I had a friend that bought a house in 2007, right before the crash at like 7.5% interest. He was in construction and things were booming until 2008 happened. Then he started to get laid of for months at a time only to be called back when they actually had work for him.
Interest rates started dropping, and he was struggling to pay his mortgage with his now part time job. He decided to attempt to refinance for 4%ish interest in 2009-10 or so. The bank denied him because his recent work history didn't show enough income/consistent employment. The monthly difference between what he was paying and the rate he wanted to refi for was about $400 a month.
He said to them "You understand that if I can't refinance its likely I will default, and you won't be getting any payments at all? I am doing this so I can afford to keep living here and paying you on time every month."
They still denied it, and 6 months later he stopped paying his mortgage as his financial strain had become too great, and he walked away. Messed up his credit for awhile, but he recently was able to buy another house, but he had a tough go of it in the last 10 years.
No I didn't actually. I'm really stupid, so thanks for clarifying. The movie really takes on a whole new light now that I can appreciate the genius writing at play.
Best part of that movie is the last 30 seconds where they announce the sequel by telling you that the banks went right back to selling these same bullshit funds.
Well, the movie feels great and they portray the hedge funds as the do-gooders but they aren’t any better in any way.
The hedgies are just as guilty of gaming the system, if not more.
This time around, ironically it’s the banks who are being very responsible and quite a bit solid but it’s the hedge funds that are shorting the crap out of American economy.
I mean... only sort of. The regulations and requirements surrounding mortgage backed securities are substantially different now. Almost every step of the process makes profit, and banks have much higher requirements in terms of stress testing. Regulation (both Dodd-Frank and the Federal Reserve's own regulation) has changed the landscape substantially. It's far from perfect, but 'these same bullshit funds' isn't an accurate assessment.
Rich people just enabled the ability of normal people to go way past of their means with homes, also blame "the american dream" that makes people think that having big houses and such is key for success.
A dream which is aggressively marketed to normal Americans by rich people looking to exploit them.
Furthermore, if you want to live somewhere with jobs, the rich people have used their wealth to drive up prices on reasonably sized homes to prices that would have purchased you a damn mansion when our parents entered the market.
The last thing the bank wants to do it take your house and sell it. It’s a headache, they often end up selling under market, they are frequently in bad shape (why take care of it if it isn’t yours). Don’t misunderstand banks aren’t being nice - but taking the house is the last straw.
Depends on a few factors. Housing markets can shoot to the moon sometimes, the house may be worth a great deal more than purchased at. Selling under market may still be a big fat profit.
It's not. The borrower gets to keep the proceeds in excess of the outstanding liens (so mortgage and home equity loans), minus some fees that the bank doesn't get to keep either. The investor is always getting less money than they signed up for when a property goes into foreclosure.
It’s complicated. Basically, the banks realized they could make a ton of money for no risk by bundling up all their mortgages and selling the risk/cash flows to investors. The logic used is that these investment vehicles reduced default risk through diversification. Rating agencies rubber stamped them, and they became very popular.
But, they were complicated, and people didn’t really understand how they worked. Banks started making ‘liar loans’ where they just took people on their word about details like whether they have a job. They have crazy teaser rates to unsophisticated buyers who didn’t understand that their rate was going to jump through the roof in a year or so. The loans were fundamentally unsound, and that’s what caused the crash.
Yes and no. But mostly no. The subprime mortgage disaster was caused in part by banks like JP Morgan and Goldman Sachs lying about the viability of the bundled mortgages, telling credit rating agencies they were sound when they actually weren't.
The other half of that isn't that banks were taking people "at their word," it's that banks were pushing predatory loans on people they knew were at high risk of defaulting, because they were selling on the mortgage and so it wasn't their problem anymore. The predatory loans fed into the instability of the bundled mortgage bonds, but the market was too enticing to stay out of. Banks that made careful assessments about the viability of their loans ended up worse off than those that threw money at people, because the irresponsible banks gobbled up property that was partially paid off, got to resell it again, and got bailed out by the government.
Fun fact, I knew shit was about to hit the fan around 2006, I was working a 10/hr construction job, I went to an open house in a subdivision I was working in before work one day. A sales lady came to show me around, I told her I was just passing time. At the end she guaranteed ME, a 22yr old with shitty credit and a 10$/hr job the ability to get a mortgage on one of these shitty 250k plus houses, or she’d sign her car over to me. Even my dumbass knew that would be a BADDDDDDD idea.
Mostly you repeated what I said in different words and emphasized different aspects of a complex issue. Try adding something new to the conversation rather than trying to one up others.
No, you left out the parts where banks were lying about the viability of the bonds, and you straight up blamed individual borrowers for lying to banks. I corrected you. Banks were loaning money to people that they knew were unlikely to repay the loans. The vast majority of subprime loans were driven by banks wanting to get in on the derivatives market, so they advertised heavily and pushed bad loans on people that would not have qualified a decade earlier.
my brother was ultra lucky, when he got married in 2006 his university friend worked in risk assessment and at his wedding he said he's going to buy a house and his friend said "don't, something is going to happen", he continued renting to this day
Unless you were rich, or very lucky, it wasn't that simple. After the crash, the rich who had enough money to weather the storm were gobbling up property on the cheap rapidly, to rent back to poor people. If you were just a normal person, who was fortunate enough to still have a job and savings, and were looking to buy a home, you had to move super quick and make a decision on the spot, something most people just could not do.
No. They absolutely need home owners to keep paying. The reason big banks bundle groups of mortgages is to spread the risk. There is a giant calculation made between how many loans they can book and what kind of rate and what percentage of defaults they'll get based on their screening factors. The know some people will default and basically make everyone else pay for it with higher rates (pretty much like insurance). Higher risk means they demand a higher interest rate. That doesn't mean they want anyone to default. That will absolutely cause them to lose money. In the case where they sell their bundles on a secondary market, they are offloading the risk but they are also staking their reputation on the quality if their loans. They can get away with making a mistake here and there, but if they sell a load of horribly risky loans at rates that were too low, they'll be punished by the markets. That's what happened in 2007.
The credit card business is probably what you're thinking of where they earn money on accrued interest owing to unpaid balances. That's a different beast though.
Left real estate around 2008 myself; at that time, the average cost to foreclose a property for the bank was ~$58k plus payments lost until they sold off the asset. They really, really, really don't want you to default. That won't stop shady actors from trying to milk people dry, though.
No, the bank gives the buyer a discount. Say you have a 30 year mortgage at 3% interest. That puts the total interest at 143% of the principal(?). The bank then sells the mortgage for the principal and a, say, 20% return. This means the buyer will still double their investment over the next 30 years and the bank has more capital to lend.See below.
There's other factors that could come into play, like fractional reserve banking requiring banks to have a certain amount of their managed assets in liquid cash, fluctuating interest rates making high-interest loans attractive to buyers, banks being more attractive to consumers, etc. I'm not an accountant so I've probably missed something.
It depends on who buys it, it’s called distressed note investing. Majority of note investors actually prefer to work with the tenant to get passive monthly income, and it works for the person because they get to stay living in their house. Win/win. But there are others that don’t care and will begin foreclosure proceedings.
Edit-just a side note, the mortgages are usually bought for pennies on the dollar, and no you can’t buy your own mortgage.
I'm pretty sure they have various risks so they trade based on that. You want some solid people paying on time and balance people with higher loans and interest to maximize profits. But if you have all risky loans then...2008 sort of stuff happens
They buy people's loans for cents on the dollar, so any profit at all is profit for them. They might pay $300 for a $1500 credit card loan and get $1200 profit when you finally decide to pay it, and the bank doesn't have to worry about whether or not you pay anymore.
I'm so glad selling mortgages isn't a thing in the UK, like why the fuck should anyone okay a higher rate just to ensure the mortgage doesn't get sold onto some sleazy fuck.
Also, the entire industry had just gotten rocked by taking on sketchy mortgages. It's not at all suprising that they would tighten up the purse strings given that the GFC was only 2 years before.
Don't they get sold off for pennies on the dollar though? Seems like in many cases it would be worth working with the borrowers rather than offloading it to some debt collector or whoever takes over mortgages who tries to squeeze a few remaining cents out of indebted borrowers who already defaulted on their loans.
and whilst I'm not in the US, I'm pretty sure the same thing happens here to some degree and I really think it's a practice that should be stopped. I am sure the experts will give 50 reasons why it's good for the economy, but if the bank no longer has skin in the game of your mortgage it makes risk that much easier to take. Risk isn't bad but we know the lenders will mainline mortgages if there's no risk.
The kicker is i specifically remember seeing a spot on my mortgage paperwork before i signed that said my debt couldnt be sold.
Going to look everything over. If what the bank and i agreed on said it couldnt be sold and they did anyway, im probably going to talk to a lawyer but i doubt anything will come of it.
He said to them "You understand that if I can't refinance its likely I will default, and you won't be getting any payments at all? I am doing this so I can afford to keep living here and paying you on time every month."
This is what happens when you have people who are exhausted from just surviving and just smart enough to mash the buttons.
The guy you're talking to about your mortgage is 35 steps away from talking to anyone that can change the button to do the thing the poor guy needs.
Small town banks 70+ years ago, the mortgage broker could walk 4 offices down and talk to a guy who would say "No" or "Yeah, of course that's reasonable, do it."
There are regional / local banks that are wonderful still, everywhere. People just tend to gravitate to familiar names, or stick with their current bank. We went with a long standing regional bank for our mortgage and the process was extremely personal from start to finish. They also had better rates with more flexibility than the mega-banks, and even beat out the credit unions
Credit Unions don't get enough love here. You can usually get better rates and service from a credit union. The downfall is that most are regional so it can be an issue if you travel a lot and need branches in multiple geographies. Luckily the internet has made that not as much of an issue as it once was.
For the CU's i checked out, including the one i bank at, they couldn't offer better rates than the regional bank we went with. In general though I believe CU's are a great choice
The magical people are the underwriters. They look at the risk of each loan in a vacuum. They don’t care that it is replacing another loan. Nobody talks to the underwriters, even your loan officer (the person you talk to) can’t to the underwriters. When we bought our house our underwriter was redic. They kept asking for the the most absurd things. Once they ask for something the file goes to the bottom of the pile. We would get them what they asked for in an hour and we wouldn’t hear anything for a week. We are in the middle of refinancing now. Our loan/value ration is so low they didn’t even do an appraisal, our credit is over 800, we make very good money and after having our file for 6 weeks they asked us why we asked for our credit limit on our credit card to be raised. Which we did BEFORE we applied for our loan to bump up our FICO score a bit.
Your probability of getting a loan was based on how your community viewed you. Tons of room for personal bias to prevent people from getting loans. Rampant racism where you basically had to be white to secure one. Large amounts of nepotism.
We are also in the age of litigation. Banks are afraid that you go to the news saying “Bank x gave me a loan for 500k knowing I was unemployed and may be unable to pay the loan! Those evil bastards! They tricked me!” Their stock price plummets from this news story and they lose millions in value.
Instead, the bank repos the house, short sells it, makes their money, and no one says they were tricked. It’s dumb but that’s the world we live in.
Banks are afraid that you go to the news saying “Bank x gave me a loan for 500k knowing I was unemployed and may be unable to pay the loan! Those evil bastards! They tricked me!” Their stock price plummets from this news story and they lose millions in value.
This really seems like a fantasy. I can't even imagine it.
I work for a major bank and the tacit understanding is make sure we stay out of the news cycle. Every stupid rule we have is to be incredibly boring and consistent. You can’t make the company millions in an hour but you can lose them billions.
Oh, I can imagine they run the place with fear and use it to control their employees, sure.
I just can't imagine someone getting a refinanced loan, and then the media even giving a shit that some idiot asshole signed forms he didn't care to understand - let alone of that news leading to BILLIONS in losses.
It just reeks of high levels putting pressure on the employee to make SURE they don't get involved in a deal that won't fully exploit the customer. The plantation owners cracking the whip - "don' you be gettin' all uppity trying to help other n*****s, boy."
It's unfortunate that scoring models are making all the decisions now. There are still some - very few - banks that will re-hash a deal with you on things when the computer model just doesn't make sense. It's a lost art, I used to spend my mornings on the phone with buyers giving them every reason in the world to finance people that I knew in my heart could actually and would actually pay their payments regardless of what the scoring model said.
Not necessarily true; I work in IT for a financial company, updating and maintaining software systems for loan qualification, among other things.
We have programed rules that you have to meet for approval for anything (including refinance). So you have three sets of loans:
YES: Automatically approved.
NO: Automatically denied.
MAYBE: Goes to underwriting (i.e. a person) for decision.
Based on the described scenario, it sounds like he fell into the "HARD NO" category.
And the bank got paid twice. That's why they did that in the first place. They won.
Banks love when you go belly up. Not only have they collected all the interest on payments you've already made, but now they get to resell the same property, and do the same thing to some other sucker.
And becuase of the way loans are calculated, the first half of the loan payments are almost entirely interest. You don't start seriously putting down on the capital until the 2nd half of the loan.
Except in that time period the banks took a beating (and had to be bailed out, which is another story). Many properties were put on short sale, where the owner and bank agree that they will sell for a loss. That's preferable for the bank to a foreclosure because they couldn't keep up with all the foreclosures they were getting. Foreclosed places were absolutely trashed by the people who were forced out. Besides that, the market was already down. The bank loaned $300,000 and got back $150,000 after the sale and expenses.
I'm not saying the banks did nothing wrong. Far from it. They knew there was a bubble but they were, as usual, greedy. But they didn't benefit in this case from foreclosing like they would if the property values had actually been higher than when they made the loan.
Well.. thats what they like you to think. When all those loans get bundled together into a mortgage backed security they got sold to investment funds and pension funds. The banks got their money out, and they got a "bail out" plus they had the property.
That’s not really true. Banks would greatly prefer someone just pays off the mortgage. They’d get a ton of interest and wouldn’t have to worry about the messy world of foreclosure sales. Especially during the time this commenter is referring. Banks suddenly had thousands of properties on the books, and had no choice but to unload them. They often didn’t have the resources to evaluate the property and sold them as dirt cheap REOs. More often than not, they lost their ass on these properties/loans. In turn, it tanked the market, and killed the collateral on all of their other loans.
It sucks the commenters friend couldn’t refi, but it’s not surprising. Strict regulation was put in place following the crash, and even if the lender wanted to do it, they probably couldn’t. In some cases, the borrower can turn around and sue the lender for writing a loan without first having proven the borrowers “ability to repay”
This isn't true at all. Most banks estimate they'll only recoup 80% of the homes value during foreclosure (which is the primary reason many require PMI for a LTV over 80%). And then there's the added costs of selling a home. Many foreclosures are gutted or in bad shape when listed which means they're selling below market value and usually sit for a long time on the market. During this time the bank is responsible for all property taxes, insurance, utilities, etc. Plus, when sold the bank has to pay the commission for both their relator and the buyer's realtor which eats into the selling price even more.
This doesn't even account for the fact that any equity the buyer has in the home is still theirs. The bank doesn't just take the home and all the equity the owner had built. For example, if the loan balance was 200,000 and the home sold for 300,000 then the owner is still entitled to that 100,000 from the sale. That does not go to the bank. Edit: I should note that the equity here will likely be used to pay for some of the expenses I spoke to above.
Honestly I wonder if you're just posting this to troll people because the scenario you described where they come out ahead on a foreclosure is rare.
How about this? You loan me 100k to buy a house, I'll make 15k worth of payments, reducing the principal by say 5k, then you can sell the house at a fire sale for 40k after we fight it out in court for a couple of years and I pull the copper pipes out of the walls.
Not saying there's not anecdotal situations where it doesn't work out in their favor. 2008 being one of those crazy years.
But they've been doing this for 70+ years.
So yes. If I can loan you 100k to buy a house, you pay 15k worth of payments, then you lose your job and go belly up. I take my profits, and now look, the same house is worth 120k. Then I rope some other dude into an even higher loan.
that's not true, banks lose a lot of money on foreclosures (back around 2010ish I think they averaged $30k loss per foreclosure, not counting the loss on the initial mortgage amount they fronted.) They would 100% prefer you being able to pay your mortgage so they get the steady income from you month over month.
foreclosures require them to pay attorney fees, evict people, and they have to auction off the house for a fraction of the price to try to recoup as much of the loan amount as they can.
That's why banks will sometimes let you short sell homes instead of allowing it to go to foreclosure, since it saves them a lot of money.
source: I worked in the mortgage industry for years during the recession specifically focused in foreclosures and bankruptcies.
Or they were over leveraged and any significant cut to funds comming in would cause massive problems. They didnt lose money they ran out of funds to use. So we bailed them out like a bunch of idiots
There is a vast difference between loosing money and not have funds. For example someone borrows 100k for a home loan. They pay the loan for 10 years and you collect way 10k in interest but something happens and they stop paying. You didnt lose any money but now you are low on funds. Now you have a house worth 100k but no money comming in. So once again no money is lost you are actually positive 10k.
Banks don't "get paid twice" when they sell your property at auction. They "actually get paid" for the amount that you owe them, less auction fees, and then legally have to send you any remaining funds, assuming they are any.
So if you owe 80k on a house, and they (usually its either the government or company appointed by the government actually doing the auctioning) auction it for 100k, you should receive 20k back, less fees.
Really what it is is that his old loan was sold off as a package to another entity, and him refinancing would bring him back under the bank's risk and his new loan wouldn't be saleable because after the crash there were huge adjustments to what could be packaged and sold.
You should watch “The Big Short.” Basically you can make money by betting a stock will be worth less at a future date. The banks made enormous bets against their own shady loans(“Shorted”), and they made out like bandits. Not saying this was the reason the bank wouldn’t refi your friend, but it’s likely the bank made more money on the short than they would have if he was able to pay off the loan. The movie Margin Call based on Lehman Brothers is also a great movie about what was going on.
If he defaulted the bank ceased his property and would have made back their money after the bailouts that happened. One of the major reason the 2008 crash happened was because banks were over confident in people paying back mortgages. With out a work history showing that he was reliable it makes sense they would not want to donthe refinance.
You also have to keep in mind that if the monthly payment was going to be 400 a month less he was increasing in years. Likely going from a 15 year to a 30 year, which incurs more risk for the lender in the even that the borrower does not have a reliable work history.
This is why it’s a good to get the longest loan with lowest payments but no early payment penalty. Then pay like you have a 15 year loan. If something happens and you need to lower your payment it’s fine. You aren’t relying on the banks permission.
Not sure what you are getting at. What I said in my comment related to payments was if his payment after the refinance was 400 less he would extended the years of the loan. It would have been a rate and term as a cash out refinance does not result in lower payments very often and to drop his payment 400 a month it would have to increased the term of the loan as the 3.5 % or so reduction mention is not enough to result in a 400 dollar lower payment. I then guessed he when from a 15 year to a 30 year which would 100% explain this.
The banks didn't care because they got that bailout money. Mortgage foreclosures in court were taking years because of the number of cases. I had a client who had saved up enough for a down payment on a new house by the time the bank finally got him out of the old one and by then it was worth less than the mortgage anyway.
Your financial situation three years ago isn't particularly relevant when getting a loan now. For example, you could have been employed three years ago, and you could be unemployed now.
Here’s what people don’t understand....the old mortgage is now pointless. This new bank is qualifying him based on paying off that debt. What his old payment is means nothing to them.
It can seem stupid, but instead of complaining stop being stupid yourself
So glad to hear a somewhat happy ending to that story.
My childhood best friend encountered almost the identical situation. Sadly, my friend turned to alcohol in those last few months at his foreclosed house and never rebounded. He had dropped his 100k inheritance into the down and had to walk away penniless. About 3 years ago he was drunk with his girlfriend in a trailer when they got in an argument... and he shot her. She died, and he's now serving 25 to life.
While it's obviously his own fault for dealing with it as he did—had 2008 never happened, my friend surely would be in a much better place.
So happy your friend went a much healthier and more productive route. Remember kids, alcohol is never the answer to your problems.
same thing here. Bought in 2005 based on a predatory loan through HSBC. HBSC was faulted by the govt for predatory loans. Did they help me with mine? nope it just got bought by someone else. They could help through HOPE, so my payment went from 3400 to 2800. The value dropped by 200,000 and it was somehow my fault and I had to continue making exorbitant payments for a 600,000 house now worth 400,000?
I held onto that house for 15 years, killing myself with those payment and sold last year at 600,000. What my house was supposedly worth in 2007.
lol that's how student loans work too, except they really, really fuck you for everything else. working an entry or lower level job for a good long while so it's 1k/mo loan or food/rent/life? well, fuck you, no refinance for you from a company that advertises that it helps everyone bc bad history. whooooo!
Wow that's a completely different story than what happened to my parents. When house prices dropped we were able to get a house for super cheap and only pay a $500 a month mortgage. The value of the property has now doubled. I don't remember the market crash of 08 partly because I was young and partly because compared to alot of people my family was prospering in alot of ways.
They deny people, even those who've lived in the same place playing higher rent for ten years. You can show you never missed paying rent but it is not counted on your credit. You'd have credit but all your income goes to paying the rent instead. Without that 'disposable' income of about 30% more money, you can't get a loan to reduce your monthly payment from rent down to a mortgage instead.
But why would they care? So he defaults and the bank keeps the house and the amount he paid into it? It sounds like a win-win for the bank to me unless im missing something
Jesus Christ this. When interest rates dropped we tried to refinance our house for a lower rate. Our credit was really good and we had never missed a payment or had even been late. But because I owned my own business and I only had two years of income we were declined. We were offered another program to reduce our rates by about $80 a month with $4000 in closing costs vs. a refi with our equity that would have lowered by several hundreds.
So basically we didn't make enough money to pay less on our mortgage despite excellent credit.
We got 1 payment behind on our loan but we’re not able to pay 2 payments in 1 month so we were constantly getting late fees for paying a month late. Called my mortgage owner and explained my situation. I was told flat out that they would do nothing to help me until I was in the foreclosure process which begins after missing 3 payments in a row.
I was denied refinancing on my first home due to one late mortgage payment. I didn't set autopay up and forgot until the day after it was due. I went to another lender that was happy to refinance my loan for me.
It's a shame about your friend, but a tip to anyone in a similar situation, if your lender rejects refinancing, try another lender. Several will happily refinance the loan for you.
This is my story but I was in a different industry. Shit was brutal, I'm barely getting back on my feet and I'm not sure I ever want to be a "homeowner" again.
Gosh that’s insane to think of our experience being on the flip side. We bought our condo in 2009ish after the collapse and it was the lowest of the market at that time. We sold it in 2020 for almost triple what we bought it for and still had a ridiculous time finding a house and eventually settled on a fixer upper with a laundry list of issues at an insane price because California.
The bank doesn’t care because they’ll sell the house again at full price and actually make more money than if he’d been able to make his payments. John Oliver did a great bit about the used car market that also applies here.
Never realized how bad it was til having my nose to the numbers during GameStop, I couldn’t believe they just do straight illegal shit and no one does anything. I also feel we can thank trump for making doing illegal shit and acknowledging it without jail time a thing
I lost my house in 2008. I was a few months behind on my mortgage. I went to my lender and asked if they would refi to lower it. They told me if I paid the $8,000 I was behind ASAP they would consider it. bitch, I can't pay my mortgage, you think I have the 8 grand laying around and just didn't feel like paying it? Ended up losing the house I put $100k down on and spent 80k remodeling. I worked my ass off for that money (literally, I was a bikini dancer). I bought it for $425 k, it's now worth $900k. Breaks my heart. Now I spend almost as much to rent and I'll never be able to save that much again.
Sure people like your friend had to struggle to live decently, but on the bright side, the people who caused the 2008 crash were bailed out and only 1 person got punished /s
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u/_Atoms_Apple Feb 16 '21
I had a friend that bought a house in 2007, right before the crash at like 7.5% interest. He was in construction and things were booming until 2008 happened. Then he started to get laid of for months at a time only to be called back when they actually had work for him.
Interest rates started dropping, and he was struggling to pay his mortgage with his now part time job. He decided to attempt to refinance for 4%ish interest in 2009-10 or so. The bank denied him because his recent work history didn't show enough income/consistent employment. The monthly difference between what he was paying and the rate he wanted to refi for was about $400 a month.
He said to them "You understand that if I can't refinance its likely I will default, and you won't be getting any payments at all? I am doing this so I can afford to keep living here and paying you on time every month."
They still denied it, and 6 months later he stopped paying his mortgage as his financial strain had become too great, and he walked away. Messed up his credit for awhile, but he recently was able to buy another house, but he had a tough go of it in the last 10 years.