How is this allowed to happen?

[Nebuchadnezzar]

I know a family whose house is worth $300k but they owe $500k on it.

How is this allowed to happen?

And no it's not Trumps fault, they have been accumulating this debt for years. Not only taking loan after loan out on their home but also able to buy cars, have them taken from them then buy another. 

I don't know their credi card debt but it must be shy high as well.

[Dill]

(01-08-2019, 06:05 PM)Nebuchadnezzar Wrote: I know a family whose house is worth $300k but they owe $500k on it.

How is this allowed to happen?

And no it's not Trumps fault, they have been accumulating this debt for years. Not only taking loan after loan out on their home but also able to buy cars, have them taken from them then buy another. 

I don't know their credi card debt but it must be shy high as well.

??? Are you asking a question about how mortgages work?  How the value of real estate changes?

Are you saying that this family took out home loans in a greater amount than the value of the house?

Wouldn't that be on the bank?

[*Nately120*]

Predatory lending plus a materialistic society?

[Vas Deferens]

too white for their own good.

[HarleyDog]

You will pay 3x what a house is worth on a 30yr loan. Even more if on flexible rate possibly. However, it has always been accepted because the payments are affordable and your dream (at the moment of purchase) becomes true.

Like buying a car at Superior Auto.

[*bfine32*]

Don't blame the player, blame the game.

[HarleyDog]

(01-08-2019, 08:25 PM)bfine32 Wrote: Don't blame the player, blame the game.

Exactly. Putting extra loans on a house to buy personal stuff is not the smartest thing to do. But, people do it to get by.

[fredtoast]

Here is how it works.  Lenders give you $500K on a $300K house, make some money off the up front fees, then sell the debt to get out from under the risk.  These over extended mortgages are then bundled together in REIT (Real Estate Investment Trust) or some other form of mortgage backed security.  Then shares of these securities are sold to individual investors who take the loss when borrowers default on the loans and the colateral does not cover the debt.

Too bad we can't issue any reguolations to end this practice, but as you know big government regulations are always bad because they hurt profits.

[SunsetBengal]

I don't get the premise of the OP, asking how is this "allowed" to happen. People have free will to do as they wish, if they can't maintain self control, someone will certainly be there to exploit their weakness.

[Nebuchadnezzar]

No, they bought the house for $257k but continue to take loans out on the home, borrow money against the home, don't pay their bills. They've been doing it for years and I'm wondering how they are allowed to continue to borrow money?

[Benton]

(01-08-2019, 10:08 PM)Nebuchadnezzar Wrote: No, they bought the house for $257k but continue to take loans out on the home, borrow money against the home, don't pay their bills. They've been doing it for years and I'm wondering how they are allowed to continue to borrow money?

See post 3.

Many banks know borrowers can't pay the secondary loans, and they don't care. Worst that happens to them is that family owes them a huge sum of money, they collect a big chunk of it when they file bankruptcy or die, the bank resells the house at a price it wants and gets to write off the losses as tax breaks against accrued profits. The system is set up for banks to increase dollars over the long term.

But post 3 was less wordy about it.

[*bfine32*]

I just can't wait to get my house paid off, so I can get a reverse mortgage.

[NATI BENGALS]

When I was selling cars there were people who would buy a car through our credit acceptance bank that was listed at say $10k. They had to put like 1/3 down and would get a 20ish% interest rate. They would walk out with a stupid high payment on a car not even close to being worth it. It was crazy. One of the main reasons I got out of the business. Even though I wasn't the one ripping them off I still felt like shit being the middle man.

[GMDino]

My wife's aunt and uncle had a home they remortgaged so many times that when he passed away she lost the home because she couldn't afford it anymore.

Very sad.

[Dill]

(01-08-2019, 10:45 PM)cBenton Wrote: See post 3.

Many banks know borrowers can't pay the secondary loans, and they don't care. Worst that happens to them is that family owes them a huge sum of money, they collect a big chunk of it when they file bankruptcy or die, the bank resells the house at a price it wants and gets to write off the losses as tax breaks against accrued profits. The system is set up for banks to increase dollars over the long term.

But post 3 was less wordy about it.

Seems like a serious moral hazard.  But can a bank really recoup 500,000 on a 300,000 dollar home by writing off losses?

[fredtoast]

(01-09-2019, 10:30 AM)Dill Wrote: Seems like a serious moral hazard.  But can a bank really recoup 500,000 on a 300,000 dollar home by writing off losses?

No.  There is a $200K real loss that can not be recouped by just "writing it off".  All you save when you write off a loss is the amount of tax you would have paid on that amount of income.

Banks often sell the debt to third parties so they don't take the loss.  Many times the mortgages are bundled together and shares are sold to individual investors.  This is why so many retirement funds and other institutions were in trouble during the '08 crisis.  They held shares in mortgaged back investment funds that were going to go broke.  And the credit default swaps that they had purchased to protect them from the funds going broke were useless because credit default swaps are not regulated like regular insurance policies.  Sp the companies that wrote them did not have the funds to cover the losses.

And when we bailed out the lenders and asked for some regulations to make sure this never happened again their heads exploded.  They had to get the bail out money with "no strings attached" because regulation of investment markets destroy profits.

[Dill]

(01-09-2019, 02:50 PM)fredtoast Wrote: No.  There is a $200K real loss that can not be recouped by just "writing it off".  All you save when you write off a loss is the amount of tax you would have paid on that amount of income.

Banks often sell the debt to third parties so they don't take the loss.  Many times the mortgages are bundled together and shares are sold to individual investors.  This is why so many retirement funds and other institutions were in trouble during the '08 crisis.  They held shares in mortgaged back investment funds that were going to go broke.  And the credit default swaps that they had purchased to protect them from the funds going broke were useless because credit default swaps are not regulated like regular insurance policies.  Sp the companies that wrote them did not have the funds to cover the losses.

And when we bailed out the lenders and asked for some regulations to make sure this never happened again their heads exploded.  They had to get the bail out money with "no strings attached" because regulation of investment markets destroy profits.

Thanks Fred, especially for the additional notes.

[*Nately120*]

(01-09-2019, 02:50 PM)fredtoast Wrote: No.  There is a $200K real loss that can not be recouped by just "writing it off".  All you save when you write off a loss is the amount of tax you would have paid on that amount of income.

Banks often sell the debt to third parties so they don't take the loss.  Many times the mortgages are bundled together and shares are sold to individual investors.  This is why so many retirement funds and other institutions were in trouble during the '08 crisis.  They held shares in mortgaged back investment funds that were going to go broke.  And the credit default swaps that they had purchased to protect them from the funds going broke were useless because credit default swaps are not regulated like regular insurance policies.  Sp the companies that wrote them did not have the funds to cover the losses.

And when we bailed out the lenders and asked for some regulations to make sure this never happened again their heads exploded.  They had to get the bail out money with "no strings attached" because regulation of investment markets destroy profits.

That sounds kinda complicated.  Can't we just blame poor people and minorities?