The core of the subprime meltdown are homeowners not paying their mortgages. A contributing factor to the default rate are people who signed up for loans with low teaser rates that ratcheted up afterwards, and now it’s time to give the devil his due. Why would people do such a foolish thing?

The Horns, a couple profiled in a New York Times story this weekend, were told by their broker that they could just re-fi two years later and get the low rate again. Mr. Horn is a 34-year-old truck driver, and Ms. Horn is a 39-year-old fast-food assistant manager, making $70,000 between them.

But when the music stops, and the lender band stops playing, they’re finding themselves without a chair, or a home…

The new mortgage was for $198,000, at a fixed rate of about 8 percent for two years and variable rates afterward. The monthly payment was about $1,600. The mortgage broker, Mr. Horn said, told them not to worry about the variable rate because they could refinance in two years and lock in a fixed rate again.

“They basically put us in a loan that they knew we couldn’t pay,” Mr. Horn said. “We never should have done it.”

When the fixed rate expired last year, the Horns found no willing lenders. The interest rate has jumped and the monthly payments rose to nearly $2,200, Ms. Horn said. “It just goes up and up,” she said.

The Horns are now filing for Chapter 13 bankruptcy, which basically just gives them more time on all their payments.

Loan by Loan, the Making of a Credit Squeeze [NYT]
(Photo: Christopher Capozziello)

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