A floor under US property prices - plan to cut mortgage rates for 395,00 loans

I don't understand the reluctance of the lenders to drop interest rates or to refinance subprime loans. If they had done this in the first place, proprties wouldn't have ended up empty and vandalised and they wouldn't be where they are today

 

There are numerous reasons why they haven't done this.

A few reasons are -

1. The lenders have no idea who the borrowers are and vica versa. (ie securitised debt obligations have alienated both sides from one another).

2. People who are facing negative equity (even those who have healthy incomes and have no problem to make their repayments) have lost their reason to continue making mortgage repayments towards a losing investment. So regardless of what the interest rate is (they could set the rate to 0) there is a growing subset of people who will still want out of their mortgage obligation. In the US you can walk away (non-recourse) unlike most of the rest of the world where you can't. So there is a growing number of cases where no amount of mortgage renegotiation will suffice to keep people committed to paying their debt. Before you rubbish this notion consider how many people have come to view their house as their retirement fund , then consider what it means today to see that suppossed nest egg go into negative equity with no sign of improvement for many, many years. Especially consider what this means when compounded with massive 401K(super annuation) losses and a perilous job market.

3. Consider that only people who have not committed fraud on their loan application forms will want to enter any of these state sponsored loan renegotiation programs. That is to say , only people who were totally honest about their stated incomes. Why? Because if they lied and over stated their incomes and a loan officer detects this , they will risk going to jail. This is precisely why so many have not taken up the existing government plans to help out under water home loan debtors.

4. Consider the number of mortgage holders who recklessly withdrew the equity on their home and blew it on buying crap like international holidays, a new car, a boob job for the wife or perhaps worst of all , to buy another house. These people are so far down a hole that Buffets old saying

'when you're in a hole stop digging'

would simply make no difference.

 

02

Most people would be motivated to do the right thing because of

1. their credit record
2. It's neither fun nor safe being on the streets.
3. Property prices will stay up and they will preserve their equity if their house is not deserted.
4. The markets will turn around, they always have and always will

 

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1. record levels of forclosures says this isn't happening.
2. the property market is so desperate that rentals are going begging in many areas.
3. In real terms, I don't think those bubble prices will be seen again in my life time.
4. Markets will turn around, agreed. But consider the Nikkie was at 36000 in 1990(the height of the property bubble) and is currently under 8000 some 18 years later. Did you know that in 1990, the area of land a one hundred dollar note covered if laid on the ground in the Imperial Palace grounds would not have been enough to purchase it? In fact the land value of the Imperial palace alone was the equivalent of the entire state of California at that time.