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Tuesday, February 12, 2008

We're All Subprime Now

by Tanta on 2/12/2008 08:08:00 AM

We welcome Vikas Bajaj and Louise Story of the New York Times to the clubhouse. Budge over, everyone.

From "Mortgage Crisis Spreads Past Subprime Loans":

The credit crisis is no longer just a subprime mortgage problem.

As usual, I enjoy the borrower anecdotes. These are, you remember, prime-credit well-educated borrowers with good jobs. What does this heretofore under-recognized not-just-subprime group have to say about the pickle it's in?

Ms. Harris, who has a new home in a neighborhood in which the builder is slashing prices to move vacant units:
In addition to the declining value of her home, Ms. Harris, 53, will soon be hit with a sharply higher house payment. She has an option adjustable-rate mortgage, a loan that allows borrowers to pay less than the interest and principal due every month. The unpaid interest gets added to the principal balance. She is making the minimum monthly payments due on her loan, about $2,400.

But she knows she will not be able to pay the $3,400 needed to cover her interest and principal, which she will be required to pay once her loan balance reaches 115 percent of her starting balance. And under the terms of her loan, which was made by Countrywide Financial, she would have to pay a prepayment penalty of about $40,000 if she chose to refinance or sell her home before May 2009.

She said that she now wishes she had taken a traditional fixed-rate loan when she bought the home.
She cannot afford a fully-amortizing principal and interest payment. So she wishes she had taken a loan that would have required a fully-amortizing principal and interest payment from day one?

Mr. Doyle has a "six-figure" income and is upside down with a $740,000 loan.
In refinancing their home in 2004, Mr. Doyle and his wife were doing what millions of other homeowners did in the last decade — tapping into the rising value of their homes for home improvements, paying off credit card debt, college tuition and for other spending.

The Doyles took advantage of the housing boom by refinancing their home nearly every year since they bought it in 1995 for $275,000. Until their most recent loan they never had a problem making their payments. They invested much of the money in shares of companies that subsequently went bankrupt.

Still, Mr. Doyle does not regret refinancing in 2004. “My goal was clear: I wanted to help my daughter go through college,” he said. “It wasn’t like it was for us.”
Is that, one wonders, what Mr. Doyle thinks is the difference between those subprime people and "us"? That while the subprime people hopelessly bungled their finances for selfish reasons, the prime people hopelessly bungled their finances for unselfish reasons?

I am tempted to say that the real difference between prime and subprime borrowers is that in the former case the denial lasts a lot longer.

(Hat tip Bode & Buzz.)