There's no need to discuss the rush to buy in the early 2000s when our economy was very much alive and interest rates were low. We've always been taught to not live beyond our means. Then along came subprime lenders telling folks they can qualify for their dream homes with creative new financing including interest-only ARMs and payment option plans. Many believed they would be paying less or the same as a rental. Credit histories and down payments didn't seem to matter because of the variations on the adjustable-rate mortgage (ARM), which is a loan where the interest rates go up or down. The initial rate is susally fixed for 2-3 years so people could pay lower interest rates. The lower the monthly cost, the more affordable it is for borrowers to get bigger loans. Interest only is dangerous because at some point, the principle must be paid and borrowers end up owing a great deal more than the original loan amount. With the payment-option loan, borrowers choose how much their monthly charges will be and again, people end up owing a lot more than the amount of the original loan. Reports indicate that approximately 34% of all new California mortgages in 2005 were interest only. Everything might have been fine if these homeowners lived in their homes for a few years and real estate prices continued to climb.
Now it's time to pay the piper because according to a First American CoreLogic study, "1/3 of ARMs taken out between 2004-2006 began with teaser rates below 4% and this year and next, about $260 billion in prime ARMs and $376 billion in subprime ARMs will beging to reset". Kathleen Keest of the Center for Responsible Lending said that "the pairing of these new loan types and new pool of borrowers was dangerous. They took the riskiest of products and sold them to the weakest borrowers to compound risk".
How could this happen? Regulators did little to nothing during the real estate boom to stop lending to borrowers who would never qualify. The Federal Reserve and other federal regulators ignored any guidelines for these unconventional mortgages until last year. So, after the fact, recommendations said lending institutions should have reviewed the borrower's ability to pay over the life of the loan and disclosures to consumers should be improved. www.RealTrac.com tracks foreclosures as do most local newspapers. The entire operation requires more than just the subprime lender. It often required appraisers, mortgage brokers, real estate agents and closing attorneys working with the seller to cram the deal through---like a mini whitel collar crime ring. Some lender partners were so blatant and fraudulent that that they sold several homes in an area based on inflated appraisals for the individual to buy property and sell it to a real or dummy buyer at an inflated price and pocket the difference.
Who's the real victim? Borrowers out to make a quick buck taking the chance that the market would continue to flourish, gambled and lost. Others were actually sought out using leads from undisclosed sources. Considering the greed versus victim issue, is it fair that Washington Mutual plans to refinance $2 billion in subprime loans below market rates or for Citigroup and the Bank of America to work with an advocacy group to help with $1 billion in subprime mortgages? Freddie Mac has committed to buying up to $20 billion of these loans and the state of Ohio has proposed a bond issue to help victimized homeowners. In any case, the best plan is to immediately renegotiate to a fixed loan--- even if you have to do it over 40 years.
