VIDEO: Watch The CNBC Republican Debate By - November 12, 2011 SHARE Facebook Twitter tweet Just in case you haven’t seen it… Part 1 Part 2 Part 3 So besides Perry’s gaffe, what was the most memorable moment for you? RELATED ARTICLESMORE FROM AUTHOR Politics WhatsApp vs. Traditional SMS – Is WhatsApp Costly than SMS? Politics Grand Theft Government Politics Putin's Nobel AV Wow, what happened to equal time? I guess being on point just isn’t sexy. Long live Rick Santorum! Tully Some of us avoid these circuses on purpose, even if we’re not coulrophobic. 🙂 Angela Where are the real solutions? I’m no economist, and certainly am not an expert on the housing market, so I invite responses to my blog which is a comment on the answers given for the question about economic and housing recovery. First, housing loans were given to folks who did not have the ability to pay back the loan because the loan was too damn big for their incomes. Simply put. But their was a housing bubble, and homes were being overvalued, and sold, for much more than they were worth. A moderate home could cost twice the original value if not more. If one is going to spend over $100,000 on a home, it might as well be a decent home. Even older homes with less amenities were selling for way too much, so I think folks, with moderate incomes, tried to get the most “bang for their buck” so to speak. It was bound to happen. Having said that, I wonder if we’re defining the problem accurately. Perhaps it isn’t that the loan was given in the first place thats the problem, rather its the outdated system we have in place which defines criteria for foreclosure, loan rehabilitation, and loan structuring. America’s economy has changed, and continues to change. The days of working your way up at the same company you’ve worked at for 20 years is no longer a reality for most people. People can expect to change jobs, or lose their job, at least once in 5-7 years. Also, prices for automobiles, houses, and other big purchases, have nearly doubled in the last 12 years or so, yet banks continue to give loans with term limits that are short, and payments that are high, even though salaries and wages have not kept up with these price increases. What that means is a person making $30,000/year has to spend 30%-40% of his income on car payments just to get a decent car. During the housing boom, an individual, or more likely, a couple, would have to spend 40%-50% of their income for house payments. Life span has increased, yet a young couple in their 20’s would still get their loan for a 30 year max. The current model in place for the credit market, at least where accepting or collecting on a loan is concerned, is outdated in that it proceeds from assumptions about economic stability, individual fortitude (I’ll do anything I have to to pay back what I owe), and income stability and/or growth. For example, many of those housing foreclosure loans could have been rehabilitated if only the banks could think outside the box. You miss 3 payments, we’re foreclosing! Really? Why not lower the payments for a short term, or put the borrowers on a graduated plan or income contingent plan, until they can begin making regular payments again. How about borrowers who are a bit more risky being required to purchase insurance for their loan? How about offering insurance for those loans? Wouldn’t that create jobs? It should be no surpise that the average credit score is going down. But instead of experts questioning the model thats in place, they tend to comment on lack of ability to pay. Its rarely recognized that lack of ability to pay is BECAUSE OF the model and current credit system thats in place. I would have a lot more discretionary income if my car payments were about $300/month. Why not stretch the terms for those loans? Cars tend to go for 200,000 miles these days anyway. Heres another example on the outdated system currently used. I have a friend who owes money on a loan. She’s unemployed right now, but her unemployment has run out, so she has no income. She’s looking for a job but can’t seem to get in even for an interview. A collector calls her about her loan. She explains she’s unemployed and she has no income but would be willing to make very small payments. The collector told her it couldn’t be less than $350/month or they wouldn’t accept it. The phone call ended, nothing was worked out. She was left with the threat of more phone calls and continued reporting on her credit report. Do I make my point here? Other solutions exist, if only creditors could think outside of the box, the model, that they steer by. Also, if you are late for a payment to a credit card or for an auto loan, it goes on your credit report and affects your credit score. Because household income fluctuates year to year these days, it should be no surprise that such late payments occur more frequently. Yet, working off the old outdated model, there is no flexibility, and thus average credit scores continue to go down. Thanks. Angela cranky critter There used to be an even older model that was called outdated. It was the model where you didn’t get a loan if you were a bad risk. If you had insufficient income, couldn’t make a down payment, then no loan for you. Here’s a root cause Angela, which is that not enough people understand one simple thing: borrowing money is a way to pay MORE. So you avoid borrowing unless absolutely necessary. If you make 30,000 a year, you save your money and buy a modest used car. If your car payment is $350 and that’s a big part of your income, you probably bought too much car. You’re very right about real estate, that people with insufficient income got loans they shouldn’t have. And that even qualified purchasers talked themselves into bigger loans than they should have. But that latter group made a bad decision even if they think they had a good excuse for doing it. You might be correct that some people in bad spots would THINK that they were better off if they were given longer term loans. But that would be a short term illusion.Just as borrowing is way to pay more, borrowing over a longer term is way to pay EVEN more. Suppose you borrow $14,000 to buy a new Kia Soul. You finance that over 4 years at 4.5% interest. Costs you $320 a month, You pay $1,324 in interest during those 4 years. Now suppose you finance it over 6 years, same rate. You pay $220 per month, but it costs you $2000 in interest. The only reason credit companies dislike longer terms for say car loans is that they may get stuck with welshers if the Kia craps out before it’s paid for. Otherwise, they’d be delighted to finance over longer terms. It’s actually a really bad deal for “poor” people to finance over longer terms, because it gives them a temporary impression that they are wealthier than they are. It’s only down the road that you see that you cant get out from under, that you’re still paying for things that are gone, and you can’t afford to replace them. The big problem for banks in the current real estate market is that there aren’t very many folks in the very narrow band of loans that are salvageable. Banks don’t want to kick the can down the road by helping out a borrower unless they have a good reason to think those folks can bounce back and find the income to afford what they’ve bought, but not paid for yet. And here’s the thing. It really doesn’t do any underwater home “owner” any good to keep alive a bad loan they can’t afford and have no realistic expectation of being able to afford soon. They’re much better off negotiating a short sale or defaulting. Angela Banks, at least in my local area, have changed their criteria on minimum credit scores to get a loan. While in the past, the score had to be 7.2 or above, they have since lowered that to 6.4. Credit scores aren’t as sure an indicator of risk as they used to be because quite frankly, thats outdated as well. Also, to keep the minimum at 7.2 narrows the market too much. It just doesn’t generate the revenues needed. Average salaries have been going down here in the U.S. on the whole. During the housing bubble, it was difficult to find a home, even an older home in a median neighborhood, at a price that was doable for the buyers. I wonder if there needs to be a balance between the banks setting up loans so payments are within, say 35-40% of the borrowers income and no more, and putting stricter limits on the amount borrowed. Of course there would be limits on the amount a bank would loan out, but there needs to be more flexibility in crafting loans. There also should be limits placed on the borrower. Loans, and banks, are a significant factor in a local, and the larger economy. Since the majority of Americans make below $60,000/year, the answer is not to keep the old model in place, preventing a significant number of people from purchasing, which in turn would affect the economy. Neither is making too many risky loans. But in my view, those loans wouldn’t have been as risky, or defaulted, if the loan was crafted such that the borrowers could meet the payment. Its about being able to make the payment, not the end result of dollars spent on interest. For someone who makes a large salary, perhaps spending more on interest is a larger factor. But to most folks who live practically paycheck to paycheck, affordable means I can make the payments. Again, many of the foreclosed homes, bad loans, were considered such based on an old model. While its true theres no sense in trying to keep alive a bad loan, its the definition of bad loan that I question, the old model and criteria that I’m looking at. Thanks for your comments. cranky critter My most important point is that financing methods can’t solve a problem of insufficient income. Coming up with some sort of “new model” can’t change reality so that someone who earns $1000 per week can afford a home that costs $350,000. If your monthly payment in creeping past a 3rd of your total income, you’re into bad decision land. Since the majority of Americans make below $60,000/year, the answer is not to keep the old model in place, preventing a significant number of people from purchasing, which in turn would affect the economy Well, again the answer is that you don’t buy something if you can’t afford to pay for it. As your comments suggest, the price of homes MUST be determined in part by the ability of regular people to buy them. That means that if households around the median income level can’t afford to buy, then prices have to go down some more. Again, many of the foreclosed homes, bad loans, were considered such based on an old model. While its true theres no sense in trying to keep alive a bad loan, its the definition of bad loan that I question, the old model and criteria that I’m looking at. Perhaps if you explained what you meant by “old model” and “bad loan”, folks might understand. IMO, a bad loan is one where the borrower can’t afford the payments, has fallen behind, and owes more than the property is worth. I see no flaw whatsoever in that. Do you? Tully My most important point is that financing methods can’t solve a problem of insufficient income. Coming up with some sort of “new model” can’t change reality so that someone who earns $1000 per week can afford a home that costs $350,000 Yep. You can diddle the parameters all you like, but in the end a mortgage is still constrained by the amount borrowed, the prevailing interest rate, the loan duration, and the value of the underlying collateral. A lot of the people who got in WAY over their heads used “new models” such as JUMBOs and interest-only balloon payment mortgages. They (and often the lender as well) assumed that the value of the underlying collateral would cotninue to increase fast enough to keep the loan above water. They were wrong. These loans had payments small enough for the borrower to manage because they didn’t actually amortize the principal. Even then, they were often a stretch to justify unless you believed that the collateral would continually increase in value along the trend line. All that extra money coming into the market kept pushing up home prices, of course, supporting the trend line, until it didn’t, and then the loans went underwater as the value of the collateral crashed. Much the same thing happened in the Great Depression when most mortgages were actually more like 3-5 year interest-only operating loans, with the home/farm as collateral. When the economy crashed and active deflation hit, those caught short were screwed. Difference is that now a huge percentage of those loans were insured by us the taxpayers through FHA, or guaranteed by us the taxpayers through Fannie & Freddie. The government created the subprime market, and created the conditions for the bubble, and then facilitated it. But we’re supposed to believe they can fix it. Angela What I mean by outdated is the entire way of doing things in the lending market does not work anymore. But because banks have been practicing the same way for so many years, the “model” isn’t questioned. I searched for statistics on the defaulted loans but could not find any. A bank can begin foreclosure after a mortgagee misses 3 payments, regardless of what loan/value is.