I read the article below and wondered about the
1.2 mil homes in foreclosure, is that a high
number? Down below is an article on the 2005 foreclosures.
These are the best times ever. A new report by
the Mortgage Bankers Association brags that we
Americans are demonstrating "the greatest and
widest availability of mortgage finance in our
nation's history, which in turn has made possible record homeownership rates."
The bankers call it the credit democracy. The
wonderful era when nearly everybody could borrow
freely with few documents, lighter restrictions and self-proclaimed income.
"In light of the mortgage lending industry's
achievements in democratizing credit, the debate
no longer concerns whether credit is sufficiently
available to borrowers," the bankers say.
"Rather, the debate now has turned to whether the
loans particular borrowers receive are in their
best financial interest. Because of claims of
lending abuses and foreclosures, some consumer
advocacy organizations have recently suggested a
'suitability standard' should be imposed on the mortgage lending industry."
I rather like the phrase "because of claims of
lending abuses and foreclosures." It only takes a
few words to dismiss the growing data that
suggest we're headed for a credit meltdown. If
you can find the news beyond strange celebrity
behavior, consider that several banks (probably
members of the Mortgage Bankers Association) last
week reported a sharp increase in defaults on risky mortgages.
Last week, for example, ResMae Mortgage Corp.
filed for bankruptcy protection. According to
Bloomberg, it's "at least the 20th mortgage
company to be sold or closed as delinquencies
rise and the market for home loans to risky
borrowers contracts at the fastest pace ever."
"The sub prime mortgage market today is a quiet
but devastating disaster," said Martin Eakes from
the Center for Responsible Lending and Center for
Community Self-Help. "The ultimate effects are
very much like Hurricane Katrina, as millions of
citizens lose their homes and the fabric of entire communities is threatened."
Eakes testified before the U.S. Senate's
Committee on Banking, Housing and Urban Affairs
earlier this month about predatory lending practices.
"Our analysis of subprime mortgages made in
recent years shows that 2.2 million families will
lose their homes to foreclosure -- foreclosures
that were, for the most part, predictable and
entirely avoidable through more responsible lending practices," Eakes said.
"As housing appreciation slows down in many areas
of the country, it is clear that problem will
only grow worse. All indications are that
subprime mortgage loans are headed toward the
worst rate of foreclosure in modern mortgage market history."
This is a big deal because so many mortgages
today are considered subprime -- it's estimated
that 20 percent of all home loans fall into this
category worth $1.2 trillion in outstanding debt.
One reason why this financial hurricane will
wreak havoc: Many of these home loans started
with "teaser" rates, special deals that made it
easier for consumers during the first few years
of the loan. That process might work as long as
housing prices continue to rise, but when home
prices stay steady or decline, the consumer is on
the hook for increased principal. In the language
of bankers: The loan is a negative amortization
loan -- one where the debt burden grows.
And, eventually, the monthly payment will have to
catch up with that debt burden. Not to mention
the interest rates that are growing to nearly 12
percent (in this low-interest environment) per year.
"Lenders and mortgage insurers have long known
that some home loans carry an inherently greater
risk of foreclosure than others," Eakes said.
"However, by the industry's own admission,
underwriting standards in the subprime market
have become extremely loose in recent years, and
analysts have cited this as a key driver in foreclosures."
But is it too late? Can we avoid the hurricane?
Is there enough evidence to shift course?
We'd better try. A national suitability standard
might prevent more consumers from being trapped
in a predatory loan. And perhaps there's a way to
help people move from unsuitable mortgages into the plain-vanilla-type loans.
But we'd better hurry. Some $600 million in
adjustable rate mortgages will be reset this
year, making it even tougher for some people to
continue making their house payments on time.
Already, last year Realty Trac reported that more
than 1.2 million homes were in the foreclosure process.
And these numbers reflect a strong economy, the
best times ever. We'd better pray it stays that
way. Our credit democracy is at risk of bankruptcy.
Mark Trahant is editor of the editorial page.
E-mail: marktrahant AT seattlepi.com.