Hi,
We touched on loaning money and paying interest briefly. Considering how many people were caught short by smart bankers, who SHOULD HAVE understood what multiple mortgages and compounding interest meant and failed to explain it clearly to consumers, perhaps this post and the next should give it a whirl.
Let's start with multiple mortgages. Let's say that you have some money you don't need and decide to loan it out. First and foremost, you want to invest the money in a mortgage. You want the money safeguarded so you insist on what is called a FIRST MORTGAGE on a home.
A FIRST MORTGAGE is THE primary contract or loan between an owner (MORTGAGOR) and a lender (MORTGAGEE) with specified payment periods and interest rates on a LIEN on the property known as COLLATERAL. Since this is the PRIMARY LOAN, it is first paid (has first dibs on the money in the case of default).
Thus far, this is well-known territory. After WWII, in order for returning Veterans to be able to buy a home after devoting their early earning years to the armed service, second mortgages were made popular. Veterans were able to finance their homes with a first and second mortgage by the Government run FHA (FEDERAL HOUSING ADMINISTRATION), who also offered low interest on the first mortgage loans with higher interest rates for the second mortgage.
Understand that the second mortgage was subordinate to the first mortgage (only paid after the first mortgage was paid off) and, therefore, lenders expected more interest paid for the risk. Any equity (Money) left after the First Mortgage would be used to pay off the second mortgage in case of foreclosure.
As the years went by second mortgages became popular with the public as short term home improvement loans when the first mortgage held a low interest rate and folks didn't want to refinance at higher rates. The equity paid into their home served as collateral.
NOW HEAR THIS!!! MORTGAGES AND LIENS ARE PAID OFF IN THE ORDER OF THEIR FILING. Therefore, if there are not enough proceeds from a sale, the last loaners are left holding an EMPTY BAG.
No one feels sorry for them because they took on high risk loans in order to get high interest. Still they lost their money--some going completely bankrupt. Our sympathies go mostly to the homeowners but the ignorance on both sides deserves some thought. Many of the new lenders following the lead of big banks were as ignorant in loaning their money as the borrower in taking it.
Obviously, when the mortgage banks and major mortgage lenders were handing out third, fourth and fifth mortgage loans, they knew the score. What happened to the voice of responsibility in the Government (BOTH PARTIES) and the Banking interests who were a large part of the current mortgage fiasco. All of this was playing out before the Market started gambling on bundled mortgage securities call Hedge funds.
Look at it this way: If a home is worth $100,000. with no down payment, the first mortgage at $90,000. the second mortgage at $10,0000. That is all of the EQUITY in the home (WHAT THE HOME IS WORTH). Another mortgage can be given without equity ( the COLLATERAL of the home) BUT WOULD BE simply based on what the home might be worth down the "road-a-piece".
If that sounds like GAMBLING--you got that right. The borrower can ASS U ME it'll be worth $200,000. and make a loan based on that assumption, charge VERY HIGH INTEREST and the borrower can ASS U ME that the lender knows what is right and both can take the risk. Often talks were aimed at reducing these risks by refinancing the extra money at a lower rate at a later date if the borrower and lender ASS U ME that the house's collateral will increase substantially.
The banker's gleeful! HIGH INTEREST ALWAYS MAKES A BANKER GLEEFUL. The borrower is gleeful! He's using someone Else's money for what he wants! But time goes by and he's got 3 mortgages and no equity. His payments are being used up by interest. What is owned is an assumption of value and the Tax collector taxes the homeowner on an ASSUMPTION. He's screwed all the way around.
The holder of the first mortgage is the only one who can hope to come out on top and that's only if the first mortgage was based on REAL VALUE and where would that REAL VALUE come from? The TAX RECORDS of course, which reflect an assumption of what a buyer will pay NOW. In good times the tax value of a property is less than the ordinary appraised value for a loan. Hopefully, the educated guesses are correct.
In dim and distant days tax collectors had to base their taxes on THE PRICE SET BY A SALE of THAT particular property. Not on BLUE SKY or the neighborhood house sales. If you chose to stay in your beloved home, your taxes remained the same for the property portion. Not a bad system but considered unfair when homes started gaining value. Nothing about any system is completely fair but it seems to me that now that taxes have been apportioned to various other expenses, a property system that rewards long term ownership might be good in these bad times.
Do you feel like you just got on a merry-go-round from which there's not exit. YOU GOT THAT RIGHT TOO.
There's another mortgage idea as well. BANKERS ARE VERY CREATIVE WHEN IT COMES TO OBTAINING THINGS OF VALUE. It's called a REVERSE MORTGAGE and is a loan made to couples over 62 on their equity in their home (preferably mortgage free or almost-so. They receive a lump sum or a check each month and the loan must be repaid when the home is sold, no longer used, or the home owner dies. IF YOU DON'T LIKE YOUR KIDS, THIS GIVES THE MONEY TO A BANKER OF WHOM YOU MAY BE VERY FOND when he sells the property!
Although the foreclosure situation seems horrendous and is; it was long overdue. Any banker worth his salt will not lend his customers' money in such reckless fashion. If your banker does then your bank will soon be picking out a site in the BANK GRAVEYARD and you'll be out whatever the government couldn't insure.
It's been said and said and said: THERE'S NO FREE LUNCH. What you postpone paying today will have to be paid tomorrow with interest!!!!!!!!!!
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