This is a good article that represents the thousands of families now facing mortgage problems. Expect to see a lot more of these sad stories about regular families now facing terrible financial problems that stem from their home purchase.
One Family's Journey Into a Subprime Trap
Monteses May Lose House as Rate Resets, Credit Options Dry Up
Wall Street Journal
August 16, 2007
FULLERTON, Calif. -- Nearly two years ago, Mario and Leticia Montes found a home they loved, a gray stucco bungalow with a hot tub in the backyard in a middle-class neighborhood of Orange County.
The price was a major stretch at $567,000. But the couple, who had sold a home a few years earlier to move to a better area, was tired of renting. Mr. and Mrs. Montes convened a meeting with their two teenage daughters around the kitchen table to hash out the implications. "We agreed we wanted to be homeowners again," says Mr. Montes, "even if it meant the end of vacations and not eating out as often."
Like many people who jumped into the rising housing market in recent years, they had little money for a down payment and chose a loan that would hold their monthly payments down for the first two years, then "reset" to a much higher level. Mr. and Mrs. Montes say their mortgage broker assured them they would be able to refinance in a couple of years to keep their payments affordable.
The really hard part of this "sub-prime mortgage" situation is deciding who is to blame and how it should be fixed.
Even if the government agreed to float families like this a fixed rate mortgage (because banks wont accept that risk), the family still could not make the mortgage and tax payments.
They may not have liked renting; a lot of people may have told them buying a home is the smartest investment; they may have felt that they deserved a home -- but the math doesnt lie. The fundamental problem we now face is that many families tried to purchase homes they could not afford to pay for. (One lesson? Do not depend on your bookie for betting advice.)
The amazing home prices we have seen are just not justified by the markets ability to pay those prices. It follows that something big will have to happen to balance the equation. That correction could be losing the home, it could be lower home prices, it could be big raises for the higher cost of living. (Well probably not the last one.)
Personally, I feel the real culprit in all of this is are the lenders. If those loans were not available in the first place, home prices would not have risen so much and we would not be in this problem now. The lenders (and the mortgage brokers they employed) got greedy, got risky, and screwed us all - and they are now the first in line for a bailout from the federal government.
Lenders in turn may say the problem was those slick guys from Wall Street. Those well dressed hedge fund geniuses who could talk an eskimo into buying snow. There is probably truth to that too.
If lenders had not been able to sell all those mortgages to someone else, who created mortgage-backed securities with them, none of this would have happened either. The banks would have been stuck with the loans they made which means they would not have taken so many risks for so long. By allowing someone else to suffer the consequences of the lending actions, we created a monster. A lot of people made a lot of money but the results are not sustainable and a lot of people are about to lose a lot of money.
There are now a growing number or articles and blogs about who is to blame and who should pay. Im pleased to see that most people dont blame the borrowers as much as the lenders.
Andrew Sammwick writes about market risks
And both refer to this post by Dean Baker
One issue none of these articles talk about is retirement.
A few of the articles talk about guidelines for how much of one's income should be devoted to housing, ie how much of a home one can afford. After all, a home is only one aspect of financial needs. Retirement is a much bigger problem. If a family couldnt afford the mortgage, how much are they saving for retirement? If there are two million homes in foreclosure, does that mean two million household bankruptcies? Two million families with no retirement except social security?
I fear that another big downside of the recent housing boom is that it is going to end up ruining the finances of millions of households. And those households are going to create a huge wave of senior citizens in poverty. Not a pleasant prospect.
