Why do ARMs have to reset to higher rates?

[HereWeGo]

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

[falcon_eyes]

I think davidt is a representation of majority US population who bought all these homes at the peak with the expectation that the bubble will continue forever.

While the smart dudes take advantage of this temporary bubble and cashing in quietly in the background.

[falcon_eyes]

I think davidt is a representation of majority US population who bought all these homes at the peak with the expectation that the bubble will continue forever.

While the smart dudes take advantage of this temporary bubble and cashing in quietly in the background.

[falcon_eyes]

I think davidt is a representation of majority US population who bought all these homes at the peak with the expectation that the bubble will continue forever.

While the smart dudes take advantage of this temporary bubble and cashing in quietly in the background.

[drunkle]

even if banks could chose to not reset arms, that wouldn’t do anything to save anyone. the bank would either be reneging on its obligations to the debt owners or it would be buying back the debt and financing it on it’s own. in the first case, the debt owners would scream bloody murder, sue the bank, drain its cash by dumping their holdings, destroy the bank’s credit, etc. in the second case, the bank would have to have the cash to buy back far more obligations than it has in reserve. in effect, it would only be able to buy back as much debt as they have in cash. meaning only a small fraction of mortgages could be suspended.

now, if your mommy and daddy were the bank, then sure. they could give you more time, they could float you some, they could even forgive you of the whole thing. everything would be peachy and no one would freak out about anything. the percentage of people who have mommy and daddy supporting them, however, is very small. very very small. miniscule.

maybe that’s why bush has no clue how to deal with the economy…

[drunkle]

even if banks could chose to not reset arms, that wouldn’t do anything to save anyone. the bank would either be reneging on its obligations to the debt owners or it would be buying back the debt and financing it on it’s own. in the first case, the debt owners would scream bloody murder, sue the bank, drain its cash by dumping their holdings, destroy the bank’s credit, etc. in the second case, the bank would have to have the cash to buy back far more obligations than it has in reserve. in effect, it would only be able to buy back as much debt as they have in cash. meaning only a small fraction of mortgages could be suspended.

now, if your mommy and daddy were the bank, then sure. they could give you more time, they could float you some, they could even forgive you of the whole thing. everything would be peachy and no one would freak out about anything. the percentage of people who have mommy and daddy supporting them, however, is very small. very very small. miniscule.

maybe that’s why bush has no clue how to deal with the economy…

[drunkle]

even if banks could chose to not reset arms, that wouldn’t do anything to save anyone. the bank would either be reneging on its obligations to the debt owners or it would be buying back the debt and financing it on it’s own. in the first case, the debt owners would scream bloody murder, sue the bank, drain its cash by dumping their holdings, destroy the bank’s credit, etc. in the second case, the bank would have to have the cash to buy back far more obligations than it has in reserve. in effect, it would only be able to buy back as much debt as they have in cash. meaning only a small fraction of mortgages could be suspended.

now, if your mommy and daddy were the bank, then sure. they could give you more time, they could float you some, they could even forgive you of the whole thing. everything would be peachy and no one would freak out about anything. the percentage of people who have mommy and daddy supporting them, however, is very small. very very small. miniscule.

maybe that’s why bush has no clue how to deal with the economy…

[edna_mode]

Ah, for scenario #2, you would have to assume the bank has the *authority* to renegotiate the loan! They may not own it anymore, despite still servicing (ie collecting payment) on the loan, because they repackaged it up like a bit of meat in a sausage and sold it as part of a mortgage-backed security (MBS). And picking out one tiny piece of meat to examine it more closely *after* it’s been made into a sausage is pretty difficult, no?

If you were the sausage-buyer, you’d be pretty pissed off if it turned out that due to the rising cost of meat, they substituted in sawdust, right? You paid for all-beef sausage, you want it to perform like an all-beef sausage.

Same thing for the MBS buyer. People bought it at a certain price on the expectation of a certain quality of product, ie that all the mortgages in it would say, be paid off in 30 years at 5.5%. You’d be pissed off if after paying a premium now for a future cash stream, people could just change the terms after your money’s gone, right? Just like biting into the sausage after the Del Mar Fair is over and finding what you can only hope is a green herb.

To complete the analogy, you are proposing trying to go back to the original butcher and complaining about the quality of his meat, which he had long ago sold off to the sausage maker. You may have a point, but the sausage maker was culpable for buying rotten meat. You can’t pin the responsibility for fixing the situation clearly on one party anymore. You’d have to get the butcher, the sausage maker and whoever sold this “all beef patty” to you all in the same room to discuss how to make it all better. Similarly, the responsibility for fixing the loan is diffused across too many parties for it to try to re-negotiate, and it’s not clear at this point who would have the authority to fix a contract that’s been handled by so many people.

[edna_mode]

Ah, for scenario #2, you would have to assume the bank has the *authority* to renegotiate the loan! They may not own it anymore, despite still servicing (ie collecting payment) on the loan, because they repackaged it up like a bit of meat in a sausage and sold it as part of a mortgage-backed security (MBS). And picking out one tiny piece of meat to examine it more closely *after* it’s been made into a sausage is pretty difficult, no?

If you were the sausage-buyer, you’d be pretty pissed off if it turned out that due to the rising cost of meat, they substituted in sawdust, right? You paid for all-beef sausage, you want it to perform like an all-beef sausage.

Same thing for the MBS buyer. People bought it at a certain price on the expectation of a certain quality of product, ie that all the mortgages in it would say, be paid off in 30 years at 5.5%. You’d be pissed off if after paying a premium now for a future cash stream, people could just change the terms after your money’s gone, right? Just like biting into the sausage after the Del Mar Fair is over and finding what you can only hope is a green herb.

To complete the analogy, you are proposing trying to go back to the original butcher and complaining about the quality of his meat, which he had long ago sold off to the sausage maker. You may have a point, but the sausage maker was culpable for buying rotten meat. You can’t pin the responsibility for fixing the situation clearly on one party anymore. You’d have to get the butcher, the sausage maker and whoever sold this “all beef patty” to you all in the same room to discuss how to make it all better. Similarly, the responsibility for fixing the loan is diffused across too many parties for it to try to re-negotiate, and it’s not clear at this point who would have the authority to fix a contract that’s been handled by so many people.

[edna_mode]

Ah, for scenario #2, you would have to assume the bank has the *authority* to renegotiate the loan! They may not own it anymore, despite still servicing (ie collecting payment) on the loan, because they repackaged it up like a bit of meat in a sausage and sold it as part of a mortgage-backed security (MBS). And picking out one tiny piece of meat to examine it more closely *after* it’s been made into a sausage is pretty difficult, no?

If you were the sausage-buyer, you’d be pretty pissed off if it turned out that due to the rising cost of meat, they substituted in sawdust, right? You paid for all-beef sausage, you want it to perform like an all-beef sausage.

Same thing for the MBS buyer. People bought it at a certain price on the expectation of a certain quality of product, ie that all the mortgages in it would say, be paid off in 30 years at 5.5%. You’d be pissed off if after paying a premium now for a future cash stream, people could just change the terms after your money’s gone, right? Just like biting into the sausage after the Del Mar Fair is over and finding what you can only hope is a green herb.

To complete the analogy, you are proposing trying to go back to the original butcher and complaining about the quality of his meat, which he had long ago sold off to the sausage maker. You may have a point, but the sausage maker was culpable for buying rotten meat. You can’t pin the responsibility for fixing the situation clearly on one party anymore. You’d have to get the butcher, the sausage maker and whoever sold this “all beef patty” to you all in the same room to discuss how to make it all better. Similarly, the responsibility for fixing the loan is diffused across too many parties for it to try to re-negotiate, and it’s not clear at this point who would have the authority to fix a contract that’s been handled by so many people.

[HereWeGo]

You’d be pissed off if after paying a premium now for a future cash stream, people could just change the terms after your money’s gone, right?

I’d be even more pissed off if the borrower just defaulted on the loan. I might be willing to negotiate if I could salvage a good portion of my premium that would otherwise be lost if the mortgager defaulted.

[HereWeGo]

You’d be pissed off if after paying a premium now for a future cash stream, people could just change the terms after your money’s gone, right?

I’d be even more pissed off if the borrower just defaulted on the loan. I might be willing to negotiate if I could salvage a good portion of my premium that would otherwise be lost if the mortgager defaulted.

[HereWeGo]

You’d be pissed off if after paying a premium now for a future cash stream, people could just change the terms after your money’s gone, right?

I’d be even more pissed off if the borrower just defaulted on the loan. I might be willing to negotiate if I could salvage a good portion of my premium that would otherwise be lost if the mortgager defaulted.

[PerryChase]

now, if your mommy and daddy were the bank, then sure. they could give you more time, they could float you some, they could even forgive you of the whole thing. everything would be peachy and no one would freak out about anything. the percentage of people who have mommy and daddy supporting them, however, is very small. very very small. miniscule. maybe that's why bush has no clue how to deal with the economy…

That's a good one Drunkle.

[PerryChase]

now, if your mommy and daddy were the bank, then sure. they could give you more time, they could float you some, they could even forgive you of the whole thing. everything would be peachy and no one would freak out about anything. the percentage of people who have mommy and daddy supporting them, however, is very small. very very small. miniscule. maybe that's why bush has no clue how to deal with the economy…

That's a good one Drunkle.

[Author]

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