Why didn't the sub-prime lenders convert ARM's to a fixed rate to prevent so many foreclosures?

Question

eyecue_t

So, do you mean they would rather foreclose and then sell at a discount instead of taking lower payments?

Greed does not explain it. Where's the benefit in foreclosing??

If they foreclose they have to sell the prop@ a discount and take a loss. If they convert to fixed rates they take a smaller profit over the long term, but it's still a profit.

Answer 1

Because of the way the subprime market works. The mortgage brokers make their money up front as a commission. The initial lenders typically then sell the mortgages to a large fund that includes conglomerates hundreds or even thousands of mortgages into one huge fund. The money for these funds, in many cases, has come from foreign investors, who bought their interests as bonds, which are supposed to pay a fixed rate of return. The bond fund managers have little or no interest in any individual mortgage holder: their concern is the performance of the entire fund as an investment vehicle.

I believe that, especially in funds that include a significant proportion of high-risk mortgages, the fund managers will be forced to default when a sufficient number of borrowers become unable to make their loan payments. Then, there may be lawsuits by the investors against the fund managers, since the investors will not be receiving their periodic interest payments, and the bonds will be downgraded to the point where other investors may buy them at a discount, perhaps a large discount.

There is some indication that the federal government may step in to reduce, prevent or delay the step-up in interest rates on some of the subprime loans.

The effect of this on the housing market in the United States is likely to be felt for years to come, and some effects will be permanent. Lenders and mortgage brokers in the future are likely to be forced to be more thorough in qualifying borrowers and verifying loan applications, at a minimum. Further, we are already seeing the sale prices of houses dropping, and in some metropolitan areas, there is a rising inventory of unsold houses, with Los Angeles being hit the hardest and Chicago second hardest.

Answer 2

Because the whole thing is about future investments. The holders of the debt have calculated future value of the securities based on the anticipated rate. With the ability to cut or hold that rate comes the forced devaluation of that long term future value.

Answer 3

A considerable percentage of sub prime loans have gone delinquent or into foreclosure already BEFORE any ARM resets - some never made more than a payment or two.

Answer 4

Greed.

Answer 5

Good old American capitalism. Greed basically.

Answer 6

greed

Answer 7

chaseing money honey