How the Mortgage Crisis Is Affecting You; Upheavals in the Housing Market Are Affecting Homeowners of All Income Levels
Johnson, Ivory, Ebony
It now appears that Americans have spent considerable effort trying to keep up with the Joneses, but failed to realize that the Joneses were trying to keep up with the Kennedys. This ongoing pursuit of material goods has prompted many Americans to spend more than they can afford--in effect using their homes as a cash machine--leading us to the current mortgage crisis that has the potential to affect every household.
Based on news reports, it would seem that all the housing problems rest on the doorsteps of sub-prime mortgage holders. A sub-prime borrower is one who has a poor payment history and a low credit score. Sub-prime loans make up 10 to 15 percent of all mortgages, and 15 percent of all sub-prime loans are more than 60 days past due or in foreclosure.
Many sub-prime mortgages are interest only loans or adjustable-rate mortgages that offer a low introductory rate but increase in as early as a year from inception. Consider a typical $250,000, three-year adjustable-rate mortgage with a 2 percent rate-hike cap. If the monthly payment is now $1,123, after the first adjustment, the monthly payment will be $1,419. After the second adjustment, the monthly payment will be $1,748--a $625 per-month increase. That means that the homeowner must come up with $7,500 more each year just to maintain the same mortgage. An estimated $515 billion of adjustable-rate home loans will adjust this year, and another $680 billion worth of mortgages will reset in 2008. Many people will not be able to make these higher payments, and this fact has rattled the confidence in our financial markets.
To make matters worse, when home values appreciated, many homeowners borrowed money from their homes through home-equity loans and credit lines. Consequently, some have no remaining equity when it comes time to refinance their original mortgages. Home-equity extraction was estimated to be $600-$800 billion in 2005. Of that, at least $150-$250 billion went toward consumer spending, as people essentially used their homes as an ATM to buy big-screen televisions, pay off other bills, and finance home improvements. With tighter lending standards and failing home values, even the ability to refinance is becoming a daunting task.
Furthermore, these risky and troublesome mortgages were pooled together and sold as collateralized mortgage obligations. …