Economy on a roller coaster: Subprimes are taking us for a ride
Posted by: in Money General TalkFiled under: Banks, Borrowing, Debt, Real Estate, Ripoffs and Scams
I love roller coasters, especially when I’m riding in the back. My favorite part is when you begin to go down the first drop. You’ve just been pulled up the hill by a ratcheting engine, and you’ve that tiny moment when you can anticipate the next few terrifying minutes. The twists and turns haven’t happened yet, but you know what’s about to happen, even if you’ve never ridden on the coaster before. It’s too late to go back and you now realize that you’re about to face a terror that you previously only imagined.
Looking at the subprime mortgage mess, I’m getting the same feeling. This time, though, I’m really not looking forward to the ride.
About three years ago, my wife and I contemplated buying a home in Roanoke, Virginia. Our credit wasn’t very good, so we considered a subprime mortgage. The theory was that we would get a decent, fixed interest rate for five years. With interest rates incredibly low, we would have been able to purchase a nice tiny duplex at a great price. Our mortgage payment would have been lower than our rent, freeing up some money so we could get our financial house in order. By the time the rate went up, we hoped that our credit would be superior, and we would be able to refinance with superior terms.
I feel like I dodged a bullet.
The idea seemed pretty good at the time; judging by the widespread misery of the current subprime mortgage mess, I get the feeling that a lot of people had the same plan. Because we weren’t sure about the neighborhood and didn’t want to permanently settle in Southwest Virginia, we walked away from the deal. However, millions of others didn’t, and the current disaster is the very first wave of a veritable ocean of subprime borrowers, up to 43% of whom are prone to default on their loans.
Another massive problem is that many of the homes that were bought with subprime mortgages are now worth less than the money owed on them. This has become an issue for banks attempting to auction off the distressed properties, as the starting bids are often higher than the house’s actual value. Right now, the Treasury department is working on a plan to help borrowers who are caught in this particular trap.
Congress is considering a wide array of proposals to help borrowers and banks weather out the subprime disaster. One bill in the Senate would grant judges to cut insurance rates and reduce the debts of homeowners who file for bankruptcy. The bill would also set aside $200 million for foreclosure-counseling services and would set aside money to help homeowners refinance their subprime mortgages. Other legislation is aimed at protecting banks from lawsuits brought against them by investors whose holdings drop in value because of defaulted loans.
The bright side, however insufficient, is that, for the moment, borrowers and lenders are both facing a major problem: borrowers don’t want to default, and lenders don’t want them to default. The housing market is reaching its lowest point in 10 years and is apt to continue its downward slide. Given that this is the kind of crisis that could potentially define an era, hopefully Congress will act aggressively to protect both sides from losing their shirts.
Bruce Watson is a freelance writer, blogger, and co-author of Military Lessons of the Gulf War and A Chronology of the Cold War at Sea.
I’ve hit a wall. A realization. The point in my life where I’ve realized how bad I was with money. It started with my tracking my spending for a week. It was unsightly. Then came a large time in my life…refinance. We got one of those variable rate loans…you know the ones…where your interest rate blows up after two years?
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