Keeping a jaundiced eye on the corporate media.
UPDATE: Here’s the video of the segment.
Jim Kramer, that Mad Money guy from MSNBC, said tonight that everyone who’s gotten a mortgage in the last three years is in danger of losing their homes.
Urp. Not good. Lots of bad news in the financial market today, tied to the losses in the mortgage market. Hope you’re all okay…
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This sounds a tad dramatic.
What’s his rationale?
I don’t know. I hoped someone else saw it and could explain. I suppose he means some houses purchased then are worth less than when they were purchased?
I didn’t see the program, but I think it only applies to people who got those wondrous variable rate loans with little or no down payment and extremely low payments for the first few years.
1. The initial monthly payments are less than the amount needed to pay the principal and interest. This causes a negative amortization. That is, the loan principal is increasing. What was a $250,000 loan may be a $260,000 committment after 2 years.
2. Since lenders of fixed rate loans are requiring more collateral and the home values are stagnent to falling in many areas, the owners have no way to refinance unless they have significant funds. This is not likely or they wouldn’t have chosen the variable rate loan to begin with.
3. The increase in the payment schedule for the variable rate loan to rates above the typical fixed rate loan will likely price many of these people out of their homes.
The variable rate loan schema is only viable under two scenarios. One is an expected significant increase in home value which becomes the down payment for the fixed rate loan.
The second is a condition we had in 1981 when the interest rate on home loans was 15% to 18% for a short while. Then the bet was on the interest rate dropping before the higher payments kicked in. Had that one not worked Reagan would have had more than the S&L scandal to deal with.
I heard Cramer say that too, but I think he overstated it–surprise. I believe what he meant was those that had taken risky subprime type loans. That would be a considerable number but still. Why would those who got decent loans from reliable banks be in trouble?
He sure was a lot calmer than he was last week. Tuesday’s a big day, though, with the Fed meeting. Stay tuned for more wackiness.
Susie, that is the case with some people,
but surely not everyone.
Excellent explanation, Jim. This is exactly what
happened to the owner of the house we are renting.
He was egged on by a sleazy realtor and loan officer.
To qualify for a zero down payment, and for
a reduced property tax, he claimed to be an
owner occupant even though he’s never lived here.
Very likely, he misstated his income as well.
He bought three properties (other than his
actual residence) on speculation and now the
shit has hit the fan.
Multiply the numbers in your example by three
or four (per property), and then multiply that
by three properties, and the result is a multi-
million dollar indebtedness by someone who
thought he’d invest nothing up front and make
a ton of money.
Of course, Alan Greenspan looked upon this
type of process very approvingly, because the
real-estate bubble made him look good.
I think that his concern is that a lot of big mortgage-holding banks will fail, forcing the big bank’s creditors to foreclose on everyone the big banks had written a mortgage for in order to recover funds. It’s unbelievably unlikely that this will happen. (And frankly, if banks on the level of say, ABN-AMRO or Bank of America failed, the mortgage crisis would be only a small bit of a full-fledged depression) Practically, anyone with an ARM is going to end up screwed unless they refinance or unless interest rates drop a couple of points. Some people are going to get foreclosed upon when they can’t make their newly-higher payments. Developers with a lot of unsold property are going to be in trouble. A lot of people who’ve made their fortunes in the last few years selling blocks of sub-prime loans as securities are going to lose their jobs. But the sky falling? No.
OK, so what Cramer said was that 14 million people
(he probably meant households) bought houses in the
last three years, and 7 million of them took out ARM’s
with temporarily low teaser rates.
It’s that latter group that he says will lose their houses.
Most of them probably will, but some will very likely
be bailed out by their families.
Seven million homes probably involves about 20
million people. This isn’t small potatoes.