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Since this was such a fun thread, I thought I would revive it!
I got the following from STRATFOR's free subscription service, so I don't feel it will be a problem posting it here. I think it is an excellent read and may put this into the proper perspective for a lot of people. It did for me!
One thing that I do agree with in the article is that consumer interest rates are still historically low, but even that is subjective...mortgage rates have creeped up during the past 2-3 weeks.
From what I see there are bright spots in the country and there are really weak spots.Manufacturing has been a weak spot for sometime.Housing and financials are also weak and there probably is more to come.Certainly the consumers are pulling back from large purchases. I think this seems more like the banking crisis from years past really and certainly nothing like the recession of the 70's. But oil is the big tipping spot. If there is a crisis in the middle east things can take a nose dive like the 70's.That's what is scary about the coming years.
The hardest part is how it takes years to recover. Since it was people's credit that got screwed en masse, the economy itself got seriously damaged beyond just a "slump." Credit effects everything now; even your ability to land a job and your ability to get promotions in the job you're in. The market will be slow to repair because the ability to earn the money to repair your credit will be slow thanks to your trashed credit score.
For what? Because in the middle of the housing boom lenders saw property values rise to where many properties were worth more than the mortgages on them, so they decided to cash in by raising variable rates? Not worth it. I saw on CBS news one couple's lenders raised the interest so high that the mortgage was worth more than what the house was worth, so since they couldn't sell the house like that, they filed for bankruptcy. Other people saw their mortgage payments double and even triple. Then when mortgages were tapped out, lenders put the squeeze on many credit card customers to try to recover losses caused by their squeezing, making a bad problem worst.
The hardest part is how it takes years to recover. Since it was people's credit that got screwed en masse, the economy itself got seriously damaged beyond just a "slump." Credit effects everything now; even your ability to land a job and your ability to get promotions in the job you're in. The market will be slow to repair because the ability to earn the money to repair your credit will be slow thanks to your trashed credit score.
For what? Because in the middle of the housing boom lenders saw property values rise to where many properties were worth more than the mortgages on them, so they decided to cash in by raising variable rates? Not worth it. I saw on CBS news one couple's lenders raised the interest so high that the mortgage was worth more than what the house was worth, so since they couldn't sell the house like that, they filed for bankruptcy. Other people saw their mortgage payments double and even triple. Then when mortgages were tapped out, lenders put the squeeze on many credit card customers to try to recover losses caused by their squeezing, making a bad problem worst.
You are right that it will take years to recover - but you do not understand the banking side - your second point is all wrong. Lender's did not raise interest rates because home values increased. The home owners obtained a variable rate mortgage that has a set base plus a margin. The banks don't control the base rate (other entities like the FHLB, Federal Reserve, LIBOR or other entities) control the rates. As rates were raised to slow inflation - the ARMs started reseting.
As to interest rates raising so the mortgage becomes higher than the home value...this has nothing to do with the interest rate - but is based on the type of mortgage that the home buyer obtained. Those people that were foolish enough to get an option ARM can find themselves in a negative amortization situation if they only make the minimum ("option") payment. In that scenario - the payment they are making doesn't even cover the interest that accured during the month.
Lenders were greedy and made foolish loans while not even verifying income - but the home owners that have option ARMs are even more foolish for having a loan that the payment doesn't even cover the interest. They end up owing significantly more than the value of their home.
This is the next crisis - because these Pay Option ARMs aren't part of the "sub-prime" crisis...and will be the next big credit crisis to come. Countrywide/BOFA, Wachovia and WaMu all have significant exposure to these very risky mortgages. If you have an Option ARM - go refinance to a fixed rate now!!! in 90% of cases - getting an ARM is foolish when rates are at 40 year lows since the only way the rates can go is up...but in 99% of cases the Pay Option ARM is a disaster waiting to happen. The bulk of Countrywide/BOA, Wachovia and WaMu Pay option mortgages are currently in negative amortization (which means the loan balance is growing). The credit crunch is going to get much worse before it gets better.
My wife and I knew a couple in Northern VA who took the Pay Option ARM. They were really upside down at one point, but eventually got themselves out of it. They ended up selling all but one of three vehicles, and the wife took a part-time job as a tutor to make ends meet. When asked why they went the PO ARM, they said that the "bottom line" is what they focused on, not the eventual result of negative amortization when interest rates go up.
I think this is the key problem in our current economy: Americans have become accustomed to getting the "high dollar" for the "bottom dollar." We lease expensive automobiles instead of buying them--leasing provides more car for less money. We buy groceries, clothes, and services on credit, all the while casually saying that "it's only money." We purchase big homes for no reason (McMansions), etc. etc.
The Middle Class segment of the economy has driven the train for a while, pushing for the "life of luxury" with little to no real resources to back that life up. Instead of living within or below their means, they live above.
I could go on and on with cliches, but I think I've made my point.
You are right that it will take years to recover - but you do not understand the banking side - your second point is all wrong. Lender's did not raise interest rates because home values increased. The home owners obtained a variable rate mortgage that has a set base plus a margin. The banks don't control the base rate (other entities like the FHLB, Federal Reserve, LIBOR or other entities) control the rates. As rates were raised to slow inflation - the ARMs started reseting.
As to interest rates raising so the mortgage becomes higher than the home value...this has nothing to do with the interest rate - but is based on the type of mortgage that the home buyer obtained. Those people that were foolish enough to get an option ARM can find themselves in a negative amortization situation if they only make the minimum ("option") payment. In that scenario - the payment they are making doesn't even cover the interest that accured during the month.
Lenders were greedy and made foolish loans while not even verifying income - but the home owners that have option ARMs are even more foolish for having a loan that the payment doesn't even cover the interest. They end up owing significantly more than the value of their home.
This is the next crisis - because these Pay Option ARMs aren't part of the "sub-prime" crisis...and will be the next big credit crisis to come. Countrywide/BOFA, Wachovia and WaMu all have significant exposure to these very risky mortgages. If you have an Option ARM - go refinance to a fixed rate now!!! in 90% of cases - getting an ARM is foolish when rates are at 40 year lows since the only way the rates can go is up...but in 99% of cases the Pay Option ARM is a disaster waiting to happen. The bulk of Countrywide/BOA, Wachovia and WaMu Pay option mortgages are currently in negative amortization (which means the loan balance is growing). The credit crunch is going to get much worse before it gets better.
Heh. Variable interest will be the death of this country.
Quote:
We lease expensive automobiles instead of buying them--leasing provides more car for less money.
I drive a 10-year-old Mercedes I got and paid $10k for, and it's a hell of a lot nicer than any new car in that price range.
The problem is everyone has to have a new car. People would rather get a new econo-box than a used Mercedes. Peope would rather have a new car than one that's five years old and is the same model. Even people on frickin welfare just need to have cars as new as they can and just have to get another new car every one to three years. It's ridiculous, and the city is choking full of used car lots because of it.
Banks are slowly turning the "American Dream" into a joke. What's with all these different loans? Why not keep it simple? Why over the life of a loan you end up paying up to 3 times the value of the home in interest?
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