August 26, 2005, NY Times — IF housing prices fall, will mortgages cushion the decline, or make it worse? Put another way, will more overstretched homeowners be forced to sell? At issue is whether financial innovations that have made it easier for Americans to buy homes have also made the system less stable and more subject to shocks that could drive many from their homes. Traditionally, home mortgages, unlike loans to buy stock, have had a calming influence during tough times. If you buy stock with borrowed money, a decline in prices can bring on margin calls, and you must either put up cash or sell. But homeowners have been able to hold on because mortgage loans – unlike margin loans on stocks – do not become due just because the value of the property declines. Your mortgage will not be foreclosed so long as you meet the monthly payments, even if the house is now worth less than you owe.
Easy Credit in Mortgages May Backfire [NY Times]


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  1. I’ve managed to save up roughly $30878 in my bank account, but I’m not sure if I should buy a house or not. Do you think the market is stable or do you think that home prices will decrease by a lot?

  2. I can picture the TV news features now if homeowners start defaulting on their I/O mortgages. The borrower, in tears, will tell how he/she trusted the mortgage broker, how the broker said they could “just refinance” if the monthly payments got too high. The spokesperson for the the mortgage lender will say the firm followed all the proper regulatory procedures in place at that time, that the borrower signed all the disclosures, etc. The politicians will say the big banks took advantage of the borrowers, downplaying the risks so that they could get their origination commission. Bad soap opera.

  3. Maybe I’m confused, but, don’t we agree? Just don’t get what’s up with the “chill” directive. I think the point I made is valid. I was just saying that the words used to frame a debate are meaningful and to make it sound like something that just was allowed happen, in my opinion, is wrong.

  4. I agreed with DN about the lawsuits and frankly, I do think it’s sickening. In fact, this entire country has a problem with personal responsibility, which I won’t bother even getting into.

    And when I said that it’s a shame it was allowed to go on, that doesn’t negate my belief in personal responsibility. I just meant it as a comment on the mania mentality that went on, especially in light of the tech crash.

    So chill, Anon at 10:42.

  5. Sorry, I didn’t intend to convey that I think class action lawsuits against lenders who extended exotic loans are appropriate, only that I think they’re likely to be filed in court if mortgage defaults spike higher. Plus, those politicians who have been trumpeting the extension of credit to underserved communities may very well be the ones waging their fingers at mortgage lenders and banking regulators if defaults rise.

  6. Those who make statements like “It’s unfortunate that this has been allowed to go on” (anon at 10:16) – and I’m guessing by “it” you mean ARMs and IOs? maybe you should even define what you mean by “it” – should be extremely wary of how they use the passive voice. It wasn’t allowed to go on, people MADE it go on, they used these loans and creative ways of financing to their ostensible advantage. It didn’t just happen. If you can muster the finances to purchase a house, somehow you can afford a calculator and do some worst-case scenario number crunching.

  7. The comment about the credit bubble makes sense. This country is addicted to credit. And the housing prices are fed by the credit addiction. As a nation, we have stopped saving almost entirely. And it’s not like those of us who will be retiring in 30 years can really bank on social security. Fiscal responsibility has gone out the window, and it’s not just on housing. The average credit card balance that people carry is absurd…particularly at the rates many people get charged.