2 million homeowners w/ $600 billion in subprime loans due to reset at higher rates in next 8 months

[Amerigo Vespucci]

New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario

By Joe Bel Bruno, AP Business Writer

NEW YORK (AP) -- When Domenico Colombo saw that his monthly mortgage payment was about to balloon by 30 percent, he had a clear picture of how bad it could get. His payment was scheduled to surge by an extra $1,500 in December. With his daughter headed to college next fall and tuition to be paid, he feared ending up like so many neighbors in Ft. Lauderdale, Fla., who defaulted on their mortgages and whose homes are now in foreclosure and sporting "For Sale" signs. Colombo did manage to renegotiate a new fixed interest rate loan with his bank, and now believes he'll be OK -- but the future is less certain for the rest of us.

In the months ahead, millions of other adjustable-rate mortgages like Colombo's will reset, giving them a higher interest rate as required by the loan agreements and leaving many homeowners unable to make their payments. Soaring mortgage default rates this year already have shaken major financial institutions and the fallout from more of them, some experts say, could spread from those already battered banks into the general economy.

The worst-case scenario is anyone's guess, but some believe it could become very bad. "We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times -- but, as an expert on the global credit crisis, he speaks with authority. "Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth," he said. "It does keep me up at night."

Some 2 million homeowners hold $600 billion of subprime adjustable-rate mortgage loans, known as ARMs, that are due to reset at higher amounts during the next eight months. Subprime loans are those made to people with poor credit. Not all these mortgages are in trouble, but homeowners who default or fall behind on payments could cause an economic shock of a type never seen before.

http://biz.yahoo.com/ap/071124/apfn_doomsday_scenario.html

[Liberal_in_LA]

1. Scary! I can't remember a scenario like this in my life time.

[Amerigo Vespucci]

4. I have a good friend who is a realtor who went back to his previous line of work.

He said that his office is like a ghost town...half of the agents are never there. He went back to his old career (selling residential / commercial sprinkling systems) and is holding onto his real estate license and keeping one hand in the game part time, but for all intents and purposes, he's no longer a realtor by trade.

I'm sure there are many, many similar stories across the U.S...

[Liberal_in_LA]

7. funny how quickly things flipped from a sellers market to a buyers market.

it was just two years ago people had to write sappy letters to the sellers to get the HONOR of buying their home. Now the market is in free fall.

[Flabbergasted]

2. I think alot of these banks will allow loans to be renegotiated. It's in their interest.

[MadMaddie]

3. Another failure by the * administration to stave off this

catastrophe....and there is nothing they can do....unbelievable that the American economy is at the brink of collapse....people can believe the lies that this administration keeps putting out about the economy....but the truth is hard to hide.


It's going to get really bad my friends....

[Liberal_in_LA]

5. I wonder if we'll have homelessness while homes sit empty. ???

[DesertFlower]

6. we will.

[Liberal_in_LA]

10. We have homes sitting empty in LA where neighbors have to take care of the lawn and pool.

and thousands of homeless people.. crazy times!

[MadMaddie]

12. Yes.....

[L0oniX]

19. We had a unusually large amount of people at our Saturday afternoon feeding last week.

Normal in Clearwater is from 20 to 35 but last week it was 70. In Saint Petersburg the numbers are much higher ...200+

[DS1]

8. So he was paying 5,000 a month before the increase he avoided

That kind of mortgage means he bought either something huge, or paid little to nothing up front. Either way, I'm pissed at both the banks and the greedy people like him who had to buy into something they could barely afford in the first place.

[Liberal_in_LA]

11. The McMansion with pool, bonus room and chef's kitchen became a requirement... no one wanted the 3+2

[DesertFlower]

20. exactly.

i know of several cases where 2 people live in a 4500 sq. ft. house.

ours is around 2700 sq. ft. and it's just 2 of us. it's nice. we have 2 master suites, an office, exercise room, and guest bedroom and bath. we built it when prices were still low and put a large down payment. we only mortgaged $120,000 which we've paid down to $85,000. it's estimated worth is about $700,000. it cost us 1/2 of that to build it.

we saved for many years to have this home. even though we could afford it, i never wanted a high mortgage payment. with jobs being outsourced, we wanted to make sure if hubby's job were to go, we could still afford the house.

we had a mortgage broker who tried to talk us into an adjustable. i wouldn't do it. no matter how much he explained it, i was not comfortable with the idea. we have a fixed 6%. sure it would have been nice to pay 3 or 4% for a few years, but the idea of the adjustable scared me.

[Liberal_in_LA]

22. U did well. I apply the same philosophy to cars. Many people buy more car than they need....

overburden themselves with large payments to impress others with they gigantic fancy SUV. Better to live below your means.

[DesertFlower]

23. we live below our means.

we also pay cash for our cars and drive them for a long time. when we do sell them, we sell them privately. the dealers make out on that too. they wanted to give me $1,000 for my last car. i told them where to go. it cost me $10 to advertise on the internet. i sold it for $4,500 to the second person who called.

financial experts say if you want to be able to live decent in retirement, you have to live under your means while your working.

there are so many "little" things you can do to save money. we don't go out to dinner. we do a late lunch (3:00--3:30). the prices are 1/2 of what they are after that. and the bonus is -- no long lines waiting to eat.

[dugggy]

28. We are the opposite...eat out twice a week and 2 cruises every year

but then I lived below by means by a huge amount for 25 years and now
we can afford to live the good life.

[DesertFlower]

32. we lived above our means

when we were young and have no regrets.

we changed our ways and we're doing just fine now. we live under our means, but in no way are we deprived.

[dugggy]

35. That's not what I meant

that you are deprived. My point was that by living below means
for many years now we can afford to splurge. It is amazing how
that compounding interest works.

[DesertFlower]

37. i totally agree with you.

it amazes me when i look at how much interest we're earning. :)

[spooky3]

15. that was what I wondered, too

I am all for a solution where it is clear that lenders and/or brokers failed to disclose or otherwise behaved badly, but I have little to no sympathy for people who were speculating or trying to buy a much more expensive house than they could afford or that anyone needs.

[OzarkDem]

34. Hard to muster sympathy for some of these homeowners

The rest of us responsible homeowners end up having to pay for their mistakes.

[Trajan]

9. A couple more hundreds of billions ....

and they could match the utter loss of treasure endured by the american people at the hands of the loony neoconservative right wing ....

In nay case: this bodes ill for our country ..... Is dislocation of an order never here before seen coming ?

[MadMaddie]

13. We should all study the times of the Great depression

This will be * legacy....remember that's all he is concerned about.

Unbelievable.....

[depakid]

25. Actually the far right enabling Democrats have PLENTY of blame

It was the Clinton administration and Dems like Lieberman, et al. who presided over the irrational deregulation of the financial industry.

Another one of those things that, no doubt, the Hillary supporters don't want you to think about.

[MadMaddie]

38. I agree with that but we have to go back to Reagan who

deregulated many more industries.....and many of these industries are out of control now.

Regulation will help but I think getting our economy off of a credit based economy will help too.

[bunnies]

14. I dont get it.

Didnt these people sign contracts for these kinds of loans? I hate to be hardass but I dont comprehend why the gov't should even be involved.

[Trajan]

16. Yes they did ....

And we all know that mothers and fathers are more savvy than learned attorneys ....

I recommend we toss their asses onto the streets .... fuckin IDIOTS ! .....

[sendero]

17. Truthfully...

... they shouldn't. But there SHOULD have been laws against many of these loans and such legislation is passing through the house right now.

In the meantime, the big players will get bailed out with Fed rate cuts, to the extent such cuts will help, and joe six pack will get jack shit as usual.

It would be in the interest of everyone to try to "bail out" the joe six packs who have some kind of chance of holding on to their properties with little things like rate subsidies.

[spooky3]

18. the industry is poorly regulated

brokers can engage in a lot of deceptive practices, and lenders do not have make disclosures I think they should be required to make. For example, I refinanced with a floating rate (because I thought rates would decline while processing occurred, and it turned out I was right). The broker wouldn't tell me what the final rate was until midnight the day before the close. The final interest rate was a little higher than I thought it should be. When I went to closing, there was an unexplained charge more than $3000 on the closing sheet. I asked the lawyer for the title agency (in this state, you don't bring your own lawyer to closing) exactly that that was. He said, "by law, I cannot say a word about it." !!!! I figured out that it was a yield spread premium--a fee given to the broker for getting me to agree to a higher interest rate than my credit rating warranted. So I told him that I would not close until that fee was removed and I was given the right rate, and left. If, however, I had been buying a home rather than refinancing, I would not have had the freedom to do that--I would have been defaulting and breaking a contract with a home seller. Nothing either of them did broke the law, as I understand it. So, the market simply cannot operate with mortgages in the way that it can with other products.

This is just one small example of many abuses. So I feel sorry for some first time buyers, less educated people, etc., who were taken advantage of. There is legislation pending in Congress now to deal with some of this, but it can't turn back time.

[DesertFlower]

21. i've heard that some

of these mortgages have high "pre penalty" payments. so even if you refinance they've got you by the balls again.

[spooky3]

26. yes, I have too - technically a buyer could know that in advance

because it's buried in the piles of documents you have to read, BUT it would be extremely easy to overlook or misunderstand this. Lenders should be required to to make these very clear to applicants.

[rufus dog]

24. Unfortunately people get whirled into the pack mentality

I live in a SoCal neighborhood where the original home prices 12 years ago were 240 to 260k. The houses shot up to over 900k a couple of years ago. All is well if you stick with the original mortgage. In my case I bought a couple of years after the homes were built and refinanced a couple of times to get the lower fixed interest rate. I was in the minority. Most took out cash, there were a couple of Christmas days that were wild, my kids got a bike or a play station, life was good, then they went outside and the other kids got bikes, a play station, and motorcycle! A year later another family went crazy. No job changes, just a ton of equity in the house used to buy stuff. The paper kept saying prices couldn't go down more than 10%. I would tell people to plan on 25 - 30%, unfortunately it was much easier to go see the mortgage broker, take out 100k, the broker gets 3k and all is good. Until you get a downturn. Then you have instability at the job, your wage increase can't keep up with your soon to be increased mortgage, and you start to have health issues due to the stress. I can see how some people say screw them, but they are friends and neighbors who fell into a trap. I don't think a gov't subsidy is called for but thoughtful legislation to allow lenders to provide products that will reduce foreclosures will help all of us.

[DesertFlower]

27. as i posted earlier

the value of our home doubled within 2 years of building it. i always felt that it was inflated and might go back down.

i listen to a real estate program and they say that people went crazy taking equity out of their houses to buy cars, boats, trips to europe. they've actually used the phrase "people were treating their homes like an ATM machine".

it is easy to fall into a trap, especially when you're young and think you're invincible. i hope what's happening now will be a lesson to young people.

[cuke]

29. I blame Hillary

Someone was going to say it so I thought I'd go there first

:hide:

[Catherine Vincent]

30. LOL!

[1corona4u]

31. The main problem is, people, in their haste to buy..

took loans they didn't reevaluate. I bought my house in 2002, and did 100% financing. It was an 80/20 loan, fixed, on both, 80% at 7.0, the 20% at 14.9!!,on stated income, good credit. And while I had the money to put down, I wanted to use it to upgrade many things. I said, at that time, just take it, pay for a year, and get out of it. I bit the bullet, and 18 months down the road, started to look for refi. I found 100% financing, at 7.0%, 100% loan, so I took it, and I got about 15K in cash out of the deal. But, the loan I took was a 2 yr, ARM, and I knew when I took it, I would be looking again before the end of the 2 years. Within 6 months before the 2 years, I got a loan for 6% 30 yr fixed, and about another 15K in cash at closing. I took it. There was no way I would have ever stayed with an ARM. I think people were betting on the rates staying the same, or less, and I just don't like speculation.

This is a crisis, I'll give you that, but people also bit off more than they could chew, and they really should have looked for better rates before the ARM was up. Now, you have a glut of houses on the market, and no one can buy, or sell. My best friend is a realtor, and she does very well, but she also works 12 hours a day, including weekends.

You really have to be thinking ahead if you take an ARM. I don't think most people did. Maybe they were first time buyers, who knows, but then you have all the flippers who also got stuck, so it's compounded.

[soothsayer]

33. 14 million subprime loans were written, and I've heard 1/2 are going into default

so this estimate seems a tad low

[Sanctified]

36. I am sorry but subprime loans are a scam and all these fucking banks deserve

what they are going to get when all of their customers default on them. The whole you have bad credit so we are going to give you an insane interest rate is bullshit.