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Homeowners, struggling to deal with sharp increases in
their adjustable mortgage payments as resets come due,
are also faced with rates as much as 3% higher if they
decide to convert to a more stable 30 year mortgage,
adding to the sub-prime lending crisis and the coming
economic collapse.
And what’s worse, is that if they cannot afford the
increase in either instance and decide to sell, they are
up against an increasing glut of overpriced, unsold homes
on the market. This massive oversupply of homes caused by
the sub-prime lending crisis and reduced demand, are
causing prices to plummet.
As property values fall below the price that was
originally financed, homeowners are finding it more
difficult to convert out of their ARM’S and for
buyers to qualify for a mortgage at the still over
inflated prices.
To illustrate the vicious cycle described above, I cite
the following example.
Even though taxes are a factor here (because taxes
don’t automatically go down as property values fall)
I will not figure taxes in this example. Let’s just
say that this upside down tax situation adds to
Joe’s problem.
Joe buys a home at market price, one that is properly
appraised and valued at $200,000. Joe puts down 20% or
$20,000 and finances $180,000 with 30 year ARM.
Joe’s mortgage payment would be $1,143.70. After 3
years, Joe’s Payment would increase to $1,157.22 and
he would owe a balance of $172,307.67.
Joe sees interest rates rising rapidly and that the real
estate market has been slowing down, so he decides to
refinance into a fixed 30 year loan. However, the falling
market has caused the value of his home to drop 20%, to
$160,000. Joe can’t refinance unless he comes up
with $12,307 to pay off the original loan.
Ouch! Joe doesn’t have $12,307 dollars, so he
decides to sell. (remember, he couldn‘t afford the
payments, but now he’s stuck) Mortgage appraisers
are tougher now because banks don’t want to get
burned any worse than they already have, so because
Joe’s house is now worth only $160,307, he must
still come up with $12,307 in order to even sell at a
loss. And that’s not counting real estate fees.
The sub-prime lending crisis has caused banks and
mortgage companies to scale back on excessive mortgage
lending. In that vacuum, banks are increasingly extending
credit card debt to those who are already unable to meet
the higher ARM resets. The very same people who were
partly responsible for the sub-prime lending crisis in
the first place. Banks are increasing credit limits and
lowering standards. Does this sound familiar?
At a time when the economy is in danger of entering a
recession, the amount of personal debt is climbing to all
time highs. Some of these homeowners are using the
unsecured line of credit to meet their mortgage
obligations. They need to keep in mind though, that in
most cases, interest rates on credit cards are about
three times that of mortgage and isn't tax deductible
either.
The most likely outcome is foreclosure and/or bankruptcy.
See how fragile our economy is?
P.S.
On Oct 4, 2007, Miami Valley Bank, a Lakeview,
Ohio-based bank was closed down by Ohio regulators.
That’s the third sub-prime related bank closing in
2007.
By Michael Scoglietti
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