -- I'm all for it. If they want to investigate the subprime business practices -- be my guest.

But dont ask the taxpayers to chip in to cover someone else's folly.

[(Anonymous)]

i will respond in a few days - it's been crazy at work.

[igorn.livejournal.com]

By virtue of living in a capitalist society and not a socialist one we are at liberty to acquire and lose as much capital as we choose. Unless something catastrophic happens, a specific bailout should not happen. Also let's not forget that the US does have bankruptcy laws and a somewhat healthy economy so for most people this will mean some financial hardship, perhaps personal bankruptcy, but not homelessness and poverty.

Since the New Deal the banks and lenders and everyone has become a lot better at distributing risks. For all those failing mortgages we are going to see a lot of players on the financial food chain suffer a little bit and a few of the players suffer a lot. So some lenders will fail and some hedge funds as well but nothing catastrophic should happen. But then risk/reward is the name of the game and everyone involved knows what they're getting into.

[mhmeln-57.livejournal.com]

i am not advocating socialism - it's a necessity rather than a choice. Yes, ideally people who fuck up will say "uhm, yeah, i fucked up" and live with it. In reality, they will vote in a guy who will help them blame others and get something out of others. So why not prevent those Robin Hoods from coming to power?

It IS a system risk if a drunk driver kills a drunk pedestrian. Yes, both were drunk. Yes both fucked up. But it could have been a sober person (EVEN ME, gasp!) who got run over, and that's not cool, so we prohibit drunk driving to everyone.

That's the concept of social contract - i agree to let society to regulate itself (and all its members), in order to prevent systemic risks. And again, some hedge funds blowing up is not a big deal, but LTCM required some last-minute Fed intrusion - because there was a systemic risk.

You are a smart guy, but the people at the Fed are not dumb, either. If they think 1.19% is a big deal, i am happy to hear your argument as to why it's not, but i am also going to give them some credit.

[igorn.livejournal.com]

I don't think drunk driving is a valid comparison. Taking on a mortgage on bad terms is a deal between two individuals, both of whom are to blame. Participating in entirely voluntary. Participating in being hit by a drunk driver is not voluntary.

Systemic risk is exactly the point I was trying to make - it is well distributed here. And the financial industry is much more adapt and handling crises - LTCM failing in '98 brought a lot of paranoia and fear but Amaranth failing in '06 has had relatively little impact.

Anyway a likely bailout would most likely keep people in their homes, keep banks from foreclosing, and spread the pain further up the chain. Not the smartest thing to do if you want efficient markets.

[cryowizard.livejournal.com]

Stop crying wolf.

"Over 500,000 mortgages, or 1.19 percent of all loans, were in foreclosure at the end of the fourth quarter 2006, according to the Mortgage Bankers Association"

That 1.19% of loans will not crash the economy, social welfare system or bring about the end of the world as we know it.

To make the long story short -- the market will take care of this with no problem since 1.19% is a tiny number and financially this whole thing is a drop in the ocean.

>> Get a medal and stop whining.

I love it how you never fail to get personal on the first reply. Keep'em coming! Stay true to yourself! He-he-he :)

[mhmeln-57.livejournal.com]

1.19% may seem like a low number in absolute figures but it may be a very strong indicator in relative terms. What was the trailing 24 months percentage? If the number was 0.1% for the past 10 years, a jump of 1100% may be a big deal. It made enough noise to make it to NYT.

The global (well, global in the US) issue is the savings rate and over-leveraging. If there is a run on the banks tomorrow, you and i, and a few other "prudent" savers, who did not fuck up will get their savings, while all others will be left without money. And we've been there before - in the early 1930s. The entire Fed system was revamped precisely to prevent such crises and offer buy-outs where necessary in order for the entire system to be stable. And the fact that the Fed is willing to accept its mistake and step in now is a big indicator that it IS a big deal that 1.19% of home loans are in foreclosure.

It may not crash the system, alone, but given the American 0.2% savings rate, of which i wrote about 2 years ago after a lecture by a republican financier, the system IS fragile and the Fed should be careful to preserve it. Just because you and i do not see the iceberg doesn't mean that the piece of ice we see is not a tip of it. Those people writing for NYT and working at the Fed are not as stupid as the morons who took out the ARMs. But those idiots who took out ARMs have the right to bear arms. Something to keep in mind for you and me.

I love it how you never fail to get personal on the first reply. Keep'em coming! Stay true to yourself! He-he-he :)
Absolutely not meant to be personally offensive or insulting. My apologies if you read it that way. The idea i was trying to communicate was that you differentiate yourself (and others like you) who do not "fuck up" from the people who took out ARMs. So the longer version of that statement is "so you are smarter, and you and everyone else knew that already...now what?"