I've heard people talk in various venues (talk radio, other discusion boards, etc) about being caught up in the sub-prime mortgage crisis and I'm more confused than ever about what exactly is happening. What I understand so far is there are people who found themselves in one of several different positions:

1) They tried their hand at house 'flipping'. They bought a house they couldn't really afford, borrowing much more on it than they should have, in order to fix the house up and re-sell it at a profit. Some of these people ran out of cash before all the remodelling was complete so they now have a house that is un-sellable because it is half finished or has major repairs required. They can't borrow any more money to finish the job because their credit is already stretched too far. Or they remodelled themselves right out of the market and find they can't sell the house to re-coup all the money they put into it.

2) There are people who bought more house than they could afford. They got suckered into an adjustable mortgage with a super low interest rate or low interest-only payments for the first few years of the loan. The thought at the time was the economy would continue to improve and they would either have higher incomes by the time the interest rates got out of line or they could sell the house for a profit before the payments became unmanagable. Either way, they found out the economy didn't improve the way they thought so now they have a house they can't afford.

3) There are people who kept borrowing against the equity in their house - and then some (I know some one in real life who did this.) There were 110% mortgages out there just a few years ago. People assumed that house would just keep appreciating so borrowing $220K on a house that is appraised at only $200K sounded like a good idea IF a year or two down the road the house was going to be appraised at $240K. Unfortunately, that $200K house is now appraised at $160K and the owner still owes $220K on it. Then their interest rates are jumping or they suddenly have to start re-paying some of the principal and they think, "Why?" They have nothing invested in the house. If they walk away they won't lose any equity so they simply abandon the house and let it get foreclosed.

4) There are elderly or very low income people who were advanced equity loans on their houses that they simply couldn't afford and never really could afford or qualify for. They didn't understand what they were doing when they signed the loan papers and they got bit by sharks.

Lastly, I think there are many people out there who will SAY they got caught with a sub-prime loan but really could re-fi or sell or do something else to get themselves out of the mess. They're waiting for the government to provide some kind of bail-out

What should happen? Instead of foreclosing, some of these mortgage companies should try to re-negotiate the terms on the loans for the better borrowers. Maybe there will be a grey market of lenders out there who will start to do this. Maybe we'll see the 'early re-payment penalty' clauses return to give lenders some incentive to put their money into that sector. Either way, I'm not sure the government should step in and offer a break to anyone.

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I just heard on Friday that Pres. Bush would NOT authorize a bail-out. I'm very happy about this - I think people should be held accountable for their decisions. I don't want to be one of the taxpayers bailing them out.

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I don't think they are smart enough to do this, or their egos will get in the way, but I think this would be a wonderful solution. "We would like to help you avoid the escalating payments, so here's what how we can help." Which really means, "We were greedy and it's backfiring on us, so we're going to become more reasonable because we really don't want a bunch of foreclosed homes in our portfolio."

I agree with Kim: I'm glad Bush isn't going to do a bailout.

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The problem is that it's not just people with mortgages that are in trouble. Thousands and thousands of people are out of jobs bc mortgage companies are going out of business. And it's not as simple as to re-negotiate mortgage terms. Wall Street is doing margin calls and "big" companies are closing line of credits, so mortgage companies don't have funds to lend.

It's a huge mess all around, everyone knew it was coming

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OMG! I agree with something he said. Is it freezing down below

That's hilarious!!!

It is the person's responsiblity to know all the details of the loan they sign for. I don't get it---you know when you get this loan the rate will change, so don't act all surprised when it happens, either refinance to a different loan or pay it. No way should the government bail these people out. Be a responsible citizen and educate yourself, don't act surprised when the rate changes on an adjustable mortgage.

Too funny.

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While I'll agree that the government shouldn't bail out someone that, for whatever the reason, spent more on a house than they could afford, I do worry about what these loans are doing to the economy as a whole.

I was reading this morning on MSN and how different market (Germany, France, for example) were having problems because of the U.S. housing market. While I won't even pretend to understand how the U.S. housing market affects Germany which in turn affects France and in turn affects somewhere in South America, I do understand that they are all connected.

I also understand that while our income is not directly affected by the housing bust / boom, it can probably be assured that at least some of the parents my husband works for are somehow connected. And if they're losing money there is a less chance of them using the services that my husband's company provides which means that raise I'm waiting for my husband to get won't happen! So, in a round about way, it does become a concern of mine.

So should the government bail these people out? No. Should the government take steps to ensure the entire economy doesn't bottom out? Yes. What are those steps? Not a clue!

I think it is a symptom of a problem that has been brewing for years. I would not be surprised if we see another stock market crash in our lifetime.

The best thing you can do is educate yourself. Don't get caught up in the got-to-have-it-now fever that happens when you find a home you really want. Sub-prime lenders will even pitch loans to people who qualify for prime rates. If you don't know this, you can find yourself in a financial mess. A lot of lenders won't tell you they are subprime lenders because it's become a bad word in the mortgage industry. They are not required to include escrow and insurance in your payment, so it appears more attractive. Usually there are prepayment penalties, so it's very difficult to get out of a subprime mortgage, even if you've re-built your credit. Just shop, shop, shop as many lenders as it takes. And if you still can't get a loan at a decent rate, don't buy it.

Here's a good article on the subject:
What Is a Sub-Prime Mortgage Lender?

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