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Originally Posted by sugarpop
And people keep calling these mortgages "toxic assets," and while the mortgages might be toxic, the actually properties aren't. The properties are worth something. So I really don't get it.
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Do the math - If the mortgage amount is more than the current home value, thats is a "toxic mortgage." To compound the problem there were ARM (Adjustable Rate Mortgages) bought by people to get into homes that, IMO, they couldn't really afford. Lets leave the "greedy lenders" out of this for a moment.
The homeowners took a gamble that they would be making more or they could refinance later or or or... before the rate on their ARM increased. Many knowingly did this. It has been done for many years, this is not something new. What changed is the home values.
To further compound the problem many homes did not increase in value, in fact, they decreased and on or around the same time the mortgage payment increased. Now you have a devalued home and an increased monthly payment.
An example of the impact:
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A toxic mortgage is when there is a loan for $500,000 on a house that is currently worth only $250,000. This is generally held by an owner whose FICO score is poor (say 600 and below). Under the bailout, the government would negotiate with the current mortgage holder (BANK) and let's say buy this loan for $400,000. The bank is out $100,000 on paper but they now have $400,000 to play with.
The government then holds a $400,000 mortgage on a house worth $250,000 being paid for by an owner who still has a marginal ability to pay even the re-negotiated loan amount.
Assuming he can not or will not pay any more money, the government will either have to reduce the loan down to an amount the owner can pay or else foreclose on the house. If the government re-negotiates down to $250,000, they are (or more appropriately, WE are) out $150,000. If the government forecloses, they now own a house worth $250,000 with no one making monthly payments, plus they're out $150,000 from the initial $400,000 purchase. They must then find a buyer or else leave the home vacant until the property value increases enough for them to break even or make a profit.
Going back to the start, if the house were to increase in value to $1 million, the government would only be able to collect the loan amount of $400,000. They are not entitled to equity gains in the property (unless they owned and held it through foreclosure).
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