One of the great legacies of the housing boom of the past six
years is that almost everyone - even people with questionable credit
- has access to a mortgage.
But now, some housing advocates contend, all that easy credit is
on the verge of creating the worst mortgage crisis since the 1980s.
The reason: A rising number of homeowners are shouldering mortgages
they can no longer afford. For example:
* In 2004, John Silva refinanced the modest home he and his wife
own in Willow Springs, N.C. Today, with their mortgage at almost 10
percent, he worries he's just a "hiccup" away from foreclosure.
* Ten months ago, newly divorced Tammy Myers got a no-down-
payment loan to buy a house in Denver. The interest rate is now so
high it's difficult to make her monthly payment.
* Susie Smith - a retired social worker who's too embarrassed to
use her real name - almost lost the house in St. Paul, Minn., she
had lived in for most of her life. That was after she refinanced it
and her monthly payments more than doubled from $675 to more than
$1,400 a month.
Across the nation, foreclosures and defaults are rising as
mortgages that were once affordable are now expensive albatrosses as
the introductory "teaser rates" that made the loan possible end and
higher interest rates kick in. Some housing specialists worry that
the mortgage industry - with more than 20 companies already in
bankruptcy - will raise its lending standards so high that would-be
homeowners with less-than-perfect credit will be frozen out. There
is even some concern that the pullback in lending will extend the
slump in the nation's housing market.
"It's the most serious threat to the economy," says Mark Zandi of
Moody's Economy.com. "It has the potential to set the housing market
back another big notch since there could be a whole class of people
who can't get credit."
At issue is a class of mortgages that lenders call "subprime"
because they do not qualify for the lowest or prime interest rate.
These are designed for high-risk borrowers, those with fixed
incomes, or those who have had credit problems in the past. Since
1998, more than 6 million Americans have borrowed in this way,
according to the Center for Responsible Lending (CRL). The majority
of these loans are adjustable-rate mortgages (ARM) that are tied to
changes in interest rates.
One in five loans subprime
That's a dramatic increase in only a decade. In 1995, subprime
mortgages represented a niche market: less than 5 percent of
mortgages originated. Today, Wall Street analysts estimate they make
up from 18 percent to 24 percent.
Advocates contend they've made it possible for millions of
Americans who in the past would not be able to qualify for a
mortgage to own their home. But critics contend they've also become
open to abuse, in part because qualification standards are now so
Deregulation has allowed the mortgage industry to create products
like the no-down-payment mortgage and the even riskier "no
documentation" loan where all borrowers have to do is state their
income without providing proof of their ability to repay the loan.
"There was a real rush to make these loans and make as many loans
as they could," says Jordan Ash, director of the ACORN Financial
Justice Center in Minneapolis, a national low-income housing
advocacy organization. "That's because the mortgage companies could
sell them off right away" to Wall Street investors.
Investors profited from the high interest rates that consumers
"Wall Street wanted the mortgage brokers to keep making loans
even though they were riskier and riskier," says Ira Rheingold,
executive director of the National Association of Consumer Advocates
in Washington, D.C. "They didn't care that ... people were getting
loans they couldn't afford because there was so much money to be
Abuses got so bad that some lenders were making loans to
borrowers who ended up defaulting on their very first payment,
according to housing experts. …