One in Five mortgage borrower is now in negative equity - meaning their even selling their house cannot pay for their borrowings. In some states (not all, many people misunderstand), once you transfer your house ownership to the lender, you will not be liable to pay the mortgage anymore.
Obviously this is not what the banks or mortgage lenders want to see, as this does not give them any cash at all! It is not easy to sell a house even at the "mark to market" price nowadays. Bush and Obama have encourage lenders to restructure their mortgage with the borrowers. Not wanting to lose their money, the lenders did as they were told, but they do it the same way that have caused the problem in the first place:
1. Delay payment now and pay back more later.
2. Lower interest rate now but higher rate later
3. A combination of 1 and 2.
Now, this type of arrangement have caused the sub prime bubble, and you expect it to solve the problem now? Have you learn anything from this crisis?
This is understandable, as people do not accept losses or failure easily. By delaying the payment, there is "hope" that it can be recovered in the future. It is the same mentality when your HSBC drop to below 50 and you think you can hold until it is 100 again.
What the lender need to do is the following:
Lender A owns a mortgage that is worth $100, but now the house is only worth $80.
Lender A sell the whole mortgage to hedge fund B (or Private equity) at $ 60.
Lender A write down the loss, Borrower now pay 40% less per month to Hedge fund B. (Reduction of principal) Borrower now only owes $60, not $100.
Government should award lenders who do this. This may cause a lot of lenders to go bankrupt, but it is the reality. Having a $100 mortgage that can never be repaid is only going to lengthen the problem. This can also help people to stay in their house and fulfill Obama's promise to help the people who are losing their houses.
http://www.bloomberg.com/apps/news?pid=20601213&sid=aPdRXuqc58RU&refer=home
Decreasing the rate to 2% is not going to end it, only a reduction of principal can.
Let's see what they will do the next few months.
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4 則留言:
But which funds will buy such crap in this time of the market? After the principal was reduced, the housing market fell more. Then the same process needs to be redone. It appears that's what going on now.
BTW, can you discuss sth about CDOs? I know the housing market decline leads to revaluation of the CDOs. But how can the subprime CDOs get good credit rating in the first place?
They will buy it if it is cheap enough. CDOs... I think you can read it in Wikipedia, they must have the details.
The CDOs got good ratings because there is an "insurance" from giants like AIG.
Yea.. I read wiki yesterday... An important reason quoted was the ignorance of the interdependence of the default rates of each subprime loans... The CDOs assume the risk pooling and tranches setting can lower risk.. But in reality as one person defaults, his behavior makes others more likely to default as well... in the end.. all dead
So in the end there is moral hazard problem (the loan issuer never cares coz it does not bare the risk)... but are the guys buying the CDOs lacking the scrutiny... they buy as long as they are cheap and AAA... To me, the rating sounds really really fishy... the rating never reflects the true risks underlying
The rating is made by rating companies and they are paid by the bond/debt issuer. There must be conflict of interest but I see no easy way out. No one will do rating company for free.
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