Why do ARMs have to reset to higher rates?

[sdduuuude]

Because people would learn that making the wrong decision is OK and thus they would learn nothing.

[davidt1]

I don’t think I even know how to ask a question correctly. I know banks are not in business to help people, and I don’t expect them to. What I am trying to ask is:

1. Currently when people can’t make payments because their ARM resets, banks foreclose and try to sell at market value but no body is buying. Meanwhile, inventories keep piling up. Eventually, banks will have to sell at substantially lower prices.

2. Or they could work out some kind of deal with troubled home owners so they (banks) don’t have to go through the trouble of foreclosing, losing the interest income and selling at a loss later.

What Would it be in the banks’ best interest to do, 1 or 2?

[davidt1]

I don’t think I even know how to ask a question correctly. I know banks are not in business to help people, and I don’t expect them to. What I am trying to ask is:

1. Currently when people can’t make payments because their ARM resets, banks foreclose and try to sell at market value but no body is buying. Meanwhile, inventories keep piling up. Eventually, banks will have to sell at substantially lower prices.

2. Or they could work out some kind of deal with troubled home owners so they (banks) don’t have to go through the trouble of foreclosing, losing the interest income and selling at a loss later.

What Would it be in the banks’ best interest to do, 1 or 2?

[davidt1]

I don’t think I even know how to ask a question correctly. I know banks are not in business to help people, and I don’t expect them to. What I am trying to ask is:

1. Currently when people can’t make payments because their ARM resets, banks foreclose and try to sell at market value but no body is buying. Meanwhile, inventories keep piling up. Eventually, banks will have to sell at substantially lower prices.

2. Or they could work out some kind of deal with troubled home owners so they (banks) don’t have to go through the trouble of foreclosing, losing the interest income and selling at a loss later.

What Would it be in the banks’ best interest to do, 1 or 2?

[sdduuuude]

So, lets say I’m a bank and I loan 200K to some guy and his payment is $1000 for a while, then it jumps to $1500 and he defaults.

I’m thinking I want the guy out so I can sell now and get as much as I can for it. If I wait and things get worse, the guy may default anyway at $1000/mo. Then, not only do I have to go through the foreclosure process anyway, but I have have to sell the house for less than I could if I had foreclosed earlier.

Basically, a default to a bank means – this guy is bad news and I want out of the deal.

If it is an interest-only or neg-am loan, the principal isn’t coming down at all anyway and I am 100% owner of a property that has declining value. Or, I am continuing to loan money to someone who has shown they can’t pay it back.

Plus, if I could have $180K back to invest at the prevailing rate, and the prevailng rate is much higher than the rate the guy signed up for, even though he is paying on $200K, I may be better off investing less capital at a higher rate than taking the smaller payment.

i.e. if I can invest any gains from the sale of the house at 8%, I don’t want the 4% teaser rate some guy paying me.

Also, when I said “they would learn nothing” – I meant the banks as well as the borrowers.

[sdduuuude]

So, lets say I’m a bank and I loan 200K to some guy and his payment is $1000 for a while, then it jumps to $1500 and he defaults.

I’m thinking I want the guy out so I can sell now and get as much as I can for it. If I wait and things get worse, the guy may default anyway at $1000/mo. Then, not only do I have to go through the foreclosure process anyway, but I have have to sell the house for less than I could if I had foreclosed earlier.

Basically, a default to a bank means – this guy is bad news and I want out of the deal.

If it is an interest-only or neg-am loan, the principal isn’t coming down at all anyway and I am 100% owner of a property that has declining value. Or, I am continuing to loan money to someone who has shown they can’t pay it back.

Plus, if I could have $180K back to invest at the prevailing rate, and the prevailng rate is much higher than the rate the guy signed up for, even though he is paying on $200K, I may be better off investing less capital at a higher rate than taking the smaller payment.

i.e. if I can invest any gains from the sale of the house at 8%, I don’t want the 4% teaser rate some guy paying me.

Also, when I said “they would learn nothing” – I meant the banks as well as the borrowers.

[sdduuuude]

So, lets say I’m a bank and I loan 200K to some guy and his payment is $1000 for a while, then it jumps to $1500 and he defaults.

I’m thinking I want the guy out so I can sell now and get as much as I can for it. If I wait and things get worse, the guy may default anyway at $1000/mo. Then, not only do I have to go through the foreclosure process anyway, but I have have to sell the house for less than I could if I had foreclosed earlier.

Basically, a default to a bank means – this guy is bad news and I want out of the deal.

If it is an interest-only or neg-am loan, the principal isn’t coming down at all anyway and I am 100% owner of a property that has declining value. Or, I am continuing to loan money to someone who has shown they can’t pay it back.

Plus, if I could have $180K back to invest at the prevailing rate, and the prevailng rate is much higher than the rate the guy signed up for, even though he is paying on $200K, I may be better off investing less capital at a higher rate than taking the smaller payment.

i.e. if I can invest any gains from the sale of the house at 8%, I don’t want the 4% teaser rate some guy paying me.

Also, when I said “they would learn nothing” – I meant the banks as well as the borrowers.

[ucodegen]

@davidt1
What Would it be in the banks’ best interest to do, 1 or 2?

Depends on many things. The problem is that houses will not maintain their value, and that the person can not make close to the real interest payment. This goes into the more complicated area of discounting a notes value due to a change in underlying interest rates. If the house is currently worth more than the discounted rate of payments, it is better for the bank to foreclose. If the bank sees the house value dropping further (very likely) and the odds of the mortgage not remaining good at the reduce interest rate are poor, foreclosure is a better option to the bank.

Remember, many of these loans were NINJAs..
NINJA = No Income, No Job or Assets.

[ucodegen]

@davidt1
What Would it be in the banks’ best interest to do, 1 or 2?

Depends on many things. The problem is that houses will not maintain their value, and that the person can not make close to the real interest payment. This goes into the more complicated area of discounting a notes value due to a change in underlying interest rates. If the house is currently worth more than the discounted rate of payments, it is better for the bank to foreclose. If the bank sees the house value dropping further (very likely) and the odds of the mortgage not remaining good at the reduce interest rate are poor, foreclosure is a better option to the bank.

Remember, many of these loans were NINJAs..
NINJA = No Income, No Job or Assets.

[ucodegen]

@davidt1
What Would it be in the banks’ best interest to do, 1 or 2?

Depends on many things. The problem is that houses will not maintain their value, and that the person can not make close to the real interest payment. This goes into the more complicated area of discounting a notes value due to a change in underlying interest rates. If the house is currently worth more than the discounted rate of payments, it is better for the bank to foreclose. If the bank sees the house value dropping further (very likely) and the odds of the mortgage not remaining good at the reduce interest rate are poor, foreclosure is a better option to the bank.

Remember, many of these loans were NINJAs..
NINJA = No Income, No Job or Assets.

[4plexowner]

So when the same person asks the same question a second time is it then OK to call them stupid?

[4plexowner]

So when the same person asks the same question a second time is it then OK to call them stupid?

[4plexowner]

So when the same person asks the same question a second time is it then OK to call them stupid?

[HereWeGo]

david-
That’s a really good question. Loss mitigation will undoubtedly take some interesting twists and turns as this downturn unwinds.

[HereWeGo]

david-
That’s a really good question. Loss mitigation will undoubtedly take some interesting twists and turns as this downturn unwinds.

[Author]

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