I am not surprised that we have a credit squeeze and a sub-prime mortgage meltdown. For me. the first sign of the impending disaster was over 2 years ago when a young couple that I knew told me they were buying a house – no money down and no credit check. And I thought, “What bank would lend to them?? They live paycheck to paycheck, can’t even get a phone in their name….we are in BIG TROUBLE.” But the mortgage lenders kept giving out the loans with great teaser rates and life seemed good.
Not only did 100% financing become popular, but so did re-financing one’s existing mortgage. When home values were on the rise and interest rates were at all-time lows, it seemed like a no-brainer – increase the amount borrowed at a lower rate – wow – presto – your home was an ATM. You just had to go to the re-fi window whenever rates lowered by enough to cover the re-fi expenses, and presto more money!! ka-ching!! But worse, people were glomming onto ARMS (adjustable rate mortgages) by record numbers because their monthly payments would be lower but OOPS they forgot that rates can go up and so did those monthly payments.
Don’t get me wrong ARMS are great even now – BUT- only if it matches your time horizon for owning your house. What no one calculated was that interest rates might go up consecutively while real estate values were tanking. And the perfect storm for the mortgage meltdown began – while interest rates in ARMS were ratcheting up, house prices were ratcheting down. People who can’t afford to pay their new high monthly rates, need to sell their houses but their current value is less than their mortgage and….voila….one is stuck in the mortgage roach motel – one way in but no way out!!
Do I smell a buyers’ market?????