Why did the subprime mortgage loans begin to expire in 2006?

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What was so special about 2006? How did all of a sudden millions of people started to default on these loans given out? Did something precipitate this?

I understand why it happened but i don’t understand the suddenness of it.

The subprime mortgage crisis has already wreaked havoc on the lives of millions of people and now it threatens to derail the U.S. economy and economies around the world. In this trenchant book, best-selling economist Robert Shiller reveals the origins of this crisis and puts forward bold measures to solve it. He calls for an aggressive response–a restructuring of the institutional foundations of the financial system that will not only allow people once again to buy and sell homes with confidence.

  1. Reply
    January 28, 2011 at 9:42 am

    The loan products, interest only mortgage loans (were not all subprime, subs just got the press) had 60 months or 5 years periods before the first reset. During the first 5 years, the interest only payments were based on the teaser rate for the first few months then they went to (usually) prime + the margin which is usually around 2. The prime rate back in the 90s and early 2000s was at historic lows so, even when it came out of the teaser rate, the pmts weren’t too bad. Hopefully, you are still with me :). Another feature of these loans was that, like credit cards, you could opt to pay a minimum amount which often didn’t cover the actual interest charge. The difference between what you paid and what was accrued was then added to the mortgage balance (this is the neg amort feature that allowed your mortgage balance to increase to 125% of it’s original amt),

    The loans had conditions which require that they be re-adjusted to cover the increased balances every 5 years. Since the peak of the refi and purchase market was 2000-2005 and this loan product did not exist before that, the first batch all had their first payment adjustments in 2005-2006.

  2. Reply
    January 28, 2011 at 10:05 am

    You are making a logical error, that I call “assuming all other things are equal”.
    They never are…

    This is a gross oversimplification, but what happened, in order, is this:

    1. The government (under Bill Clinton) decided that low income people deserved to participate in ‘the American dream” of home ownership. (this was continued under Bush, so I’m not playing politics here).
    They did this by lowering interest rates, AND threatening banks for supposedly ‘being racist’, because minorities owned fewer houses than white people.
    This made it MUCH easier for people to get loans.

    2. All these new buyers flooding the market upset the natural ‘supply & demand’ for houses – the more buyers of ANYTHING, the more the price goes up.
    (Home prices doubled during the 8 years of the Clinton administration).

    3. Builders and investors got on the bandwagon, to make sure there was product (homes) to sell all these new buyers.

    4. A rabid housing boom was underway.

    Here’s the important part:

    5. After a few years of home prices going WAY up, year after year, all sorts of people started buying, using loans that were really designed ONLY for investors – those who buy, remodel, then re-sell.
    They were thinking “what the hell, even if I can’t afford the payments when the ARM’s expire, my house will be worth 2-3 times what I paid for it, & I can just sell it… I’m gonna risk it.

    THAT is the important part – the government basically turned 70% of the population into real estate speculators.
    Almost EVERYONE was convinced that home prices would never, ever drop, so there was NO RISK in buying these overpriced homes, even if they knew they could not afford them.

    My prime personal example – my brother’s pool cleaner bought 4 HOUSES to flip.
    A freakin’ pool cleaner was doing this!
    He lost everything, and predictably, blamed everyone else and had his hand out for a bailout.

    Soooo, the point is, it’s not that the ARM”s all came due at the same time or whatever.
    It’s that the ones coming due WHEN THE MARKET REVERSED, is what everyone started bitching and moaning about.
    The people who’s ARM’s came due before that, and who couldn’t make the payments, actually DID sell their houses for more than they bought them.
    They didn’t complain about any of this, because they actually made money on the deal… until the bubble burst!

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