Comments on: Mortgage Loans Around the World http://thefinancebuff.com/2008/09/mortgage-loans-around-the-world.html like a friend telling you about money ... Thu, 19 Nov 2009 19:44:17 -0600 http://wordpress.org/?v=2.8 hourly 1 By: Danielle http://thefinancebuff.com/2008/09/mortgage-loans-around-the-world.html/comment-page-1#comment-966 Danielle Tue, 30 Sep 2008 13:08:45 +0000 http://thefinancebuff.com/2008/09/mortgage-loans-around-the-world.html#comment-966 So here's my question for the non-US mortgage holders. Do people normally pay off their mortgage in 10 years or do people refinance another 1 year term? Oh and FWIW, my friend in Russia bought a house with 4 equal cash paymenta as a "mortgage" paid off in one year. I wonder if that is typical in Russia. So here's my question for the non-US mortgage holders. Do people normally pay off their mortgage in 10 years or do people refinance another 1 year term?

Oh and FWIW, my friend in Russia bought a house with 4 equal cash paymenta as a "mortgage" paid off in one year. I wonder if that is typical in Russia.

]]> By: Neil http://thefinancebuff.com/2008/09/mortgage-loans-around-the-world.html/comment-page-1#comment-965 Neil Tue, 30 Sep 2008 04:25:55 +0000 http://thefinancebuff.com/2008/09/mortgage-loans-around-the-world.html#comment-965 TFB: "People could’ve chosen 10/1 ARM if they wanted to." Not necessarily so. People with bad or less than perfect credit can sometimes only get a two-year ARM (the idea being that they'll either refinance if their credit improves, or the bank will get higher interest). So the problem comes back to people with "sub-prime" credit getting loans that ended up hurting them when the 2-year ARM transitioned to the higher rate, and they were unable to refinance because the housing market had dropped. So, yes, for people with good credit, an ARM loan is not a problem, and they could probably get the 10-year ARM. But for people with sub-prime credit, the problem remains the 2-year ARM, which gave them the impression that they'd be able to refinance and avoid the higher rate/payment, but they were unable to. So my point remains -- either a 10-year ARM with the big gotcha rate, or a 2-year ARM without it, would have been fine. But the 10-year ARM wasn't available to people with sub-prime credit. So is the problem the people with sub-prime credit or the 2-year ARM with the high 2nd-tier rate? Well, both. The 2-year ARM is what enabled them to get the loan that they wouldn't have gotten anyway, and caused them to default on their mortgages when the housing market dropped and they couldn't refinance. TFB: "People could’ve chosen 10/1 ARM if they wanted to." Not necessarily so. People with bad or less than perfect credit can sometimes only get a two-year ARM (the idea being that they'll either refinance if their credit improves, or the bank will get higher interest).

So the problem comes back to people with "sub-prime" credit getting loans that ended up hurting them when the 2-year ARM transitioned to the higher rate, and they were unable to refinance because the housing market had dropped.

So, yes, for people with good credit, an ARM loan is not a problem, and they could probably get the 10-year ARM. But for people with sub-prime credit, the problem remains the 2-year ARM, which gave them the impression that they'd be able to refinance and avoid the higher rate/payment, but they were unable to.

So my point remains — either a 10-year ARM with the big gotcha rate, or a 2-year ARM without it, would have been fine. But the 10-year ARM wasn't available to people with sub-prime credit.

So is the problem the people with sub-prime credit or the 2-year ARM with the high 2nd-tier rate? Well, both. The 2-year ARM is what enabled them to get the loan that they wouldn't have gotten anyway, and caused them to default on their mortgages when the housing market dropped and they couldn't refinance.

]]> By: Ben http://thefinancebuff.com/2008/09/mortgage-loans-around-the-world.html/comment-page-1#comment-964 Ben Tue, 30 Sep 2008 03:56:31 +0000 http://thefinancebuff.com/2008/09/mortgage-loans-around-the-world.html#comment-964 TFB: I think you mean "Americans definitely *HAD* it better". Unfortunately you appear to be paying for the cheap credit right about.... now. :) TFB: I think you mean "Americans definitely *HAD* it better". Unfortunately you appear to be paying for the cheap credit right about…. now.

:)

]]> By: TFB http://thefinancebuff.com/2008/09/mortgage-loans-around-the-world.html/comment-page-1#comment-963 TFB Tue, 30 Sep 2008 03:52:15 +0000 http://thefinancebuff.com/2008/09/mortgage-loans-around-the-world.html#comment-963 Neil - 10-year fixed ARMs are also available in the United States. For example, if you go to <a href="http://mortgage.com/home_buying/area/default.aspx" rel="nofollow">Mortgage.com</a> (part of Citi), in the Select a Loan Type dropdown, you will see 3/1 ARM, 5/1 ARM, 7/1 ARM, and 10/1 ARM. People could've chosen 10/1 ARM if they wanted to. Ben - Thanks for the info about mortgage loans in New Zealand. I just looked at the <a href="http://www.anz.co.nz/ratefee/Interest.asp#Section100" rel="nofollow">rates at ANZ</a>. A 2-year ARM is 8.70%! A variable rate loan is 10.45%!! Americans definitely have it better. Neil – 10-year fixed ARMs are also available in the United States. For example, if you go to Mortgage.com (part of Citi), in the Select a Loan Type dropdown, you will see 3/1 ARM, 5/1 ARM, 7/1 ARM, and 10/1 ARM. People could've chosen 10/1 ARM if they wanted to.

Ben – Thanks for the info about mortgage loans in New Zealand. I just looked at the rates at ANZ. A 2-year ARM is 8.70%! A variable rate loan is 10.45%!! Americans definitely have it better.

]]> By: Neil http://thefinancebuff.com/2008/09/mortgage-loans-around-the-world.html/comment-page-1#comment-962 Neil Tue, 30 Sep 2008 02:56:47 +0000 http://thefinancebuff.com/2008/09/mortgage-loans-around-the-world.html#comment-962 Yes, you're right, the huge discount is the problem. This is why I say it's a gamble: people can afford the mortgage with the huge discount; and, if they refinance to a standard mortgage after making payments for two years (and establishing good credit), they can afford the refinanced mortgage. But if housing prices drop; or mortgage rates rise, then they're stuck with the "gotcha" rate. So, yes, the deep discount combined with the high post-two-year rate is the problem. At the same time, my point still remains that having a 10-year-fixed ARM makes a HUGE different, and gives the consumer a lot of time to refinance, regardless of interest and/or home price fluxuations. (It also gives them time to pay down their mortgage so that they can refinance even if home prices drop.) Thus, the kinds of loans Americans got WITH 10 years fixed would be OK; or a 2-year-fixed without a large "gotcha" interest rate after two years would be OK; but a two-year-fixed with a large "gotcha" interest rate would not be OK. Yes, you're right, the huge discount is the problem. This is why I say it's a gamble: people can afford the mortgage with the huge discount; and, if they refinance to a standard mortgage after making payments for two years (and establishing good credit), they can afford the refinanced mortgage. But if housing prices drop; or mortgage rates rise, then they're stuck with the "gotcha" rate. So, yes, the deep discount combined with the high post-two-year rate is the problem.

At the same time, my point still remains that having a 10-year-fixed ARM makes a HUGE different, and gives the consumer a lot of time to refinance, regardless of interest and/or home price fluxuations. (It also gives them time to pay down their mortgage so that they can refinance even if home prices drop.)

Thus, the kinds of loans Americans got WITH 10 years fixed would be OK; or a 2-year-fixed without a large "gotcha" interest rate after two years would be OK; but a two-year-fixed with a large "gotcha" interest rate would not be OK.

]]> By: Ben http://thefinancebuff.com/2008/09/mortgage-loans-around-the-world.html/comment-page-1#comment-961 Ben Tue, 30 Sep 2008 02:42:11 +0000 http://thefinancebuff.com/2008/09/mortgage-loans-around-the-world.html#comment-961 Neil, in New Zeland, 2-3 years is the standard for most mortgages, and there has never been a huge rush of foreclosures. I think one massive difference with USA ARMs, is that the initial fixed rate is often at a huge discount, leading people to believe incorrectly that they can afford a mortgage *at all*, fixed or otherwise. Neil, in New Zeland, 2-3 years is the standard for most mortgages, and there has never been a huge rush of foreclosures.

I think one massive difference with USA ARMs, is that the initial fixed rate is often at a huge discount, leading people to believe incorrectly that they can afford a mortgage *at all*, fixed or otherwise.

]]> By: Neil http://thefinancebuff.com/2008/09/mortgage-loans-around-the-world.html/comment-page-1#comment-960 Neil Tue, 30 Sep 2008 02:35:35 +0000 http://thefinancebuff.com/2008/09/mortgage-loans-around-the-world.html#comment-960 The thing that's missing in this analysis is that all of these countries with ARM loans have ARM loans with rate fixed up to 10 years. That makes a big difference. The ARM loans the American consumer got were 2 YEAR ARM loans, which means they have to turn around and refinance, or else they're stuck with a HUGE jump in monthly payment. So it's basically a gamble: as long as the price of houses remains the same or goes up, they'll be able to refinance, since they'll owe less than the house is worth. But if the price of houses drops, as it did, then they're stuck with a high-interest loan that they can't pay off. A 10-year fixed rate ARM is a totally different beast, and gives the consumer 10 years to refinance, which allows for fluxuations in the housing market without the consumer being stuck with a high-interest loan. The thing that's missing in this analysis is that all of these countries with ARM loans have ARM loans with rate fixed up to 10 years. That makes a big difference. The ARM loans the American consumer got were 2 YEAR ARM loans, which means they have to turn around and refinance, or else they're stuck with a HUGE jump in monthly payment. So it's basically a gamble: as long as the price of houses remains the same or goes up, they'll be able to refinance, since they'll owe less than the house is worth. But if the price of houses drops, as it did, then they're stuck with a high-interest loan that they can't pay off.

A 10-year fixed rate ARM is a totally different beast, and gives the consumer 10 years to refinance, which allows for fluxuations in the housing market without the consumer being stuck with a high-interest loan.

]]> By: Ben http://thefinancebuff.com/2008/09/mortgage-loans-around-the-world.html/comment-page-1#comment-959 Ben Tue, 30 Sep 2008 02:12:45 +0000 http://thefinancebuff.com/2008/09/mortgage-loans-around-the-world.html#comment-959 Another concept that interests me is how the loan is securitized. I have been led to believe (perhaps incorrectly?) that if you default on a mortgage from most (all?) USA banks, you are not liable for anything more than the *sale price* of the house. This obviously creates a big downward spiral as house prices plunge. In New Zealand (where we too only have ARMs fixed for up to 5 years), if you default on your loan, and the house goes to mortgagee sale, the bank can still chase you for any amount not covered by the mortgagee sale. You could argue that most mortgagees will have difficulty paying the remainder, but even if the bank recovers cents on the dollar it is better than nothing. Another concept that interests me is how the loan is securitized. I have been led to believe (perhaps incorrectly?) that if you default on a mortgage from most (all?) USA banks, you are not liable for anything more than the *sale price* of the house. This obviously creates a big downward spiral as house prices plunge.

In New Zealand (where we too only have ARMs fixed for up to 5 years), if you default on your loan, and the house goes to mortgagee sale, the bank can still chase you for any amount not covered by the mortgagee sale.

You could argue that most mortgagees will have difficulty paying the remainder, but even if the bank recovers cents on the dollar it is better than nothing.

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