Mortgage crisis simplified

I thought I’d take a crack at the burgeoning mortgage crisis:

Here are a couple of links.

There are (based on risk) three classes of mortgages:

prime: good credit, good income; substantial down payment; at present these are only 60% of all new mortgages. The default rate is very low.

subprime: 20% of all new mortgages; some are based just on verbal statements of income, some with no money down, and initial “mortgage” payments which are basically interest only (or less).

alt-A: 20% of new mortgages; the risk is in between prime and subprime.

Many mortgages are adjustable rate: for the first 3-4 years they have very low payments, but then the payments balloon up. The average increase is 1500 per month. Some people can afford the increase, but will have to decrease their “consumer spending.” Bad for the economy. Many people can’t make those payments. In the past, with housing prices going up, they could refinance ie use the increased value to get a bigger loan, pay off the original mortgage, and start over again with the stakes even bigger than before, but with, again, low payments for several years.

However, refinancing is not gonna be possible for many of these people, because lending requirements are getting stricter, and the value of the home may actually have gone down. Real wages adjusted for inflation have not risen at all in the last 5 years. Savings have dried up. These people are going to default, and in a couple of years this maybe 5-10% of all mortgages. Back in the day, it was only 1%.

What will happen to these houses? They will be sold at bargain prices, because unlike many homesellers who occupy the house until it is sold, banks are not using the property; the asset sits there unused and usually deteriorating. This forces down home prices generally, and thus tends to make it harder for other marginal owners to refinance. So the cycle is self reinforcing.

Now, this cycle will go on for at least five more years, because we are just getting into the reset date for loans made 5 years ago when all this started; and each year the number of alt A and subprime loans increased. ie in 2003 there were more than in 2002.

To restate: the news is gonna get worse for the next 4 or 5 years. Each year there will likely be more defaults than the year before.

So the housing market is not gonna stabilize for at least five years, and the average home price is gonna drop a total of probably 20 percent. In some areas more, in some areas less. In Detroit, some homes are already selling at auction for less than the price of a new car.

Now, there are new homebuyers who qualify for prime rates who will suck up these homes, no question. But new homebuilding will fall to very low levels. This means that the construction trades will be wiped out, that large numbers of construction workers will be wandering around with nothing to do; American big truck manufacturers, yes Ford and GM, who cater to the construction trades are gonna go under, parts manufacturers and suppliers will be hurting, the economies of many midwestern states will go further into the dumpster. This will make for more defaults, etc.

Wages will fall, because of the number of unemployed workers, and thus consumer spending will fall farther. That is really the driving force in our economy, and at that point things get really touchy.

If foreign investors lose confidence in our mortgages and our economy, then they will stop accepting dollars and put their money elsewhere. This is already beginning to happen. If there is a real flight from the dollar, then America is really going to be in trouble.

Now, there are corrective steps that can be taken, but without bipartisan cooperation, they won’t happen, because neither party wants to take the blame for the belt-tightening that is required. For example, balancing the budget will be important in retaining investor confidence. That means raising taxes. Will that happen? Foreign investors would like higher interest rates, but that might further depress the economy. The cowardly thing to do is just print more money, causing inflation, which robs us all, but especially the old.

The easy times are over, people, and there are hard times ahead. It didn’t have to be this way. But America has been sold a bill of goods over the last 6 years, with easy credit, tax cuts, irresponsible spending and a war on top of it all. America and it’s citizens are deeply in debt. It’s time to pay up.



Filed under George W. Bush: is he really THAT bad?, Personal, Politics

4 responses to “Mortgage crisis simplified

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  2. You wouldnt believe it but I’ve spent most of the day searching for this info.

  3. I found your site on bing. I couldn’t agree more. I love this site article. I will definately be back to visit again.

  4. While we’re in the Mortgage crisis simplified | Over the line, Smokey! zone, If the company can’t tell you their success rate, this is an immediate red flag and you should RUN, not walk the other way! Ask yourself: if you were in a service business like this, would you take the time to know how many loan modifications you had taken on, and how many had been approved?

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