Why so many sub-prime loans went bad

"Tad Borek" wrote

Here's a contra contra view: The media has reported amply on how way too many middle and lower income Americans are in staggering debt. Frequently it seems to be due to getting swept up into the madness of the housing bubble, going hand-in-hand with creative, suspect financing schemes that now have Congress's attention as well. Ultimately of course the debt is due to ignorance: Of numbers and financial planning.

IMO this group should try to speak mostly to the masses. Large down payments and fixed rate mortgages lasting no more than 30 years would have prevented many of the disasters about which we are reading today (including now insolvent lending companies) and which has seized much of the nation's attention. Rightfully so, because who is going to pay for the welfare of these families out on the streets? Heck, strike "welfare" and just consider the Medicaid costs the children will incur because they were not given preventive health care as their parents plunged into poverty. And when companies all hire people based on anticipated health insurance costs, what happens to the labor pool? More unemployment occurs, more welfare, my company dividends decline, and we spiral into chaos as a society.

On financial planning, speak to the masses first. Qualify for extreme cases subsequently.

Ah, but in option (c) you are retired in the last 15 years of paying the mortgage. Where did you get the income to make the payment? Was it from that "nest egg", in which case it isn't as much of a nest egg at the end of the mortgage period because you've had to drawn down in order to make the payment. I don't think you can make that comparison.

Elizabeth Richardson

It makes sense in all cases, as the term of the refinanced mortgage was shorter than it would have been without the refi, in addition to saving a huge chunk of interest. The remaining term of the 30 year mortgage was 23 years, which I turned into a 15 year term with lower payments - a reduction in the term of the mortgage by 8 years. I could spend that savings on anything I wanted and still be better off.

Elizabeth Richardson

If that is the case, then I did my numbers wrong... OK so I redid the numbers and see that you are right. Assuming nothing goes wrong with one's income, both B and C are the same.

However, if something happened to one's income, say 8 years down the road then the person who takes option B and can no longer make even a $1381 payment is in deep trouble, while the person who did option C can draw on the $101K he has invested which can make the house payment for years.

So AFAICT, the risk in option C is that the return on investment isn't guaranteed, while the risk in option B is that the investment isn't as liquid so can't handle emergencies as easily.

Yes.

Yes.

We were assuming that the return was guaranteed, though I don't know where you can get guaranteed 6% these days. In practice, the return isn't guaranteed, but the expectation is larger than 6%, which makes the decision more interesting.

Some folks in this newsgroup have been arguing that C is an inferior option because it opens the possibility of spending the money frivolously. I concede that point, but think it should be part of analyzing the psychology, not the investment.

These are the same people that will be whining about how unfair it is that they still have 20 years on a mortgage while you don't.

1). They will also be the first ones to tell you that John will be a major league pitcher someday and that is a good thing. 2). They will explain that the cars in the street (against HO bylaws) is a good thing, since John will be a major leaguer someday. 3). They will try to convince you that the weeds in the lawn are really grass. After all, my lawn looked really good 3 years ago when I moved in and your lawn looks great. I must have bad dirt. 4). They will try to tell you that the broken windows are not there fault as kids will be kids and after all, John will be a major leaguer someday.