Learn about the Housing Conundrum - part 4 Video

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Learn about the Housing Conundrum - part 4

Learn about the Housing Conundrum - part 4 I’ll now explain to you why from 2000 and 2005 we had very low defaults on mortgages. Let’s say that I buy a house for a million dollars. I buy a million dollars house, so let’s say the bank gives me a million dollars and then I’m willing to pay a percentage on it, so this is from the bank. This is me and I use that to buy a house. And the bank does that and let’s say I don’t know a year later I lost my job, I just can’t pay this mortgage anymore, so I have a couple of options. I can either sell the house and pay off the debt or I guess I could just you know tell the bank, “Well, I can’t do anything and I’m going to foreclose.” And that would ruin my credit. I will lose my credit and I would lose all my down payment. So, one of the circumstances is I can sell the house. Well, if I borrowed a millions dollars as long as —and let’s say to put no money down just for simplicity. If I can sell the house for 1.1 million dollars what I would do is right. Let me sell for 1.1 million. If I sell for 1.1 million I’ll pay the bank, I’ll pay the bank a million and I net a $100,000.00 and everyone is happy, the bank got their money back, so they don’t lose much money on the transaction. I made a $100,000.00 and so the whole reason why this worked out even though maybe I was a credit risk is because the housing prices went up. So, when you have rising housing prices, you’ll practically —the banks will not lose money lending you because if you can’t pay you just give back the house, the bank can sell or you would even get back the house. You’ll sell the house and you’ll pay it off even though you can’t pay the mortgage anymore. The only situation where I would foreclose is if the market price of the house goes less than my loan and that’s actually a situation that we’re facing now, so let’s say that I can only sell this house for $900,000.00 well then I’m just going to give the keys back to the bank that’s what you call jingle mail because you just mail the keys back. And then the bank sells the house for $900,000.00 and then they would think a lose, so when housing prices go down that’s the only situation where really you should have foreclosure, but when housing price has go up, the person who borrowed is just going to sell the house and pay off the loan and they’re actually going to make some money, so there was every incentive to buy house. So, let’s think about this whole dynamic over the last several videos that we’ve been building, so we said from 2000 to 2004, housing prices went up. Now, we do it like this. Let me change a little bit, so we know that from —so this is all going to be, we could even say from 2000 to 2006. So, we know that housing prices went up, and why did housing prices go up? Well, we saw the data it wasn’t because people were earning more. It wasn’t because the unemployment rate went down. It wasn’t because of population increase. It wasn’t because the supply of houses were limited we disprove all of that. We realize it was just because the financing got easier. The standards for getting a loan went lower and lower. Financing got easier and easier, and because housing prices went up what did that cost? What we just said when housing prices go up default rates go down alright. You could give a loan to someone who is complete dead ― but as long as housing prices go up and if they lose their job they can still sell that house and pay you back alone, so housing prices going up make sure there’s no foreclosure so defaults go down, so then the perceived risks goes down of lending. So, that makes more people willing to lend and corollary of more people willing to lend is that the actual standards go down. That’s financing issue we can actually write that, standards go down, so you had this whole I guess you can argue whether this is a negative or a positive cycle, but you have this whole cycle occurring from the late 90s but especially it really got a lot of momentum in around 2001, 2002, 2003. That financing got easier despite the facts that people were earning less, the population wasn’t increasing that fast that all of these new houses and that cause housing prices to go up. Housing prices went up then we have a lot of fewer people defaulting on their loans and no one will default on their loans if they can sell it for more than the loan then a lot of people —well, these are super safe and so you know the rating agencies standards and forms and those who are willing to give triple rating to more and more what I would argue a risky loans, so the perceive lending risks went down. Then more and more people like disaster while they said, “Wow, this is great. I can get a better return than I can get in the bank or treasuries and the whole set of securities even though these are very low risk or perceive low risk, so I want to funnel more and more money in here.” And so the mortgage brokers and the investment banks will say, “Great, the only way we can get more value to satisfy all these people who want to lend the money. The only way we can find more people to lend money too is by lowering the standards and this cycle went round and round and round. And it really started because this whole process of being able to take a bunch of people’s mortgages together package them up and then you know turn them into securities and then sell them to a bunch of investors. This was a quote and quote innovation in the mid 90s or early 90s I forgot exactly when and it really started takes ― in the early part of this decade. So, that’s essentially why housing prices went up and why kind of all of the silliness happened, and in the next video I’ll talk a little bit more about maybe some of these investors were and I’ll tell you what a common hedge funds and I think it’s very important to group all hedge funds together. There are some good ones, but one of the common hedge fund techniques was to take advantage of this virtual cycle to make the hedge fund founders very wealthy. I’ll see you soon.

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Learn about the Housing Conundrum - part 4

I’ll now explain to you why from 2000 and 2005 we had very low defaults on mortgages. Let’s say that I buy a house for a million dollars. I buy a million dollars house, so let’s say the bank gives me a million dollars and then I’m willing to pay a percentage on it, so this is from the bank. This is me and I use that to buy a house.

And the bank does that and let’s say I don’t know a year later I lost my job, I just can’t pay this mortgage anymore, so I have a couple of options. I can either sell the house and pay off the debt or I guess I could just you know tell the bank, “Well, I can’t do anything and I’m going to foreclose.” And that would ruin my credit. I will lose my credit and I would lose all my down payment.

So, one of the circumstances is I can sell the house. Well, if I borrowed a millions dollars as long as —and let’s say to put no money down just for simplicity. If I can sell the house for 1.1 million dollars what I would do is right. Let me sell for 1.1 million. If I sell for 1.1 million I’ll pay the bank, I’ll pay the bank a million and I net a $100,000.00 and everyone is happy, the bank got their money back, so they don’t lose much money on the transaction. I made a $100,000.00 and so the whole reason why this worked out even though maybe I was a credit risk is because the housing prices went up.

So, when you have rising housing prices, you’ll practically —the banks will not lose money lending you because if you can’t pay you just give back the house, the bank can sell or you would even get back the house. You’ll sell the house and you’ll pay it off even though you can’t pay the mortgage anymore.

The only situation where I would foreclose is if the market price of the house goes less than my loan and that’s actually a situation that we’re facing now, so let’s say that I can only sell this house for $900,000.00 well then I’m just going to give the keys back to the bank that’s what you call jingle mail because you just mail the keys back.

And then the bank sells the house for $900,000.00 and then they would think a lose, so when housing prices go down that’s the only situation where really you should have foreclosure, but when housing price has go up, the person who borrowed is just going to sell the house and pay off the loan and they’re actually going to make some money, so there was every incentive to buy house.

So, let’s think about this whole dynamic over the last several videos that we’ve been building, so we said from 2000 to 2004, housing prices went up. Now, we do it like this. Let me change a little bit, so we know that from —so this is all going to be, we could even say from 2000 to 2006.

So, we know that housing prices went up, and why did housing prices go up? Well, we saw the data it wasn’t because people were earning more. It wasn’t because the unemployment rate went down. It wasn’t because of population increase. It wasn’t because the supply of houses were limited we disprove all of that. We realize it was just because the financing got easier. The standards for getting a loan went lower and lower. Financing got easier and easier, and because housing prices went up what did that cost? What we just said when housing prices go up default rates go down alright.

You could give a loan to someone who is complete dead ― but as long as housing prices go up and if they lose their job they can still sell that house and pay you back alone, so housing prices going up make sure there’s no foreclosure so defaults go down, so then the perceived risks goes down of lending.

So, that makes more people willing to lend and corollary of more people willing to lend is that the actual standards go down. That’s financing issue we can actually write that, standards go down, so you had this whole I guess you can argue whether this is a negative or a positive cycle, but you have this whole cycle occurring from the late 90s but especially it really got a lot of momentum in around 2001, 2002, 2003. That financing got easier despite the facts that people were earning less, the population wasn’t increasing that fast that all of these new houses and that cause housing prices to go up.

Housing prices went up then we have a lot of fewer people defaulting on their loans and no one will default on their loans if they can sell it for more than the loan then a lot of people —well, these are super safe and so you know the rating agencies standards and forms and those who are willing to give triple rating to more and more what I would argue a risky loans, so the perceive lending risks went down. Then more and more people like disaster while they said, “Wow, this is great. I can get a better return than I can get in the bank or treasuries and the whole set of securities even though these are very low risk or perceive low risk, so I want to funnel more and more money in here.”

And so the mortgage brokers and the investment banks will say, “Great, the only way we can get more value to satisfy all these people who want to lend the money. The only way we can find more people to lend money too is by lowering the standards and this cycle went round and round and round. And it really started because this whole process of being able to take a bunch of people’s mortgages together package them up and then you know turn them into securities and then sell them to a bunch of investors. This was a quote and quote innovation in the mid 90s or early 90s I forgot exactly when and it really started takes ― in the early part of this decade.

So, that’s essentially why housing prices went up and why kind of all of the silliness happened, and in the next video I’ll talk a little bit more about maybe some of these investors were and I’ll tell you what a common hedge funds and I think it’s very important to group all hedge funds together. There are some good ones, but one of the common hedge fund techniques was to take advantage of this virtual cycle to make the hedge fund founders very wealthy. I’ll see you soon.

Transcription by: Scribe4you Transcription Services