1% interest rates
 

OK, I understand there's a 'credit crisis' going on, but I was absolutely astounded to see that interest rates in the US are down to 1% and predicted to go lower and may in fact go into the negative.

Can someone please tell me how that works, and why can't people pay these mortgages.

I thought you were all lucky with only 4% interest.

This is the rate that the central bank charges for overnight loans. That rate is not available to consumers, only to other financial institutions.

OK...so what's the average American paying on their home loan at the moment then?

Around 5.75 - 7%

No longer know what the interest rates are. But the problem is this. Triggers on ARMs adjust those interest rates closer to 10%.

Why is this problem? Before George Jr, the average American had an outstanding debt equivalent to 80% of his disposable income. Since the average American income has dropped 2%, then Americans have debts of 140% of disposable income to maintain his standard of living.

Obviously, this meant America should have entered a recession. Recessions fix irresponsible economic activity. Instead, government stimulus encourages new money games so that recession would not occur (rather than address the fundamental problem). People who could not and should not own homes were able to obtain ARMs mortgages - that were virtually non-existent a decade earlier. Even worse, these money games were given to the richer and richest. Suddenly a successful middle class homeowner who could only afford a 3,000 square foot house was now buying 4,000 square foot homes - at even higher prices. ARMs and mortgage backed securities (all with virtually no underwriting) made this possible.

Further making reality ignored were massive investments from China, Japan, UK, etc because the ROI in America was higher due to these money games and because so many American dollars are now overseas. Risk assessement? Virtually non-existent even in risk rating companies such as Moodies, S&P, etc.

Obviously, a lower Fed rate means the banks can offer lower mortgages. But then another consequence of deregulation this past decade creates more problems. Because of those low interest rates, prices of houses increased 40% above real value. How do you refinance a homeowner who owes more than the new house value? He cannot refinance because he is technically banckrupt. Due to credit card and car payments, he cannot acccure equity. Banks just don't know who is safe to offer a loan AND can no longer sell that loan to others who worshipped NINJA (ie mortgage backed securities).

In short, a money shortage is not the problem. Lower Fed rate is how we pump money into the economy. We are literally trying to unfreeze markets by flooding finance companies with even more cash even though many need to first fire bad management. Cold water on ice takes a long time to thaw that ice. Welcome to an America where the spread sheets have been lying for a long time.

The American economy has frozen for reasons created by easy money and economic stimulus where we routinely threw money at problems rather then let recession fix the problem - ie fire so much business school trained management such as Rick Waggoner of GM. Now that the economy is frozen, we will spend almost $2trillion of cold cash to eventually thaw the ice. Then borrow from all over the world or sell off America to cover those $2trillion debts while suffering the inevitable inflation or recession or both.

Only thing I cannot say - how severe economics will punish us and who will be punished for the sins encouraged by the few in highest positions of industry and government.

Interesting. That's a little bit lower than we have here at the moment, but it's expected our rates will drop again next week.

Sorry - my two cents of ranting.

I am currently 27. I bought my house when I was 24 on a impulse buy (I know, I'm a little odd). I was all alone buying the house, not even a boyfriend and I still pay the mortgage all by myself regardless of 'the boy' whose lived here for 1 year. Anyway...I was utterly dumbfounded on why all of these foreclosures were occurring. Hell, if I can do it...why can't others. Some days I don't understand HOW I can do it, but I manage and am okay. Then I realized what people (perhaps 'young people') were doing. They were trying to live out the American Dream in one giant step. People are no longer buying 'starter homes.' I actually saw one of my friends go through it pretty bad. They see what they qualify and MAX it out. Sometimes they get an additional mortgage/loan to fix up their house or make it livable. I drove past my house, thought it was cute (600 square feet) and 30 days later was living in it, no joke. I have no clue what I qualified for. I just saw a simple, starter home, good enough for just little me and bought it. People see they qualify for $200,000 homes and they go for it, because they can. I could be wrong, but that is my interpretation. Also, I think some hopeful/gambling homeowners got into signing onto a 'balloon' mortgage it does not have a set interest rate so as the economy struggles and there is a lack of control in the mortgage industry the interest rate goes up, resulting in more $$ and people can not pay it in the long run. I believe I am at 5.88% set. Just my thoughts.

Also - tw - I just gotta say....you are smart!

In the city I live in, a starter home price begins at about $400k.

I've noticed the difference in starting prices between US and Australia are huge. In fact, if we sold our house, we could buy several properties in the US and have no mortgage at all hardly. (Obviously I know that depends on where you buy, but even in rural areas in Oz prices seem to be much higher)

Okay, I should then clarify :) MY 'starter home' cost me $62,000 on a good deal. But, my income is lower because I'm in a rural area as well... so, for someone like me going from 62,000 to 200,000 is really drastic. 100,000 in my area is pretty normal/reasonable....in my area for a 'starter home.'

And, my friends - that's why I don't/can't move into a big-bad city, cost of living is so high I can't afford there what I have here all by myself....maybe then I would be one of the foreclosed many...

I was never smart. I simply spend much time learning the facts behind what so many others knew - but could not specifically cite. None of this is complex. It's all in the newspapers today or years previous when I was being so poltiically incorrect by posting these warnings. Just wondering how many so doubted when I discussed that falling brick labeled "Housing prices".

Despite rumors to the contrary, I read far more than I write. How long ago did we know we had a problem? (My first indication was in 2001 when the Norwegian foreign minister said George Jr would destroy the Oslo Accords.) From the Economist of 16 Jun 2005: 3 years and 2 months later ...

Our "starter home" 15 years ago was $50K. It was a two-bedroom, cute little brick craftsman-style house built in 1927 in a marginal neighborhood (which is now not a good place at all, unfortunately...we got out while the gettin' was good.)

We worked like crazy to make extra payments. We're on our 3rd house now, and each time we approximately doubled the purchase price. OTOH, we qualified for a LOT more than we actually borrowed, especially if we were willing to take one of those crazy speculative loans.

We always opted for the boring old conventional 30-year. The DH and I are not risk-takers, particularly. Take an ARM out on the off chance you might be earning more in 5, 10 years? Ha ha ha. Even if people do end up earning significantly more, chances are they are spending more too. Dumb.

Now, it really ticks me off to hear all the whining about "predatory lenders." Hey listen -- these were BANKS. Or mortgage brokers, who make money by selling a loan as a product. These are not noted for being nice, caring, altruistic people: Caveat Emptor.

Hey listen -- you buy a product, you make a mistake, it's YOUR fault. You should've done the research ahead of time and figured out what you were signing up for.

I could have bought a $500K house instead of my $200K house, but I thought it might have been nice to eat, too.

I can't afford to buy a property.
My salary is £19.5k
3.5x that is £68,250

There are some places in the UK where I could buy a starter property for this price, but they're not in areas that offer my salary for the work I do. Average flat price in Greenwich £240k.

It's quite relaxing knowing it's completely impossible.

Oh...yes. Well put!

So you are saying that these predatory lenders were bad, but because you were too smart to fall for their tactics, you think it's OK that they were bad to stupid people?

We still try to work it so we can survive on one income. We both have pretty secure jobs, but I am very conservative in some ways. I prefer to buy much less than I can afford. It worked out well when Badger took a leave of absence from work to go full-time for his Master's degree.

Now, if only we could sell our town home in Lawrenceville! It's beginning to feel like an albatross.

We were the same way when we bought our house. We bought a house we could afford on only my income, even though we were both working at the time.

When I read news stories of what some people in this area have as their mortgage payments, my jaw drops. It's like 3-4 times what I'm paying.

Very well said - I too bought my first home after working 2 & 3 jobs for years to save up for the down payment. I scrimped and saved and sacrificed. I HAD to be disciplined to achieve my goal. I was and I did. No entitlements!

The people who bought more than they could afford because they didn't do their "homework" or weren't/aren't willing to sacrifice get no sympathy from me. :headshake

If you took a risk & lost thats on you - YOU pay the piper.

Or, you'll be able to refinance at more favorable rates--maybe even another teaser ARM. The problem is, you can't do that refinancing if the value of your home has dropped to the extent that it's less than your mortgage balance. It's another example of an assumption that only worked in a world of perpetually increasing property values.

I've always said I couldn't see any point in taking an ARM when rates are near historic lows, meaning they have nowhere to go but up. So I'm with you to a large extent. But let's not let the banks off so quickly.

What makes the bank more money? a $100,000 mortgage or a $200,000 one? Duh. And if they're going to sell the note to somebody else before the ink is dry, they don't have a massive investment in making sure I can pay off the more expensive mortgage.

Appraisers and realtors are tied into this too--your house that you bought for $150,000 two years ago has to be appraised at $300,000 before you can take out that $150,000 home equity loan. Etc.

Of all the things that tied together to feed this crisis, IMHO, the root cause is not that certain loans shouldn't have been taken out by consumers, or made by banks. (Although arguably they shouldn't have in many cases.) A more fundamental problem was that the risk of default on these loans was not evaluated properly.

No, it's not OK. But that's a moral issue, not a legal one.

I don't think that is entirely true. They got bad loans for people that they knew the people could not qualify for. I do believe that 60 minutes did a whole expose on it, I will look for the link.

and that they knew they would bundle up and sell to another company or investor... They not only knew the loan was bad, but that they wouldn't be the one holding the bag when it happened.

I forgot to add this -- before we bought our first home, we lived for 5 years in a dinky single-wide trailer, purchased for $1500. Sold it for $5K, which was the 10% down payment on our house. Nice how that worked out.

But people hear that story and say "ewww....you lived in a trailer? In a trailer park? You must be trailer trash! I'd never live like that..." Those are some of the people who are having trouble these days, aren't they? Too many young people expect to have an equal standard of living to the one they had with their parents, right away.

I lived in a trailer when I was in HS in the 70's. People often forget where they started in life.

You are correct -- I will backpedal slightly and agree the lenders are to blame...to a point.

However it's also necessary to point out that during the Clinton administration (hello, Democrats?) lenders began to be forced into giving loans to people with risky credit under the affirmative-action lending policies, sometimes approving risky loans and denying the better ones, or else they'd face prosecution.

Can't blame it all on the lenders. Or the Republicans.

Ok, it's official. We now love you.

A trailer! You were lucky! We wished we could have a trailer. There were over 150 of us, living in a cardboard shoebox in t' middle of road.

I - OMFG - repressed memory here.... Lived with my in-laws for awhile to save money. Looking back - I think I might have rather gone bankrupt with an ARM instead. NOT! IT totally sucked living with them, but it was just a sacrifice I had to make in order to achieve my goal of owning a home.
Too many kids today don't believe they need to work or sacrifice for things - they believe they should just "have" stuff.

LOL Merc --- I suspect you're in the minority now. ;)

UT -- very funny, this is indeed starting to take on that "barefoot both ways to school, up hill in ten feet of snow and we were glad to do it" tone.

ROTFLMAO!!!! I watched that MP skit someone posted, funny as hell. :lol2:
"you were lucky to have a cardboard box! we had to live in a hole in the ground with nothing but a tarp on the top!"

He was lucky to have a cardboard shoebox. When I was a kid....

Lucky you glatt - at least you got to be a kid!

Well when we got upside down in our mortgage for the hole we had to move the hole to a lake.

A kid? Not like you think. I didn't get to play. We woke up each morning (half an hour before we went to bed,) in the middle of a pond, and started working.

Well, speaking for myself, I'm just glad Dazza earns decent money so I can be at home to look after the kids and do all the running around. We qualified for our mortgage based on his income only. Actually, our bank manager basically told me they weren't interested in my income at the time because they didn't need to know.

It is nice for us to know that if things did get desperate, I could get a job to suppliment our mortgage payments. It's hardly a drop in the ocean compared to D's income though, so things would have to be pretty tight for it to make a difference.

That is our situation as well.

Us too.

Then all you fat cats can hit the tip jar, yes? :haha:

Back on topic, I am worried about the super-low interest rate thing.

The idea is that people will have more money to spare for consumables, and thus stimulate the economy.
But with interest rates so low, surely people will take out more loans and dig themselves deeper into debt. Then, when interest rates creep back up, they will be unable to make their payments. Deja vu RFN.

No, those interest rates are to get the banks moving. The public will never see them.

No way, never. Not as long as Radar and Iby post. :D

what the hell is wrong with me? ive prettymuch been totally passive on the politics/current events sections lately anyway...

I'm not a fat cat. I'm a starving college student.

Well, I'm a college student. ;)

I'm a fat Pat...and I have a pussy, so maybe I could be a fat cat.

I love it.

Mrs Slocombe already used that joke.

Well I'm much younger and better looking than she was. :)

No frigging doubt about that. I love that show. :p

Yeah, it was a funny one. We still get it on cable over here. I liked Mr Peacock. :) Such a stuffed shirt.

You have 5 pussies. Question is, which one will be the same size in five months...?

Oh god sorry, that's awful.

Probably 4 of them will be the same size. I think mine will suffer an overnight expansion, but I'm hopeful things will go back to the way they were before too long. :)

It goes back, just not all the way.

Ah yes, but if I get any tearing, that can be fixed. ;)

Still, I'm just saying, regardless of the potential for tearing, you could ask them to add a few stiches. :D kidding, you can't do that.

That's true. :) I tore with the last two though and they weren't difficult deliveries, so I probably will with this one too.

What color is your hair?

I am doubting blue is one of her hues.

I have brunette hair at the moment. That could change on a whim though. :)