Mortgage Meltdown Isn't Just A Subprime Problem Anymore
The New York Times says that the mortgage meltdown isn't just a subprime problem anymore, but has spread into the prime market where consumers with good credit are now struggling to pay their bills.
Plummeting home values are sticking home owners with properties that they refinanced with the intention of selling before their rates jumped. Now they're trapped in homes they can't afford and also can not sell for more than they owe.
Here's an example from the Times:
An example of the spreading credit crisis is seen in Don Doyle, a computer engineer at Lockheed Martin who makes a six-figure income and had a stellar credit score in 2004, when he refinanced his home in Northern California to take cash out to pay for his daughter's college tuition.The article also provides some troubling statistics about auto loans and HELOCs, both of which are seeing increasing amounts of loans in default.Mr. Doyle, 52, is now worried that he will have to file for bankruptcy, because he cannot afford to make the higher variable payments on his mortgage, and he cannot sell his home for more than his $740,000 mortgage.
"The whole plan was to get out" before his rate reset, he said. "Now I am caught. I can't sell my house. I'm having a hard time refinancing. I've avoided bankruptcy for months trying to pull this out of my savings."
It seems that the heady days of homeowners who were happy to pay huge monthly payments into their "investment" are over:
In a conference call with analysts in December, Kenneth Lewis, the chief executive of Bank of America, said more borrowers appear to be giving up on their homes as prices fall, noting a "change in social attitudes toward default.""You don't mind making a $2,000 payment when the house is going up" in value, said Steve Walsh, a mortgage broker in Scottsdale, Arizona, who has seen several clients walk away from their homes because they couldn't refinance or sell. "When it's going down, it becomes a weight around your neck, it becomes an anchor."
Mortgage Crisis Spreads Past Subprime Loans [NYT]
(Photo:MeghannMarco)
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Comments:
not according to this article:
[articles.moneycentral.msn.com]
btw: most those people who got those loans didn't know better. The banks however did know better. These people are not living beyond their means. They didn't know, and the banks didn't tell them (except the small print)that their rates will go up so high they won't be able to afford it. The banks know right of the bat how much that person can afford before giving them the loan. So it is the banks fault for giving loans to people who they know can't afford it.
@dirk1965: Your absolutely correct. There is no 'meltdown'. For the media, the only news worth reporting to them is bad, sensational news. Good news doesn't get anyone worked up. I wish they would look at the statistics. Foreclosures maybe up, but by barely a percent. Nothing worth writing home about.
@hi: Come on, people need to take responsibility for themselves. Stop looking to blame someone else for something you decided to turn a blind eye too. A bank doesn't know my budget, my priorities. They can't tell me what i can or can't afford. I DO! OH, and don't look to Washington to solve your financial problems either. They haven't been able to balance a budget in decades.
The banks are NOT to be blamed for this. I blame ignorant people that took out subprime loans without understanding the concept of an adjustable rate. However, I don't see why banks made the loans if they had this in mind...
i don't think it is all media sensationalism. even those of us who are keeping up with our house payments are having a harder time paying the bills. groceries, gas, and home heating have all gone up faster than most people's wages. there are probably millions of us who are making the payments, but definitely feeling the pinch, even if we don't end up in bankruptcy.
@hi: WTF? The terrorists raised house prices? The terrorists failed to manage interest rates and prevent an asset bubble? That has GOT to be the most retarded article on the crisis I've EVER read. The fault of this lies squarely with government institutions who mismanaged the economy to the point where people thought it was OK to take out loans on houses that were 10x their annual income.
Considering the FACT that banks do background checks and check to see if a person can afford a loan BEFORE approving a loan ... how are they NOT responsible?
You know, i think the biggest part of the problem is the fact that so many people bought into an "investment", and still look at it that way, rather than a place to live. I am 22 years old, and bought a condo with my fiance who is also 22, last April. Even at 22 years old (closed before our graduation date) - we were still able to get a 30 year fixed rate mortgage. I dont care what anyone says, if we can do it at starting salaries (not to mention the fact that we are paying over 300/month in condo fees, were required 250/month in PMI, and 300/month in property taxes), anyone can do it.
My ARM just adjusted and went DOWN two percent (thanks oh reckless fed reserve). My mortgage was $800/mo and is now $650/mo. What kind of ARMs are these people getting?
I don't have a lot of pity for someone who can't afford the mortgage payments on a $740,000 home. Next time buy something you can actually afford.
@superbureaucrat: I agree with you on this. However I feel blame is not needed because the banks in seeking short term gains will have punished themselves far more in the end when they need to sell these homes that are mortgaged for double their value and they can only sell for a quarter of their real worth and take a loss of 80%+ of the home's original sale/refinance.
@hi: The problem seems to be that they approve you can afford the house, not the house, a big screen tv for every room, a vacation every month ect. So few of the people I see with these problems can actually say they haven't frivolously frittered away money that could be saving them from foreclosure right now. This is not to say everyone in trouble did this, or that no one should have a big screen tv, but there is only so much to go around, you have to prioritize.
@weave: If you're paying $250/month for PMI you're an idiot lol.
For $250/month your mortgage insurance should be a full term product (not decreasing term) should cover you regardless if you sell your home or pay off your mortgage, cover you with disability income, provide you with over $500,000 if not $1,000,000 worth of coverage for you AND your spouse and then to top it off to return all of the premiums you ever paid into it after the 15, 30 years etc.
And if you think I'm making this up if you can come to PA I'll write you up the policy myself.
Did anyone notice that this article does not appear to be talking about sub-prime loans but home loans in general?
It may become the cost of doing business, to walk away from some investments. Corporations often do it when the cost of maintaining the investment exceeds its value.
I was going to raise a lot of cash, too. "The whole plan" was for me to sit at a blackjack table and get an ace and a ten out of a deck of cards. I drew a 16. Now I'm caught.
Would you take out a car loan that said, "we can adjust your payment up or down however we want"? No? Then why would you do that with a house that costs way more than a car?
@superbureaucrat and @dirk1965: It's a bit of both.
Problem: Banks gave out loans to people who should not of otherwise qualified.
Reasoning: Banks' fault
Problem: People took out loans that were interest only and were surprised when their property values dropped and their principal was now more than the property was worth, so they're stuck and can't sell or refinance.
Reasoning: People forgot to research.
The main problem is people who were in these subprime loans aren't dumb. They're uneducated, often living on the edge. They were trying to live the American dream which includes "Life, Liberty and the pursuit of property" (Locke).
Now, should they have read the fine print and had good lawyers who explained it all to them? Sure, in a perfect world.
However, how can we not blame the banks who were making pure profit on interest only loans to begin with and were merely rubbing their hands together in the prospect of potential rate increases which would screw these people.
Should the government bail people out? I think it depends. If they were absolutely mislead and can prove it, than yes, I believe people deserve to be helped out. If they just didn't think their rates would ever go up (considering they'd just about bottomed out, where else could they go?), then no, they should live with the consequences of their actions. The banks, not at all. They brought this on themselves.
The other, not often discussed, problem is the rebound this has on the rest of the real estate market and, ultimately, the economy at large.
You now have a load of foreclosed homes on the market in addition to the homes ordinary people are trying to sell in the course of their everyday life (there were 3 notices in last week's local paper alone for just my town). There are a lot less buyers out there, so people are stuck. Then people can't move and the economy starts to stagnate.
So, no, the media is maybe using shock tactics a bit, but there really is a big problem out there. Real estate is an early indicator of economic problems (as is new home construction).
@hi: Then its their fault for not reading all the fine print. You are signing a contract... READ IT!
I don't feel sympathy for people that attempt to "flip that house". There are always risks involved, and you bought that house with intent to make a huge profit, when there could have been an eldery couple or young married couple with kids that could have put it to use "as is".
Homes shouldn't be counted on as "an investment".
I don't want to be condescending to people who are in distress, but really, they have to shoulder some of the blame. Think about this. A house is the biggest thing you are ever likely to own, unless you are a billionaire and buy a small country or something. As such, you might want to invest a proportionate amount of time in researching all the terms and traps, that you would on a purchase of a car or a college education. And by proportionate, I mean, like this:
Car costs $25K.
House costs $250K.
If you would spend 10 hours in researching your car purchase and your financing options, why wouldn't you want to spend at least 100 hours on learning everything you need to know about buying a house.
Consumers are at fault. Banks are at fault for not explaining this shit to people in ways they can understand it. There is a large amount of unnecessary jargon that goes into mortgages with the seeming sole purpose of confusing the customer. It's as bad as medical insurance.
Lastly, I blame the financial media. They have perpetuated this myth that home ownership is ALWAYS financially responsible when anyone who does the math can see that it doesn't make sense for a lot of people a lot of the time. Especially considering the fungibility of homes, relative to other investments and savings vehicles. If you don't understand fungibility, there's always [google.com]
This story is really infuriating. Rather than let his daughter take out some loans, he equity-strips beyond his means and will just declare bankruptcy.
@chiieddy: You stated that "there is a load of foreclosed homes". I would have to disagree with you. The final 2007 statistics show that less than 1% of homes were in some stage of forclosure. I would call that "a load".
I wonder if any body's paying attention to the actual article. This isn't about subprime or interest only mortgages. It's about people who refinanced their houses, and now that the housing prices are falling, they're stuck with mortgages worth more than the price of their home. They knew they would need to refinance again in order to avoid the ARM increases, but they can't because their house has devalued. You could blame them for not knowing the market would crash, but the housing experts were predicting that home prices would increase forever. It's just like the Dot-com bubble burst, but because of the importance of housing, the effect on the economy is much worse. We should stop worrying about whose to blame and who should be punished for their mistakes, and concentrate on what can be done to save the economy.
Have consumers now gotten the idea that their home isn't an ATM?
Actually, it's fair to blame the losers that causes the subprime crisis in the first place. I'm probably upside down in my house (prime, 30 year, fixed mortgage) because of depreciation, not my own reckless spending habits. It was bought as a home, not a flipper, and I still plan to be in it for many years. Hence, I'm not worried that I'm probably upside down, but it makes capital improvements that much more difficult. It means either (a) having the cash on hand (always the best option anyway), or (b) losing tax deductions in taking an ordinary loan. Option (c) is no longer available, that is, using your own house to fund its own improvements. By capital improvements, I don't mean a 72" television screen, but say a new roof, a sun room, big stuff. The depreciation is directly attributable to all of the losers that have provoked foreclosures and drive down the prices. We normal people had nothing to do with creating the problem, but as the article shows, their irresponsibility is affecting those of us that manage money wisely.
@dirk1965: Read CHIIEDDY & POTKETTLEBLACK's comments. They explain it better than I.
-POTKETTLEBLACK
"There is a large amount of unnecessary jargon that goes into mortgages with the seeming sole purpose of confusing the customer. "
@dirk1965: is that 1% of all homes? Because 1 in 100 of all homes is a load. Even if it's of homes currently for sale, it certainly doesn't seem like a low number.
i tend to err on the side of 'people should deal with their own
problems', but with this particular problem, it appears that everyone
who was involved in the process is actually to blame:
-sleazy real estate agents who helped anyone who wanted one to get a loan
-mortgage companies & appraisers who told folks their homes were
worth more (didn't mention the fact that the bubble would pop) and
encouraged them to refinance
-banks trying to cash in on skyrocketing home values, and "looking the
other way" when a credit score was less than stellar (sometimes not
even requiring proof of income)
-uneducated home buyers
-local governments also cashing in on increasing property values
through increased property tax rates (which are assessed each year)
and finally....
what about the developers who built tons and tons of hideous and
generic tract homes in "hot" areas like California, Nevada and Florida?
is it a coincidence that these are the top 3 foreclosure states? most
of those homes were purchased as investments.
everyone is to blame. and now that my chances to buy a home are even slimmer because the standards have become incredibly high, and the economy is slipping into recession because of shit i didnt even participate in - YES the government needs to step in and fix things. this isnt the time to teach anyone a lesson. its more dire than that. wait until next year when your city has to face deep budget cuts adn the library and parks and shelters are closed... this is bad for everyone.
I'm sorry, the only one to blame here is that engineer who took a high risk bet. If you're gonna try to live beyond your means, don't complain about it later. Nothing to do with sub prime mortgages or anything related to it.
@yesteryear: You only mention local government (which I agree with you about property taxes). But why should the federal government (aka ME!) have to bail out these people that made a bad investment? Of course, thats assuming you meant 'bailout'... but you did say 'fix' which could mean something else.
I know "who to blame" is debated with every housing article posted but I am a little surprised that no has mentioned the Realtors and their National Association. These are the salespeople. They feed stories/statistics to the media that make it appear as if owning your home is an obvious choice no matter what. They upsale properties then try to find a lender willing to give their client the money, so they can make their nice little profit. Even a buyer's agent is compensated on price, so even your so-called representative is looking to sale you more house at a higher price. But they develop relationships and people trust them and do what they are told. Even now they are running ads telling peple now is a great time to buy. They are the salespeople converting peoples dreams into commission, then walking away without a thought as to what happens to those people next.
@B: I feel bad for them because this is a terrible financial situation for any family, but these people borrowed money to pay for things they couldn't afford, gambling on the fact that their house would rise in value. If this guy had borrowed money and lost it all on the stock market, no one would allow him to shirk responsibility so completely.
DESCEND: And why do you care? His actions didn't hurt you. And he'll have to face his own consequences. It will have no impact on your daily existence.
@DashTheHand: I know, that's what I pointed out, my question was 100 houses or 100 houses that are for sale. Makes a huge difference in the total number of foreclosures.
The NYT article states "As long as home prices were rising, these borrowers could refinance their loans or sell their properties to pay off their mortgages." I keep seeing this mentioned elsewhere and it makes no sense to me. How can people keep refinancing their mortgages upward, pulling cash out, and still afford the payments? And if they were to sell later on, where would they live? Some place cheaper? In both cases, it seems these people were doing nothing more than gambling with mortgage rate and housing price futures - and they lost. Except, instead of just losing their investment, they'll end up losing their house.
They gambled and lost. Why should they get special treatment? Will there be an equity sharing program for ARM loans in the future?
@superbureaucrat: "However, I don't see why banks made the loans if they had this in mind..."
There was an interesting article posted to Consumerist a few weeks ago which apparently nobody read. It was labeled as an interview with a hedge fund manager but it went into the root causes of the "subprime meltdown". Give it a read and you can see that these loans were pushed on banks as well...
@jscott73: "Even now they are running ads telling peple now is a great time to buy."
It isn't? I bought a house recently and unlike the insane market of a few years ago I had time to look at houses and do research. A few years ago you had to put in a bid within fifteen seconds of seeing a house on paper or else somebody else was going to get it.
@PotKettleBlack: Yes I remember those little whispering articles a few years ago that said it may be better to rent, than buy at the peak of a market value. I'm glad I listened to those articles.
One word sums up this whole thing in its entirety : GREED
@arch05: seriously!!! Everytime I see one of those "Buy me" shows on HGTV, I just feel nauseous realizing that the real estate agent is driving a hummer and pumps up house values to keep up that lifestyle.
I really hope they're the ones that really get a swift kick in the pants during the recession.
@hi: "Considering the FACT that banks do background checks and check to see if a person can afford a loan BEFORE approving a loan ... how are they NOT responsible?"
A bank is there to loan you money, not guarantee your financial future. That's your job.
The bank will see if you could realistically make payments under the conditions that exist when they give you the loan. Home loans typically have 30 year terms. The bank can't possibly know what's going to happen with interest rates, your home's value, your spending habits, and your income over the next 30 years. Once they give you the loan it's up to YOU to figure out how to pay it back.
The current administration knew the bubble was coming, two years ago. They thought they could ride it out and let the next candidate take the fall, but they couldn't.
BTW, Ben, it's been beyond subprime for some months now.
In an election year, everything is a crisis.
There is no 'meltdown'... do the math! This is nothing but media sensationalism. All this is is dumb ass people allowing themselves to live beyond their means. It's also partially the fault of the mortgage companies for misleading people in believing they can afford the mortage. I'm so tired of this type of reporting!