Banks- (insurance) take a nose dive

[GaryPanic]

The exact liability of mortgages is hard to quantify because no-one knows how many people will default on their payments so the figures quoted for Northern Rock are not necessarily accurate at present. I suspect the same is true of Fanny Mae and Freddie Mac. We just don't know how many people won't be able to pay their mortgages.

Northern Rock -actual doesn't have dodgey morgages- (as such)
what it has is a shortage of monies due to the way it was set up - it borrowed from Bank A at a rate of 4.5% and lent it out at 5.25% and it was making money on the difference -
Bank A now isn't prepared to lend money to NR - at which point the liabilities exceeded the reserves (value of propery reduced) there for assets reduced and as such the bank has no monies - The goverment stepped in and in the long run the NR will pay for itself - but the cost of the admin will be down to us ...short term - when stocks and shares recovers then you will see parts of NR sold off ..

 

[Access_guy49]

I am young (only 22) so i have yet to worry about a morgage, and my understanding of them is probably not the best. This is my understanding of what has happened, maybe I can get some confirmation or correction:

Due to Clinton administration, the rules guiding the morgage lending system were not as tight as they had been previously. As a result of this as well as low interest rates, banks were able to offer exceptionally low interest morgages to almost anyone. The banks stipulated that the person only had to pay the interest per month minimum, but the principle did not have to be paid off. (i stress HAD to be, as in optional). The idea being that house values would increase over time. Example, Person buys house valued at 200,000. They only pay on the interest. In 7 years lets say, the house will be valued at 250,000. so if they walk away, they get 50,000 in pocket and everyone is happy. Some lenders began morgaging for the projected value of the house. Lending 300,000 on a house currently valued at 275,000 with a projected value of 325,000 in 10 years.

Congress then began raising interest rates. (something like 30 consecutive times in a row). so when people went to re-establish morgages the interest rates had increased substantially and the people could no longer afford the payments. If you owe 325,000 on a house worth 300,000 your gona walk away. and that's what happend.
So then you have the banks that need to sell these houses for something, so they sell low to cut losses, this drives the market down.
On top of that more and more people are defaulting.
Then the next problem comes with packaged morgages. Banks would sell morgages to other banks, in packages (so many billions of dollars worth or morgages at 4% or whatever). Many of these packages started containing more and more of these bad loans. So now you have a bunch of banks that are afraid to buy any of the other guys stuff for fear that it's all crap. (this isn't exclusive to american banks by the way). So the Government has steped in to say that they will be setting a base price for the morgages which gives a floor to the hole situation.
because the banks have to show their assets at market price, the 300,000 morgages were now on the books at lets say, 250,000 or maybe even 225,000. This so now the banks had less assets to borrow with, but still needed to hold whatever percent money for their depositors. As a result of the depreciated assets and not being able to borrow against them, they are not able to lend out, and now new loans and morgages become difficult to secure. which means no new money coming in from morgages...
seem right?..that's my understanding of it anyways.

so i say the government was at fault, they should clean it up. infact, in theory, by purchasing all these bad morgages, they could in THEORY make a profit if the housing market turns around.

 

[georgedwilkinson]

You got the essentials right.

Congress does not raise interest rates, the Fed does.

The raise of interest rates was very minor during the period marking this cycle.

Many (not all) of the sub-prime mortgages started with a very low (introductory) APR which was increased in a year or two (totally depending on the circumstances of the individual contract). People couldn't afford thier mortgages because they were not initially qualified and did not have a significant raise in their income to compensate for the new, higher, non-introductory interest rates. Many of these mortgages were for the full value of the home (100%+ financing) and those people who were lucky got out before the bottom fell out of the real estate market. Obviously, not everybody moved that fast (I got stuck with a $300K house falling to ~$150K in Tampa).

There was a lot of re-packaging of mortgage notes into securities that you got essentially right. Same with reserves.

You said an interesting thing about values dropping. It seems some of the Wall Street firms were using the full value of the mortgage notes as their book value. Recently, a new rule went into effect that essentially said that they had to "mark to market", meaning they had to use the real value of their assets on their reports. This is when the full shock happened to the markets.

As far as who is at fault, you can't lay it all on the government. Clinton started the ball rolling but the banks and the borrowers were complicit, as well as Congress as early as 2002 (they totally ignored Greenspan's warnings).

 

[ColinEssex]

So when someones wooden house is destroyed by a hurricane, do they still have to pay a mortgage?

Or, is it possible to get a mortgage in a hurricane belt like New Orleans? I would think it's very difficult.


Col

 

[statsman]

Col:
I know in Canada you can't get a mortgage without insurance on the house. It has to cover the full amount of your outstanding debt on the mortgage. Acquiring it is the homeowner's responsibility.

A lot of us are overlooking the most obvious reason for the low interest rates. The US was fighting wars in Afganistan and Iraq without raising taxes (no Republican would ever raise taxes). The US administration had a vested interest in low interest rates as they were financing these wars with loans rather than increased taxes.

Now, interest rates will have to rise as will taxes. Combine that with a downward moving economy and the new President (whoever he may be) will be getting the blame for cleaning up "W"'s mess.

If I were a Presidential candidate this year I would just say to my opponent "you win, see you in four years".

 

[ColinEssex]

A lot of us are overlooking the most obvious reason for the low interest rates. The US was fighting wars in Afganistan and Iraq without raising taxes (no Republican would ever raise taxes). The US administration had a vested interest in low interest rates as they were financing these wars with loans rather than increased taxes.

Ah, so that'll be why the USA is trillions of dollars in debt then, and is now up shit creek without a paddle over this financial crisis.

Col

 

[Rabbie]

Col:
I know in Canada you can't get a mortgage without insurance on the house. It has to cover the full amount of your outstanding debt on the mortgage. Acquiring it is the homeowner's responsibility.

This is the case in the UK as well. I know people who have not been able to get a mortgage on timber houses because of Insurance issues.

 

[dkinley]

Here in the US depending on how much you put down and stuff - mortgage insurance is a requirement, too. This might vary according to states. I've only bought houses in two of them and was required each time. If AIG was on the hook as insurance provider and was regulated to provide, then it makes sense why they went in the tank.

In one state I bought a house it was a requirement to have a termite contract on the house in order to purchase and keep.

-dK

 

[ColinEssex]

In one state I bought a house it was a requirement to have a termite contract on the house in order to purchase and keep.

It must have been in a state if it had termites.

Col

 

[statsman]

Ah, so that'll be why the USA is trillions of dollars in debt then, and is now up shit creek without a paddle over this financial crisis.

Col

Ronald Regan (a much maligned President) did accomplish one thing during his time in office. He put a check on deficit financing and the national debt. He reined in government spending to do it.

While Clinton increased it somewhat, he was still aware of the legacy he inherited, respected it and brought in balanced budgets.

I'm glad it was a Republican who has taken the US to the brink of bankruptcy. All the right wing journalists and broadcasters will have to shut up for the next few years (not an easy task) as the US recovers. If McCain wins they certanly won't eat their own young. If Obama wins he just has to smile and claim he's cleaning up a Republican mess.

 

[Rabbie]

I have never understood why politicians condemn inflation in general but applaud it in house prices.

 

[statsman]

I have never understood why politicians condemn inflation in general but applaud it in house prices.

The government takes in more tax money with high inflation. The fact the money isn't worth the paper it's printed on doesn't seem to occur to them. Meanwhile you and I have to deal with 10% price increases on a 5% wage increase.

 

[Rabbie]

The government takes in more tax money with high inflation. The fact the money isn't worth the paper it's printed on doesn't seem to occur to them. Meanwhile you and I have to deal with 10% price increases on a 5% wage increase.

I know that. My point is that they criticise wage/price inflation but praise property inflation

 

[Rich]

I know that. My point is that they criticise wage/price inflation but praise property inflation

Of course they do, more tax for the government, nationally and locally

All I can say is that it's a good job our former chancellor put an end to the boom and bust years

 

[statsman]

I know that. My point is that they criticise wage/price inflation but praise property inflation

The way it works over here is:
My parents bought the family home for $25.000 in the 1950's. The house remains assessed for property taxes (rates) at $25,000 until they sold it recently for $100,000. The new owners have to pay property taxes on a $100,000 home even though it was assessed at $25,000 the day before. This is the local municipality's cut.

The Province charges a Land Transfer Tax based on a percentage of the cost. Thats their cut.

The Federal government charges a sales tax, again based on a percentage of the cost.

Of couse they want house prices to increase. Expecially right now with low inflation when the money is actually worth somthing.

 

[Banana]

Interesting.

I know of at least one case where a owner had a house, inherited in his family whom built it decades ago, was basically forced out by developers because developers went to the city council and ask them to re-assess the tax, skyrocketing it from $1500 something a year to $12000 a year. The developers finally got their hand on the house (but more importantly the land) so they could build a condominium.

I'm not exactly sure whether the assessment will be done outside of sale, but I can certainly agree with the point that government likes rising home prices. It's ridiculous, though. Here's Case-Shiller index of US housing price since 1890.

EDIT: Someone made a roller coaster video out of this.... Linky to Google Video

The end of clip is a great food for thought.

 

[oumahexi]

Some interesting stats:

Financial Advice

If you had purchased £1000 of Northern Rock shares one year ago it would now be worth £4.95.

With HBOS, earlier this week your £1000 would have been worth £16.50.


£1000 invested in XL Leisure would now be worth less than £5,

but if you bought £1000 worth of Tennents Lager one year ago, drank it all, then took the empty cans to an aluminium re-cycling plant, you would get £214.

 

[David Eagar]

but if you bought £1000 worth of Tennents Lager one year ago, drank it all, then took the empty cans to an aluminium re-cycling plant, you would get £214.

At long last! Some SOUND financial advice!!

 

[Access_guy49]

I know this is a little off topic, but Statsman pointed out the finances of the war. I know alot of people say the war is expensive, as i'm sure it is, but all the figures i have seen are provided by people against the war. These figures are always total yearly expenses. Has anyone ever compared the yearly expenses when in war vs. the expense that is normal? I mean, war or no war, those ships are still floating around out at sea, they still do training, they still pay everyone, and they still fly around..
I don't think it's AS much as everyone seems to make it out to be.

 

[GaryPanic]

I know this is a little off topic, but Statsman pointed out the finances of the war. I know alot of people say the war is expensive, as i'm sure it is, but all the figures i have seen are provided by people against the war. These figures are always total yearly expenses. Has anyone ever compared the yearly expenses when in war vs. the expense that is normal? I mean, war or no war, those ships are still floating around out at sea, they still do training, they still pay everyone, and they still fly around..
I don't think it's AS much as everyone seems to make it out to be.

not quite
firstly
Active service pay ...
then theres LOA - local over seas allowance
you don't pay for your food when on Active Service
so there is a loss of revenue and and increase in cost thats just the personall side of things.

now when on active service you are more likely to fire your chosen weapon against training

-Artillery - when training 95% of the time there is no need to fire the round/ big bullet - shell
if you can get your triangualtion right then you will be on target so 95% of the time its all about triangulation .

THe main soldier - Yes there is little difference in the working cost of a soldier - however more equipment will be used /broken and require maintenace

Training - you usally don't lose vechiles (well not often)
Planes do more tours than in training again most are simulated in training - and even when training flying they don't drop proper bombs /missles just dummies .

Navy pretty much the same - the navy on this occasion is pretty much support based and not into naval combat - however they still have to be prepared