So I was listening to the radio today and I learned why the housing mess came around. I found this interesting and thought that I would write about it just in case anyone else wanted to know.
First of all there are the primary buyers of mortgages. These are the people that first give the loans. To specify the ones that are a problem, I am reminded of a sign in front of a car dealership in downtown Cleveland. It said, "We want good people with bad credit!" These lenders are the primary buyers. I will apply it to houses now. Those that offer those easy loans are salesmen who are getting a quick buck on commission. They do not have to worry about you paying off any loan because they turn around and sell it to a secondary buyer. (When I say you, I am talking about people that get loans in this situation so don't take it personally.) This secondary buyer is willing to buy the loan from the primary buyer because they are willing to take the risk that even if you are not able to pay off your mortgage, by the time you default, the value of your house will have gone up. They get the house back and they resell another loan worth more money. No one wanted to admit there would ever be a cap on how high that value would be. Let me give a clear example of this and I will be done. You go to the easy lender and want a loan for your $200,000 home. They give you the loan. Over the life of the loan lets say you would end up paying $225,000. (I am not going to do actual interest math here for the sake of effort.) So the primary buyer sells off your loan to someone else for lets say $210,000. They just made a quick $10,000, and the secondary buyer will make $15,000. Then let's say you default. You have to give the house back...this is obviously the worst case scenario for all parties...sort of. Then the secondary buyer puts the house back on the market, but taadaa the house is now worth $250,000. Now they can loan out that amount and have the potential to pull in maybe $275,000. This process continues until houses are way overvalued and then the crash and burn. Get the picture....good now you know.
Nate
UPDATE: The Jazz broke my heart tonight..........................................................................................
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Thursday, April 10, 2008
For those of you who care!
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3 comments:
Wow, I did not understand this until I read your blogg
well said! my parents actually just started a company called Uwin Financial that is dealing with this very problem and about a zillion other problems that the average person has with their finances. (chad.uwinfinancial.com) and ps: the interest you pay on a 200,000 dollar house is actually over double the worth of the house like 275,000 just in interest! gross! pps: cleveland rocks and i was with nate when he saw that sign.
Yeah but the Indians closer does not rock and gave up a two run shot to Manny to lose to the Red Sox.
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