> I suspect most of the borrowers know the
> risks - they're just ignoring them.
Ignoring them? Sheesh. It's one thing to factor in risk to a decision and still come out with signing on the dotted line. It's another thing entirely to IGNORE them.
> Like the people who bought Pets.com.
An equity investment is NOTHING like buying a house. For one, you don't live in your stock; it replaces a pre-existing expense: rent; the chances that your stock will tank or the company itself will vapor (through no {in,}action on your part) are much MUCH higher than the chance that your house will become worthless; the downside is far more limited in most cases: you can lose all your equity in a house and still have a normal-loking payment for your shelter for a long long time; equity investments are usually made with so-caled 'risk-capital' (many of those who lost on pets.com did so from tax-protected vehicles, and have time to make it up: it's bad, but they aren't out on the street). And so on.
Yes, if you have to get out of a house while your equity is negative, that can be bad. Very, very bad. It's much more rare than you make it out to be and you need something of a perfect storm to do it. I'm willing to bet that in a lot of cases, mortgages that get defaulted on are only part of such a storm that would similarly gobble up your savings, your car, and your position as a renter. I've seen people say that in 90% of bankruptcy cases, "something bad" happened to the family (typically a health matter), it wasn't that they did something foolish/irresponsible.
> This is just an extreme variation of the taste for adjustable rate
> mortgages. In the past, the public actually timed their choice of
> fixed vs. floating pretty wisely, chosing floaters at interest rate
> highs and fixed at lows. At around 35%, the floating share of new
> mortgages is at record levels, surpassing earlier peaks in 1994 and
> 2000. But both earlier peaks were also times when interest rates were
> peaking. More bubble symptoms, I'd say.
Or perhaps more sophistication and/or access! Don't forget that variable-rate mortgages start much lower than fixed-rate ones (especially so with teasers, which, though called a 'tease' are actual performers <grin>), so even if ultimately your variable one gets to be "more" than the fixed, it'll be a while before you actually catch up to the initial savings.
This likening to pets.com is just wrong!
Wojtek writes:
>> It also COMPLETELY UNDOES the cancellation of "interest for
>> personal debt" being tax advantaged: businesses write off 100%
>> of interest paid,
>
> But on the other hand, it swaps an unsecured debt into a secured
> one, which makes all the difference in the world if you consider
> filing for Chapter 7 bankruptcy protection.
First of all, we're down in the noise on these people: those who file for bankruptcy are less likely to own a house than the rest of the population. If you're in the 1%, sure: be careful, dragons be there, etc. But what about the other 99%?
What other 1% population do you care so much about? :-)
Here's an interesting (though a little out of date) report:
http://www.sric-bi.com/CFD/MRsummaries/MR.V-3.shtml
BTW, I spent some time Googlin' about bankruptcy, but there's not much out there that I could find that looks at the 'average' bankruptcy. Pointers welcome, especially if they highlight things like what kind of mortgage they had when they filed.
/jordan