Re:Bankruptcy, not bailout, is the right answer
by nostrademons on Tuesday September 30, 2008 @05:10PM
(#320055)
I'd like to read more about the majority of defaults being middle-class, gentrified buyers. Are there public sources available? It's very much at odds with the "common wisdom" portrayed by the media.
As for how it could happen - my cubemate bought a house in the South End of Boston in 2006, right next to downtown. He's a well-established professional, solid skills, solid resume, and I believe makes over 6 figures. But he bought the house with a $500k interest only mortgage. His banker told him that nearly everything they wrote these days is interest-only, and he should buy the biggest home he could afford. So if housing prices fall, he has every incentive to walk away. It hasn't happened yet (he got promoted to CTO, and prices are still rising in the South End), but I could imagine there're many people who took out similar terms but don't have the same wherewithal to pay them.
Re:Bankruptcy, not bailout, is the right answer
by Retric on Tuesday September 30, 2008 @04:20PM
(#319990)
Hypothetically, as a 28 year old in 2005 I would have little problem getting an interest only loan on a 400k home. If the market drops 100k within a year or two I might as well default and rent for a while or move in with a girlfriend and who could then buy back in at the bottom.
Note: I am not alone and I am not stupid.
Re:Bankruptcy, not bailout, is the right answer
by joshwa on Tuesday September 30, 2008 @03:43PM
(#319947)
Well, all those 'gentrifiers' took out interest-only or teaser loans, with the expectation that real-estate prices would only ever rise. When the time came for the re-fi, the market had tanked, so they now had negative equity in their assets, and couldn't refi based on the value of the asset. Hence, default. Many of the so-called 'gentrifiers,' in the true American Spirit, were 'strivers' without the cash reserves to take the loss and keep their homes.
Re:Bankruptcy, not bailout, is the right answer
by jonny_noog on Tuesday September 30, 2008 @09:35PM
(#320258)
Could there also possibly be some knock on effect from the rising cost of fuel prices, leading on to rising costs of food, home heating/cooling and other essentials for these "gentrifiers"?
The bottom end is a secondary problem, people defaulting on mortgages. Which the system would be able to tolerate in a market place where mortgages are properly secured. That is, a marketplace where people on the top end do their jobs right. This problem is caused only in part by CRA, AND in a manner different than Ron Paul argues. CRA encouraged a large number of middle class people to move back into the city cores around the country. Poor people moved out, hip, young, creative class moved in. All funded by CRA allowances. Gentrification and all that. Basically, Fannie and Freddie were moving 'good' people in, while Ginnie moved 'bad' people out. Problem was, according to the auditors, these "gentrifiers" are defaulting in droves. To the point where Fannie and Freddie collapsed. And, to add insult to injury, Ginnie is fine. The problems it does have it acquired in government attempts to rescue Fannie and Freddie.
I, frankly, find this state of affairs difficult to believe. If we were redeveloping the city cores, and then letting the same people who lived there before buy the redeveloped housing, then I could see a high level of defaults. But the people in those neighborhoods now are actually pretty solid. That is one of the most perplexing facets of this entire mess to me. I understand the bad risk assessment at the top end, I think ANYONE generally assigns a higher risk to people in poverty, and a lower one to people in higher socio-economic classes. I would have gotten that risk assessment wrong as well if I was judging that market. So how can so many solid home buyers be hitting the skids at the same time? I would like to think there is something more going on here. I am simply unable to find it.