Mortgage defaults
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Not being in the US, there is something that makes me scratch my head. I have read a number of articles on the web about the massive number of foreclosures going on. But very often, it is described as if people are going into default because of the declining value of properties. It totally makes no sense, because as long as someone can make mortgage payments, the value of the home has nothing to do with it (as long as you do not move). They should be talking about people going into foreclosure because they have lost their job and cannot pay their bills, not people losing their home because it has lost value.
You can't turn lead into gold, unless you've built yourself a nuclear plant.
Pierre Leclercq wrote:
But very often, it is described as if people are going into default because of the declining value of properties. It totally makes no sense
I have a £5 note here. Would you like to buy it for £7? No? That's effectively the situation some of these people are in. The value of the house is less than the value of the mortgage, so they are deciding to walk away and cut their losses, rather than keep paying for something where the cost is more than the value. I would imagine it affects their credit rating in the future, but I'm not in that field, so I really couldn't say how much of a problem that would be if they wanted another mortgage later on.
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Pierre Leclercq wrote:
But very often, it is described as if people are going into default because of the declining value of properties. It totally makes no sense
I have a £5 note here. Would you like to buy it for £7? No? That's effectively the situation some of these people are in. The value of the house is less than the value of the mortgage, so they are deciding to walk away and cut their losses, rather than keep paying for something where the cost is more than the value. I would imagine it affects their credit rating in the future, but I'm not in that field, so I really couldn't say how much of a problem that would be if they wanted another mortgage later on.
The cost is more than the value? Does not compute. Whilst they are living in the house the price they are paying is the value. OK, the selling price should they have to sell is reduced, but it is still their home. By staying put and paying off the mortgage they will still be making the investment work. The financial hardships will not last forever and soon the 'value' of the house will increase. By the time this happens there will be less owed on the property and so more money can be made from it upon sale. It is a very simple concept of investment, capital, usage, perceived value and long termism. I could bore you with a small treatise on the value of sticking with long term investments as a strategy for stability, but I won't!
------------------------------------ "Your manuscript is both good and original. But the part that is good is not original, and the part that is original is not good." Dr Samuel Johnson
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Christian Graus wrote:
who borrowed expecting they could refinance down the track against an increased value of their home
yes, it is a moronic attitude to play black jack with one's home, there's nothing to be proud of. This is especially bad for the american way of life when people lose the basic sense of responsibility when the government starts pouring free money and everyone starts running after it instead of rebuilding the economy.
You can't turn lead into gold, unless you've built yourself a nuclear plant.
Pierre Leclercq wrote:
This is especially bad for the american way of life when people lose the basic sense of responsibility when the government starts pouring free money and everyone starts running after it instead of rebuilding the economy.
Dude, this is exactly how I feel about it, it's all counter productive. GM execs are scheming how to get a chunk out of that bailout pie, while they should be working like crazy building economic cars and adapting their business. Running out of business is the best motivator to adapt yourself to the changing world. EDIT: plus what pisses me off too is that these huge companies with overpaid execs are getting tax payer money. When things were good, these guys were filling their pockets with huge amounts of money. Now they should feel the pain too, exactly like the small companies are feeling pain. I don't see the local car repair guy flying to Washington in his corporate jet to bail him out.
Wout
modified on Thursday, February 19, 2009 5:34 AM
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The cost is more than the value? Does not compute. Whilst they are living in the house the price they are paying is the value. OK, the selling price should they have to sell is reduced, but it is still their home. By staying put and paying off the mortgage they will still be making the investment work. The financial hardships will not last forever and soon the 'value' of the house will increase. By the time this happens there will be less owed on the property and so more money can be made from it upon sale. It is a very simple concept of investment, capital, usage, perceived value and long termism. I could bore you with a small treatise on the value of sticking with long term investments as a strategy for stability, but I won't!
------------------------------------ "Your manuscript is both good and original. But the part that is good is not original, and the part that is original is not good." Dr Samuel Johnson
Dalek Dave wrote:
The cost is more than the value? Does not compute.
Why not? All that means is the price you pay for something is more than it is worth (more than you can sell it for) If you sign a mortgage agreement to pay £1000 a month for 25 years, and prices drop so that the current market value of the property is less than £300,000, the cost is more than the value.
Dalek Dave wrote:
soon the 'value' of the house will increase.
And right there is the fatal assumption. "I'll make money on this investment because the value of the property will increase above the rate of inflation". A moment's thought will show that in the long term, that is an untenable situation.
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Dalek Dave wrote:
The cost is more than the value? Does not compute.
Why not? All that means is the price you pay for something is more than it is worth (more than you can sell it for) If you sign a mortgage agreement to pay £1000 a month for 25 years, and prices drop so that the current market value of the property is less than £300,000, the cost is more than the value.
Dalek Dave wrote:
soon the 'value' of the house will increase.
And right there is the fatal assumption. "I'll make money on this investment because the value of the property will increase above the rate of inflation". A moment's thought will show that in the long term, that is an untenable situation.
Graham Bradshaw wrote:
If you sign a mortgage agreement to pay £1000 a month for 25 years, and prices drop so that the current market value of the property is less than £300,000, the cost is more than the value.
No, it's value is what you are prepared to pay for it as a home, regardless of what it's perceived market price may be. You are confusing Value with Price, (qv Oscar Wilde - A cynic knows the Price of Everything and the Value of Nothing).
Graham Bradshaw wrote:
And right there is the fatal assumption. "I'll make money on this investment because the value of the property will increase above the rate of inflation". A moment's thought will show that in the long term, that is an untenable situation.
No, a moment's thought will show you that over 25 years the average earnings will increase and although in the short term the price will fluctuate, over a 25 year span, the amount you pay will be less than the market value at the end. As time goes on the monthly repayemnt will generally reduce as a percentage of income. In fact prices in the UK today are about the same as they were in 2003, so although a medium term reduction has occurred, the long term sales price has increased. I am an accountant for a land and property developer and so have somewhat of an expert knowledge in this field.
------------------------------------ "Your manuscript is both good and original. But the part that is good is not original, and the part that is original is not good." Dr Samuel Johnson
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Graham Bradshaw wrote:
If you sign a mortgage agreement to pay £1000 a month for 25 years, and prices drop so that the current market value of the property is less than £300,000, the cost is more than the value.
No, it's value is what you are prepared to pay for it as a home, regardless of what it's perceived market price may be. You are confusing Value with Price, (qv Oscar Wilde - A cynic knows the Price of Everything and the Value of Nothing).
Graham Bradshaw wrote:
And right there is the fatal assumption. "I'll make money on this investment because the value of the property will increase above the rate of inflation". A moment's thought will show that in the long term, that is an untenable situation.
No, a moment's thought will show you that over 25 years the average earnings will increase and although in the short term the price will fluctuate, over a 25 year span, the amount you pay will be less than the market value at the end. As time goes on the monthly repayemnt will generally reduce as a percentage of income. In fact prices in the UK today are about the same as they were in 2003, so although a medium term reduction has occurred, the long term sales price has increased. I am an accountant for a land and property developer and so have somewhat of an expert knowledge in this field.
------------------------------------ "Your manuscript is both good and original. But the part that is good is not original, and the part that is original is not good." Dr Samuel Johnson
Dalek Dave wrote:
No, it's value is what you are prepared to pay for it as a home
No, it's value is what someone else will pay for it.
Dalek Dave wrote:
No, a moment's thought will show you that over 25 years the average earnings will increase and although in the short term the price will fluctuate, over a 25 year span, the amount you pay will be less than the market value at the end. As time goes on the monthly repayemnt will generally reduce as a percentage of income.
You've completely missed my point. In the long term, the value of a property will not increase above the rate of inflation. Do you disagree with that statement?
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Graham Bradshaw wrote:
If you sign a mortgage agreement to pay £1000 a month for 25 years, and prices drop so that the current market value of the property is less than £300,000, the cost is more than the value.
No, it's value is what you are prepared to pay for it as a home, regardless of what it's perceived market price may be. You are confusing Value with Price, (qv Oscar Wilde - A cynic knows the Price of Everything and the Value of Nothing).
Graham Bradshaw wrote:
And right there is the fatal assumption. "I'll make money on this investment because the value of the property will increase above the rate of inflation". A moment's thought will show that in the long term, that is an untenable situation.
No, a moment's thought will show you that over 25 years the average earnings will increase and although in the short term the price will fluctuate, over a 25 year span, the amount you pay will be less than the market value at the end. As time goes on the monthly repayemnt will generally reduce as a percentage of income. In fact prices in the UK today are about the same as they were in 2003, so although a medium term reduction has occurred, the long term sales price has increased. I am an accountant for a land and property developer and so have somewhat of an expert knowledge in this field.
------------------------------------ "Your manuscript is both good and original. But the part that is good is not original, and the part that is original is not good." Dr Samuel Johnson
Dalek Dave wrote:
No, it's value is what you are prepared to pay for it as a home
No, it's value is what someone else will pay for it. There's an important difference there.
Dalek Dave wrote:
No, a moment's thought will show you that over 25 years the average earnings will increase and although in the short term the price will fluctuate, over a 25 year span, the amount you pay will be less than the market value at the end. As time goes on the monthly repayemnt will generally reduce as a percentage of income.
You've completely missed my point. In the long term, the value of a property will not increase above the rate of inflation. Do you disagree with that statement?
Dalek Dave wrote:
I am an accountant for a land and property developer and so have somewhat of an expert knowledge in this field.
We are talking economics, not property development. Your profession and employer are irrelevant.
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Dalek Dave wrote:
No, it's value is what you are prepared to pay for it as a home
No, it's value is what someone else will pay for it. There's an important difference there.
Dalek Dave wrote:
No, a moment's thought will show you that over 25 years the average earnings will increase and although in the short term the price will fluctuate, over a 25 year span, the amount you pay will be less than the market value at the end. As time goes on the monthly repayemnt will generally reduce as a percentage of income.
You've completely missed my point. In the long term, the value of a property will not increase above the rate of inflation. Do you disagree with that statement?
Dalek Dave wrote:
I am an accountant for a land and property developer and so have somewhat of an expert knowledge in this field.
We are talking economics, not property development. Your profession and employer are irrelevant.
Graham Bradshaw wrote:
No, it's value is what someone else will pay for it. There's an important difference there.
No, it's PRICE is what someone else will pay for it. Value is an arbitry figure. A small object left to you by a grandmother may only be priced at £10, but it's value is far more to you for other reasons. Price is only what value realsies at the point of sale. You may have reasons not to sell your house even if you are being offered more than the market price because it has a value greater than price.
Graham Bradshaw wrote:
You've completely missed my point. In the long term, the value of a property will not increase above the rate of inflation. Do you disagree with that statement?
That is a very bold statement that you cannot/chosen not to back up. First Land is Finite, it is in fact becoming rarer as population increases. Secondly, over a cycle house prices have ALWAYS increased above inflation, (a small amount to be sure, but historically this is the case). Thirdly, you buy a house primarily as a home not an investment. Fourthly once paid for, the money spent on mortgage is best used as investment in other things, the house itself is still gaining, and the use of it is constant. Fifthly my employment is relevant, as I see trends and prices. We buy land and work out precisely how much we can make upon realisation. The market is still bouyant and hopefully will remain so. A house is about the biggest thing most people buy, and once owned, is an efficient use of capital as much can be done to make it tax effient for various purposes. If the market is falling and you do not have to sell, then don't, but you won't lose money. A loss only occurs if you have to sell, or if you are in a short term market position. Long term you will always win. Remember also that inflation has little to do with profit on houses, as inflation is tied to salary increases. There is much to take into account. (ps I am Qualified in Economics, but I try to keep that quiet! :) )
------------------------------------ "Your manuscript is both good and original. But the part that is good is not original, and the part that is original is not good." Dr Samuel Johnson
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Not being in the US, there is something that makes me scratch my head. I have read a number of articles on the web about the massive number of foreclosures going on. But very often, it is described as if people are going into default because of the declining value of properties. It totally makes no sense, because as long as someone can make mortgage payments, the value of the home has nothing to do with it (as long as you do not move). They should be talking about people going into foreclosure because they have lost their job and cannot pay their bills, not people losing their home because it has lost value.
You can't turn lead into gold, unless you've built yourself a nuclear plant.
It's a little more complicated than that, Pierre. True, many people are losing their homes because of job losses, and that's a shame. But a big part of the crisis was caused by a mix of factors. For starters, speculators were using low interest rates to buy up property and develop housing in areas that had low property values, then charging outrageous prices for them. For instance, where I live, over a span of 4 years, a house worth $75k was run up to $500k by these "developers." They got away with it because to people in places like California, these homes looked like a bargain. That was repeated all over the country. Once the initial inventories were sold to the wealthy, sellers had to find ways to get lower income people into the homes. The Adjustable Rate Mortgage (ARM) was ideal for this purpose, as the banks loan on a measure of ability to pay, and the initial low rate let lots of people qualify. The lure was simple - buy a home now, and your payment for the first 5 years will be X. Of course, the payment will go up to Y then, but by then the home will be worth so much that you can refinance and use your increased equity to pay off the first. Or, since in the US we tend to move every five years, you can sell it, rake in huge profits, and start again somewhere else. Except it didn't work that way. When those big increases in payments came up, nobody was buying, and the home that was never really worth what the buyer paid couldn't be refinanced. So the buyers were stuck with payments they couldn't afford, a home that couldn't be sold or financed for what they owed, and nowhere to turn for help. Your view is entirely correct, except that these people were sold homes they can't afford using unscrupulous financing methods arranged by developers and banks trying for a quick, unreasonable profit. The only happy result is that most of them were destroyed, too.
"A Journey of a Thousand Rest Stops Begins with a Single Movement"
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It's a little more complicated than that, Pierre. True, many people are losing their homes because of job losses, and that's a shame. But a big part of the crisis was caused by a mix of factors. For starters, speculators were using low interest rates to buy up property and develop housing in areas that had low property values, then charging outrageous prices for them. For instance, where I live, over a span of 4 years, a house worth $75k was run up to $500k by these "developers." They got away with it because to people in places like California, these homes looked like a bargain. That was repeated all over the country. Once the initial inventories were sold to the wealthy, sellers had to find ways to get lower income people into the homes. The Adjustable Rate Mortgage (ARM) was ideal for this purpose, as the banks loan on a measure of ability to pay, and the initial low rate let lots of people qualify. The lure was simple - buy a home now, and your payment for the first 5 years will be X. Of course, the payment will go up to Y then, but by then the home will be worth so much that you can refinance and use your increased equity to pay off the first. Or, since in the US we tend to move every five years, you can sell it, rake in huge profits, and start again somewhere else. Except it didn't work that way. When those big increases in payments came up, nobody was buying, and the home that was never really worth what the buyer paid couldn't be refinanced. So the buyers were stuck with payments they couldn't afford, a home that couldn't be sold or financed for what they owed, and nowhere to turn for help. Your view is entirely correct, except that these people were sold homes they can't afford using unscrupulous financing methods arranged by developers and banks trying for a quick, unreasonable profit. The only happy result is that most of them were destroyed, too.
"A Journey of a Thousand Rest Stops Begins with a Single Movement"
Roger Wright wrote:
The only happy result is that most of them were destroyed, too.
Unfortunately too many of them were bailed out...
You can't turn lead into gold, unless you've built yourself a nuclear plant.
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Not being in the US, there is something that makes me scratch my head. I have read a number of articles on the web about the massive number of foreclosures going on. But very often, it is described as if people are going into default because of the declining value of properties. It totally makes no sense, because as long as someone can make mortgage payments, the value of the home has nothing to do with it (as long as you do not move). They should be talking about people going into foreclosure because they have lost their job and cannot pay their bills, not people losing their home because it has lost value.
You can't turn lead into gold, unless you've built yourself a nuclear plant.
There's a couple reasons (based my limited understanding): Complex: People bought houses at low interest rates for a specific term limit, and are now faced with the term expiring and either a balloon payment or higher rates. People expected property values to increase, so they could either borrow against their equity or sell for a profit when the term limit comes up. Of course, this is just stupid, and I don't think these people should be bailed out, but on the other hand, these kind of loans should never have been legal to begin with, as it's basically a form of gambling. Simple: Lots of people are losing their jobs. They simply can't afford to make their mortgage payments with no income. They can sell their house, but then they still have some remaining debt because the value of their home is less than the loan amount. And renting is tough when the monthly rent payment is equal or greater than the mortgage payment, and you still don't have a job to pay the rent. Marc
Available for consulting and full time employment. Contact me. Interacx
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Pierre Leclercq wrote:
But very often, it is described as if people are going into default because of the declining value of properties. It totally makes no sense
I have a £5 note here. Would you like to buy it for £7? No? That's effectively the situation some of these people are in. The value of the house is less than the value of the mortgage, so they are deciding to walk away and cut their losses, rather than keep paying for something where the cost is more than the value. I would imagine it affects their credit rating in the future, but I'm not in that field, so I really couldn't say how much of a problem that would be if they wanted another mortgage later on.
Graham Bradshaw wrote:
I would imagine it affects their credit rating in the future, but I'm not in that field, so I really couldn't say how much of a problem that would be if they wanted another mortgage later on.
All black (and white) marks stay on your credit report for 7 years. Dunno if foreclosure is like bankruptcy in that it's something you have to answer truthfully for the rest of your life when applying for major loans.
Today's lesson is brought to you by the word "niggardly". Remember kids, don't attribute to racism what can be explained by Scandinavian language roots. -- Robert Royall
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Not being in the US, there is something that makes me scratch my head. I have read a number of articles on the web about the massive number of foreclosures going on. But very often, it is described as if people are going into default because of the declining value of properties. It totally makes no sense, because as long as someone can make mortgage payments, the value of the home has nothing to do with it (as long as you do not move). They should be talking about people going into foreclosure because they have lost their job and cannot pay their bills, not people losing their home because it has lost value.
You can't turn lead into gold, unless you've built yourself a nuclear plant.
Rodger's post above is pretty accurate as part of the problem. I'd like to add that it's not just developers but people who just went crazy trying to make money on rising home prices. I live in a gated golf community, very popular in Florida (and elsewhere I imagine). I bought there 7 years ago or so, nice house. Let's say I paid $100,000 for it back then and most homes in our community were at that same price. After a year or so, our surrounding area started to grow RAPIDLY and of course thousands of people started to move into the area. Supply and Demand!. To many people, not enough homes...prices went straight up. At this same time, people took notice that the Mortgage companies had all these new, cheaper monthly payment option mortgages, such as ARM's and Interest only. So, people would come in and buy homes with the only intent of keeping it a year or two max, and then sell at a hefty profit. And it worked...for awhile. I knew people making 100%-200% PROFIT on thier homes. These folks do this as a "living" moving from home to home constantly buying low, selling high...just like the Stock Market. Problem was that it topped out, people had invested in homes that were already inflated in value hoping that the market would continue and they'd make lots of $$$, but it failed. So, now these ARM's and Interest only loans start coming to marurity because folks can't sell for what they bought the house for much less that HUGE profit...they just leave the house there, stop making payments and forclose. Again, it's just part of the overall problem.
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Not being in the US, there is something that makes me scratch my head. I have read a number of articles on the web about the massive number of foreclosures going on. But very often, it is described as if people are going into default because of the declining value of properties. It totally makes no sense, because as long as someone can make mortgage payments, the value of the home has nothing to do with it (as long as you do not move). They should be talking about people going into foreclosure because they have lost their job and cannot pay their bills, not people losing their home because it has lost value.
You can't turn lead into gold, unless you've built yourself a nuclear plant.
Pierre Leclercq wrote:
I have read a number of articles on the web about the massive number of foreclosures going on. But very often, it is described as if people are going into default because of the declining value of properties. It totally makes no sense, because as long as someone can make mortgage payments, the value of the home has nothing to do with it (as long as you do not move).
And if you move? You end up with two Mortgage payments and a house that cannot be sold. Or rather a house that cannot be sold for the remainder on the note. Most people can't afford to continue, and can't sell. I just started a business and worked 2 jobs to pay for the other house.
_________________________ John Andrew Holmes "It is well to remember that the entire universe, with one trifling exception, is composed of others." Proudly folding for Team Code Project!! and Keeping "Team Lavaboy" at bay since 2009-02-04
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Rodger's post above is pretty accurate as part of the problem. I'd like to add that it's not just developers but people who just went crazy trying to make money on rising home prices. I live in a gated golf community, very popular in Florida (and elsewhere I imagine). I bought there 7 years ago or so, nice house. Let's say I paid $100,000 for it back then and most homes in our community were at that same price. After a year or so, our surrounding area started to grow RAPIDLY and of course thousands of people started to move into the area. Supply and Demand!. To many people, not enough homes...prices went straight up. At this same time, people took notice that the Mortgage companies had all these new, cheaper monthly payment option mortgages, such as ARM's and Interest only. So, people would come in and buy homes with the only intent of keeping it a year or two max, and then sell at a hefty profit. And it worked...for awhile. I knew people making 100%-200% PROFIT on thier homes. These folks do this as a "living" moving from home to home constantly buying low, selling high...just like the Stock Market. Problem was that it topped out, people had invested in homes that were already inflated in value hoping that the market would continue and they'd make lots of $$$, but it failed. So, now these ARM's and Interest only loans start coming to marurity because folks can't sell for what they bought the house for much less that HUGE profit...they just leave the house there, stop making payments and forclose. Again, it's just part of the overall problem.
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Ironically it says INDOOR market, yet shows a picture of stalls outside! That's Stoke for you!
------------------------------------ "Your manuscript is both good and original. But the part that is good is not original, and the part that is original is not good." Dr Samuel Johnson
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Ironically it says INDOOR market, yet shows a picture of stalls outside! That's Stoke for you!
------------------------------------ "Your manuscript is both good and original. But the part that is good is not original, and the part that is original is not good." Dr Samuel Johnson
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Pierre Leclercq wrote:
I have read a number of articles on the web about the massive number of foreclosures going on. But very often, it is described as if people are going into default because of the declining value of properties. It totally makes no sense, because as long as someone can make mortgage payments, the value of the home has nothing to do with it (as long as you do not move).
And if you move? You end up with two Mortgage payments and a house that cannot be sold. Or rather a house that cannot be sold for the remainder on the note. Most people can't afford to continue, and can't sell. I just started a business and worked 2 jobs to pay for the other house.
_________________________ John Andrew Holmes "It is well to remember that the entire universe, with one trifling exception, is composed of others." Proudly folding for Team Code Project!! and Keeping "Team Lavaboy" at bay since 2009-02-04
El Corazon wrote:
I just started a business and worked 2 jobs to pay for the other house.
Who you trying to kid? We all know how you can afford it.[^] :) :) :)
Henry Minute Do not read medical books! You could die of a misprint. - Mark Twain Girl: (staring) "Why do you need an icy cucumber?" “I want to report a fraud. The government is lying to us all.”
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Graham Bradshaw wrote:
I would imagine it affects their credit rating in the future, but I'm not in that field, so I really couldn't say how much of a problem that would be if they wanted another mortgage later on.
All black (and white) marks stay on your credit report for 7 years. Dunno if foreclosure is like bankruptcy in that it's something you have to answer truthfully for the rest of your life when applying for major loans.
Today's lesson is brought to you by the word "niggardly". Remember kids, don't attribute to racism what can be explained by Scandinavian language roots. -- Robert Royall
dan neely wrote:
black (and white) marks stay on your credit report for 7 years. Dunno if foreclosure is like bankruptcy in that it's something you have to answer truthfully for the rest of your life when applying for major loans.
As long as I've paid my arrears debts, a default judgement only remains on my record for five years. :)