Wednesday, March 28, 2007

Housing: Ruined Dreams

by Bill McBride on 3/28/2007 12:30:00 AM

Here are two related stories: the first from the perspective of borrowers facing foreclosures, and the second from a macro perspective of the housing bust.

From Kareem Fahim and Ron Nixon at the NY Times: Behind Foreclosures, Ruined Credit and Hopes.

His monthly payments are now more than $2,600.

Earning about $2,000 a month on his salary, he quickly fell behind.
And from Rex Nutting at MarketWatch: Will 'lemming loans' drive economy off the cliff?
For the first time in the nation's history, a significant number of Americans are being threatened with the loss of their home even though they still have a steady, good-paying job.

It's not just an issue for people with poor credit, those with subprime loans. It also affects people with good enough credit to qualify for a prime loan. Known as Alt-A mortgages, these loans were written for 1 in 5 U.S. mortgages and could have a big impact on the economy and on credit markets -- bigger, perhaps, than the effects of the recent shockwaves buffeting the subprime-lender market, economists say.
In the past, homeowners have generally lost their home to foreclosure only when they suffered a major life-changing event, such as loss of their job, a major illness or death of a family member. A big jump in foreclosures was unheard of outside a recession that brought high unemployment.

But now, because of the recent popularity of loans geared to let people buy a more expensive home than they can truly afford, all it will take is the passage of time to trigger a default. At some point, all these loans are adjusted to switch from a low, subsidized monthly payment to the full amount required to pay off the loan.
Hmmm ... lenders making "loans geared to let people buy" more than they can afford? Like the example in the NY Times, with payments of $2600 per month and an income of $2000 per month? I'm still trying to do the math. How was that supposed to work?