4 ms·

>The weeks flew by. My boyfriend proposed, and we bought a house. Then, just three weeks after we closed, the market crashed. The house we’d paid $240,000 for w

by bko 12y ago

>The weeks flew by. My boyfriend proposed, and we bought a house. Then, just three weeks after we closed, the market crashed. The house we’d paid $240,000 for was suddenly worth $150,000. It was okay, though — we were still making enough money to cover the exorbitant mortgage payments. Then we weren’t. I don't understand how a mortgage payment can go from (presumably) reasonable to exorbitant with just an adjustment of the perceived value of the home. My impression is that in the past people put less stock in the financial value of their home and just continued to pay their mortgage regardless of the underlying market. Now it is more common to walk away if you're under-water or refinance if you're in the money or want to take out some equity.

Tloewald 12y ago
The quoted lines do not state that the mortgage became exorbitant because the value of the price dropped -- you're reading that into it. On the other hand, a lot of people bought houses on 3-5 year fixed interest mortgages during the housing bubble, on the grounds they expected to be able to resell or refinance when the fixed interest rate expired and the mortgage suddenly got a lot more expensive and -- because their properties were now underwater -- they could not sell or refinance. Back in the days when people just paid their mortgages, real estate was seen as a safe but boring investment, and interest rates were at 5-6% (2-3% above inflation). It's a bit rich when a mortgage lender lends money to a high risk customer and takes out insurance on their defaulting or the property losing value (PMI) and charges the customer for that insurance and then gets annoyed if the customer walks away from the wreckage.
- bko 12y ago
  The mortgage was 240k. Even with 0% down payment, a 3.92% rate would result in mortgage payments of ~$1,100 a month. The couple was making 120k a year combined. I think this is more than reasonable. I couldn't understand the gut negative reaction I had to this story. I understand why these programs exist and am not necessarily opposed to them. But I feel that people (within their means) should structure their financial affairs to not have to rely on these programs and not use them unless they have to. Unemployment for college educated workers barely crossed 5% at its worst so the two should not have been unemployed for years.[0] I would be hard pressed to accept food stamps even if I qualified but I would likely accept unemployment insurance. In that sense, it's funny that food stamps are faux pas, unemployment insurance is acceptable and tax minimization is applauded. Even knowing that, I can't help but hold those same biases though. [0] http://www.economicpopulist.org/content/what-happens-when-president-outsources-job-creation-multinational-corporate-executives http://www.economicpopulist.org/content/what-happens-when-pr...
  - Tloewald 12y ago
    You're assuming the mortgage was for $240k (e.g. they may have paid $240k then pulled out equity on an inflated valuation -- a lot of people did this, although it was a silly thing to do) and that the interest rate was _very_ low (interest rates on 5/1 ARM loans pre-bubble were fixed at 5-6% and suddenly went up to 7-8% when the fixed period expired. If they paid 0% down then they may also have been paying PMI of around 1% on the loan (high risk borrowers effectively get punished twice on interest rates).
    - woobar 12y ago
      I am not sure where you get the rates for ARM loans that suddenly went up. Most ARM loans define the rate after fixed period as "An Index" + "Margin"(2%-3%). The rates for pre-bubble 5/1 ARM mortgages after five years of fixed APR either remained the same or went down. Just look at the LIBOR Index (most popular index for ARM mortgages) in 2008 and 2013. Jan 2008 - 4.18750% Jan 2013 - 0.84250%
      - Tloewald 12y ago
        Where do I get these rates? Personal experience. I bought a house in 2006 and already had a house purchased in 2004. Also your figures seem wrong to me: http://www.hsh.com/natmo2007.html http://www.hsh.com/natmo2007.html -- in 2007 a 1 year ARM was over 6% for most of the year, longer ARM loans would have been higher. Most people in 2008 didn't have loans taken out in 2008, but more likely in 2004-2006 when the market was hot and rates were higher. Incidentally, while the real interest LIBOR rates right now are close to zero, actual mortgage rates are considerably higher, especially on 30y fixed (we got a 15y fixed mortgage because with the difference in interest rates our mortgage payment was only about 40% higher than the 30y option).
        woobar 12y ago
        Ok, so in your personal experience, what was the "margin" portion of the adjustable rate mortgage that you had? My numbers look wrong to you because you are comparing them to your APR. You shouldn't. As I've mentioned before APR = Index + Margin. If index goes down, and margin is fixed, what happens to the APR? You are correct, most people did not get their mortgages in 2008. But the family we are discussing here did. And for anyone with 5/1 ARM taken out in 2004-2008 the rate would have gone down after the fixed period.
- FireBeyond 12y ago
  Right, so they got a much better deal than they usually would, didn't factor in a contingency, took a bet... and lost.
kaitai 12y ago
The couple lost their jobs -- that's why they weren't able to pay. I had a friend buying a house in 2004-2005. She was getting first-time homebuyer's assistance from some semi-governmental agency: they assign you a person who walks you through the paperwork and gives advice on mortgages, presumably to prevent fraud and rip-offs. The guy was heavily pushing an adjustable-rate mortgage, though: "Look at these low rates for the first two years! And after that I'm sure they'll be reasonable." My friend was outraged, as someone who'd gone into risk management in lieu of college. "How could this guy be trying to convince me to sign up for unknown rates that will rise and could change at any time, when I could just get a 30-year mortgage like anyone else?" Think of all the people in 2008 who didn't know not to get an ARM, and who might have been pushed into it by some "advice" they thought was good.
- jwcooper 12y ago
  "Think of all the people in 2008 who didn't know not to get an ARM, and who might have been pushed into it by some "advice" they thought was good." They'd likely have really low interest rates [1] right now due to the federal reserve keeping the rates low, and presumably refinancing soon now that house prices have risen quite a bit (depending on your market, and loan details, of course). The 6-month libor, which a few ARM's are pinned to is currently at 0.4%, in 2008 it was around 3%, so your ARM could potentially have a lower interest rate of around 2.6%. If you didn't lose your job, and had a 3-5 year interest only ARM in 2008, it's possible you could have benefited from it (again, depending on your local housing market). This obviously didn't work out well for everyone, but ARM's are a risk that can pay off as well. That being said, once rates start rising (possibly soon, according to the fed[2]), there could be another foreclosure bubble of people sitting on ARM's watching their rates climb up. [1] http://www.erate.com/six_month_libor_index.6-months-libor.htm http://www.erate.com/six_month_libor_index.6-months-libor.ht... [2] http://www.nytimes.com/2015/03/28/business/yellen-says-fed-will-increase-rates-slowly.html?_r=0 http://www.nytimes.com/2015/03/28/business/yellen-says-fed-w...
  - kaitai 12y ago
    Yes -- you have to have the money to roll with the risk, though. My friend was buying this house as a single person with small cash reserves, which the advisor knew; for her it would have been very risky given her relatively low income. If you have two incomes and some larger savings, the interest rate game might be one you can responsibly play.
IkmoIkmo 12y ago
Why not? Exorbitant means 'unreasonably high'. Is it strange that when paying $1k in mortgage payments to 'buy-back' 240k of value, that paying $1k to 'buy-back' $150k in value can be called unreasonably high? Especially when suddenly you can buy equivalent property for much lower prices, and lower mortgage rates. And suddenly rent starts to look cheap in comparison to paying mortgage + the cost of $90k devaluation in a 2 year span. I can easily see how that can turn exorbitant. However, even that it turned exorbitant you're assuming. They may have felt it was unreasonably expensive in the first place, despite it being a good move compared to renting. e.g. if you live in a place like NY, some may consider everything and anything exorbitant, just a matter of perspective. It certainly seems true that the cost of housing as a portion of income and disposable income has been one of those things (like healthcare or education) that got cheaper over time, while other things (like most technology) got cheaper.

by bko 12y ago

Tloewald 12y ago

The quoted lines do not state that the mortgage became exorbitant because the value of the price dropped -- you're reading that into it. On the other hand, a lot of people bought houses on 3-5 year fixed interest mortgages during the housing bubble, on the grounds they expected to be able to resell or refinance when the fixed interest rate expired and the mortgage suddenly got a lot more expensive and -- because their properties were now underwater -- they could not sell or refinance. Back in the days when people just paid their mortgages, real estate was seen as a safe but boring investment, and interest rates were at 5-6% (2-3% above inflation). It's a bit rich when a mortgage lender lends money to a high risk customer and takes out insurance on their defaulting or the property losing value (PMI) and charges the customer for that insurance and then gets annoyed if the customer walks away from the wreckage.

bko 12y ago
The mortgage was 240k. Even with 0% down payment, a 3.92% rate would result in mortgage payments of ~$1,100 a month. The couple was making 120k a year combined. I think this is more than reasonable. I couldn't understand the gut negative reaction I had to this story. I understand why these programs exist and am not necessarily opposed to them. But I feel that people (within their means) should structure their financial affairs to not have to rely on these programs and not use them unless they have to. Unemployment for college educated workers barely crossed 5% at its worst so the two should not have been unemployed for years.[0] I would be hard pressed to accept food stamps even if I qualified but I would likely accept unemployment insurance. In that sense, it's funny that food stamps are faux pas, unemployment insurance is acceptable and tax minimization is applauded. Even knowing that, I can't help but hold those same biases though. [0] http://www.economicpopulist.org/content/what-happens-when-president-outsources-job-creation-multinational-corporate-executives http://www.economicpopulist.org/content/what-happens-when-pr...
- Tloewald 12y ago
  You're assuming the mortgage was for $240k (e.g. they may have paid $240k then pulled out equity on an inflated valuation -- a lot of people did this, although it was a silly thing to do) and that the interest rate was _very_ low (interest rates on 5/1 ARM loans pre-bubble were fixed at 5-6% and suddenly went up to 7-8% when the fixed period expired. If they paid 0% down then they may also have been paying PMI of around 1% on the loan (high risk borrowers effectively get punished twice on interest rates).
  - woobar 12y ago
    I am not sure where you get the rates for ARM loans that suddenly went up. Most ARM loans define the rate after fixed period as "An Index" + "Margin"(2%-3%). The rates for pre-bubble 5/1 ARM mortgages after five years of fixed APR either remained the same or went down. Just look at the LIBOR Index (most popular index for ARM mortgages) in 2008 and 2013. Jan 2008 - 4.18750% Jan 2013 - 0.84250%
    - Tloewald 12y ago
      Where do I get these rates? Personal experience. I bought a house in 2006 and already had a house purchased in 2004. Also your figures seem wrong to me: http://www.hsh.com/natmo2007.html http://www.hsh.com/natmo2007.html -- in 2007 a 1 year ARM was over 6% for most of the year, longer ARM loans would have been higher. Most people in 2008 didn't have loans taken out in 2008, but more likely in 2004-2006 when the market was hot and rates were higher. Incidentally, while the real interest LIBOR rates right now are close to zero, actual mortgage rates are considerably higher, especially on 30y fixed (we got a 15y fixed mortgage because with the difference in interest rates our mortgage payment was only about 40% higher than the 30y option).
      - woobar 12y ago
        Ok, so in your personal experience, what was the "margin" portion of the adjustable rate mortgage that you had? My numbers look wrong to you because you are comparing them to your APR. You shouldn't. As I've mentioned before APR = Index + Margin. If index goes down, and margin is fixed, what happens to the APR? You are correct, most people did not get their mortgages in 2008. But the family we are discussing here did. And for anyone with 5/1 ARM taken out in 2004-2008 the rate would have gone down after the fixed period.
FireBeyond 12y ago
Right, so they got a much better deal than they usually would, didn't factor in a contingency, took a bet... and lost.

kaitai 12y ago

The couple lost their jobs -- that's why they weren't able to pay. I had a friend buying a house in 2004-2005. She was getting first-time homebuyer's assistance from some semi-governmental agency: they assign you a person who walks you through the paperwork and gives advice on mortgages, presumably to prevent fraud and rip-offs. The guy was heavily pushing an adjustable-rate mortgage, though: "Look at these low rates for the first two years! And after that I'm sure they'll be reasonable." My friend was outraged, as someone who'd gone into risk management in lieu of college. "How could this guy be trying to convince me to sign up for unknown rates that will rise and could change at any time, when I could just get a 30-year mortgage like anyone else?" Think of all the people in 2008 who didn't know not to get an ARM, and who might have been pushed into it by some "advice" they thought was good.

jwcooper 12y ago
"Think of all the people in 2008 who didn't know not to get an ARM, and who might have been pushed into it by some "advice" they thought was good." They'd likely have really low interest rates [1] right now due to the federal reserve keeping the rates low, and presumably refinancing soon now that house prices have risen quite a bit (depending on your market, and loan details, of course). The 6-month libor, which a few ARM's are pinned to is currently at 0.4%, in 2008 it was around 3%, so your ARM could potentially have a lower interest rate of around 2.6%. If you didn't lose your job, and had a 3-5 year interest only ARM in 2008, it's possible you could have benefited from it (again, depending on your local housing market). This obviously didn't work out well for everyone, but ARM's are a risk that can pay off as well. That being said, once rates start rising (possibly soon, according to the fed[2]), there could be another foreclosure bubble of people sitting on ARM's watching their rates climb up. [1] http://www.erate.com/six_month_libor_index.6-months-libor.htm http://www.erate.com/six_month_libor_index.6-months-libor.ht... [2] http://www.nytimes.com/2015/03/28/business/yellen-says-fed-will-increase-rates-slowly.html?_r=0 http://www.nytimes.com/2015/03/28/business/yellen-says-fed-w...
- kaitai 12y ago
  Yes -- you have to have the money to roll with the risk, though. My friend was buying this house as a single person with small cash reserves, which the advisor knew; for her it would have been very risky given her relatively low income. If you have two incomes and some larger savings, the interest rate game might be one you can responsibly play.

IkmoIkmo 12y ago

Why not? Exorbitant means 'unreasonably high'. Is it strange that when paying $1k in mortgage payments to 'buy-back' 240k of value, that paying $1k to 'buy-back' $150k in value can be called unreasonably high? Especially when suddenly you can buy equivalent property for much lower prices, and lower mortgage rates. And suddenly rent starts to look cheap in comparison to paying mortgage + the cost of $90k devaluation in a 2 year span. I can easily see how that can turn exorbitant. However, even that it turned exorbitant you're assuming. They may have felt it was unreasonably expensive in the first place, despite it being a good move compared to renting. e.g. if you live in a place like NY, some may consider everything and anything exorbitant, just a matter of perspective. It certainly seems true that the cost of housing as a portion of income and disposable income has been one of those things (like healthcare or education) that got cheaper over time, while other things (like most technology) got cheaper.