In Defense of Capitalism & Free Markets

[Rick]

Yes the person should have said that. It does not take a rocket scientist to know that lenders don't know what rates will do in a few years. One of the reasons to take an ARM is specifically because one thinks rates are going to go up. But if a person is stupid they should still have protection against fraud.

For all the complaints against ARMs they are still a good tool for many people and those same people who might complain that their rate went up would still have an average rate that is lower than the average rate that the person with the fixed year loan got.

As a simplistic example, if an ARM has a 3% rate for 7 years and then adjust to 7% that is still better than the person who had the 7% for the full time. If the person was not lied to and they hoped that their salary was going to be high enough in 7 years to afford the higher payments was wrong - well, they still had seven years of a lower rate.

Yep, but if they get stuck because of changing interest rates, they shouldn't start bleating that they got screwed by "capitalism" - rather, they rolled the dice and lost.

 

[clarkatticus]

I live in one of the top 5 worst zip codes in America. I lost 60% of my home value which means that I am about even but not upside down. I also live in a good neighborhood and I like my neighbors, so I can wait. A lot of what happened in my area was speculators trying to invest in several homes in order to resell them at a higher price (flipping), most left the keys in the mailbox. A great deal was made of illegals buying homes but it turned out they were some of the best risks and most did not default. The vast majority of defaults in SoCal was because the housing industry was a major employer, when work dried up most were not busy enough to pay their upcoming rate hike so they just chapter 7'ed and rented or moved. The resulting meltdown of periphial jobs (resturants, auto sales, retail) going along with wage freezes and cuts and we have our present situation. The good news? CA is still the most desirable area in the world to live, the market has only one way to go-up, though it will never reach the heights it did before.

 

[Dr.Who]

The number of defaults during the burst increased a "whole lot" to about one percent. It would be silly to blame the burst on an increase in defaults that went from less than one half to about one percent.

In all humility I am again recanting what I said.

I was just reading an article by one of the commissioners on the panel that investigated the collapse. I stand by my facts; that only a small percent of mortgages when into default. And technically it is true that the percent of foreclosed homes increasing from less than one percent to about one percent did not cause the crisis. But about 50% of the homes in this country had subprime loans. FEAR of them defaulting would be reasonable and would clearly drive a crisis. It is not silly to blame the burst on the default of subprimes (in a roundabout way of course).