Delicious
Digg
StumbleUpon
Newsvine
Facebook
Google
Yahoo
TechnoratiAmerican Dream Ends in Property Market Crash
WASHINGTON -Even now, the ads on television, radio and the internet continue: "Is your credit bad? Don't worry, we'll provide the loan for the home of your dreams ..." What those commercials should, but do not, add is: go through the small print with a toothcomb. Or else you, too, could be swept up in America's subprime mortgage crisis.Just as in Britain, homeownership is a traditional goal of American society. But as interest rates have climbed and the housing market has slumped, the number of what are politely called "delinquent" loans has soared. And as home repossessions grow, civil rights groups and presidential contenders alike are stepping into the row over the high risk, or subprime, mortgage market.
In the most sweeping call yet, a coalition of civil rights organisations have demanded a six-month moratorium on foreclosures. They want lenders - whose reckless and sometimes predatory policies are largely blamed for the crisis - to help victims refinance their mortgages, or face law suits.
"We know that there are safe and affordable loans that meet the needs of our communities," said Janet Murguia, the president of the National Council of La Raza, the biggest Hispanic civil rights group in the US, noting that minority groups were especially hard hit by the crisis. Lenders should "match families to the sustainable loans that they should have had in the first place", she added.
The subprime crisis has erupted over the past few months as borrowing rates have turned upwards while house prices have fallen steeply in many parts of the country. All sectors of the mortgage market have been affected but none more so than subprime loans, extended to borrowers with shaky credit histories.
Typically they carry interest rates 2 or 3 per cent above conventional mortgages. But, under complicated formulas, which critics say can come close to fraud, they usually offer very low "teaser" rates for a limited period.
As long as house values were on an upward path, they appeared to carry little risk. People were able to take on far more debt than they could afford. But when interest rates climbed sharply in 2005 and 2006, many were left facing payments they could not meet.
"I feel like they took advantage of me because I'm 77," Jennie Haliburton, one distressed borrower, told a congressional panel investigating the crisis last month. Ms Haliburton said she signed up for a loan with initial monthly payments of $700. However, these jumped to $1,300, an impossible sum for a widow living off a $1,800-a-month social security income.
Her plight drew an emotional response from the Senate Banking Committee, and helped turn the mortgage crisis into a major political issue here.
The Connecticut senator Christopher Dodd, the chairman of the committee and a Democratic presidential candidate, condemned such "risky, exotic mortgages". He accused the Federal Reserve of failing to use existing laws to regulate the market and maintain proper standards. More than two million Americans could see their homes repossessed over the next few years, he warned.
Other Democratic contenders for the White House have leapt into the fray.
Barack Obama has called for a "homeownership preservation summit" between lending groups, regulators and borrowers. "We cannot sit on the sidelines while increasing numbers of families face the risk of losing their homes," he said.
Hillary Clinton wants better protection for borrowers: "This market is clearly broken and if we don't fix it it could threaten our entire housing market," she said last week.
But the industry is resisting the moratorium, calling it an "over-reaction" to the difficulties of the market. Although more than 1 per cent of all US mortgages will end in default, the reason was as likely to be unexpected medical bills or a lost job as abusive lending by a mortgage company, a Bankers Association spokesman said.
The problems of the subprime market have sent shudders through financial markets, amid fears they could spill over into the broader economy. On Monday, New Century Financial, one of the largest US subprime operators, filed for bankruptcy protection.
But the true picture is more complicated. The subprime market is huge, involving loans worth a total $1.3 trillion (£660bn). But although one in six subprime borrowers are at least two months behind on their payments, the majority are not. Moreover, the rate of overall homeownership has jumped from 64 per cent to 69 per cent in little more than a decade, largely thanks to the subprime market which helps people not previously eligible for loans to obtain them.
'We thought it was a great deal'
Tim and Angela Sneary bought their little slice of the American Dream back in 2004. They were smitten by the house the estate agent had shown them in Denver, Colorado - drawn by both the bright-pink paint and the property's $240,000 price tag. "We thought we were getting a deal," said Mr Sneary.
They especially thought they were getting a deal when their agent told them he would find them a mortgage that required no deposit down.
Initially, they thought they would be borrowing at a fixed rate of 6.5 per cent. Each month they would have to pay $1,290, little more than their current rent.
But when they came to close to deal, things had changed. The loans were rather different, and the interest rates were much higher. Now, the Snearys wish they had walked away, but instead they took on additional jobs.
Today the Snearys are set to lose their home. Their problems began when Mr Sneary lost his job and had to take less well paid work. They soon fell behind on their payments. Mrs Sneary took on more hours but, in July 2005, she was in a car crash that left her unable to work for several weeks.
The Snearys are now seeking to sell their home to avoid foreclosure. They have less than two months to do so.
"[The lender] said you're going to have to pay ... or we'll have to go to foreclosure," Mr Sneary said. "Well, I guess I'm going to have to go foreclosure because I've given everything I have to give and you can't squeeze blood from a turnip."
The couple's plan now involves finding new jobs and a place to rent, and they will try to save some money. When they come to buy again they may even make an offer to another family seeking to avoid foreclosure.
Boom then bust
An estimated 1.5 million homeowners in the US face foreclosure this year.
In the 1960s, 1970s and 1980s, home ownership in the US stagnated at around 65 per cent. In the past 15 years, it has risen to nearly 69 per cent.
According to a study released last month by agencies devoted to fair housing, racial minorities are more likely to be given high-cost, subprime mortgages - in six major American cities, black borrowers were 3.8 times more likely than whites to receive a higher-cost home loan.
Last year, subprime loans made up 20 per cent of the market for new mortgages.
US interest rates have increased sharply recently - in 2003 and 2004 they were at a historic low of 1 per cent. They have risen to more than 5 per cent.
In the past five years, the subprime market has risen sharply - it now accounts for nearly a quarter of new mortgages and is worth about $665bn (£337bn). In 2001, it was worth about $200bn and only accounted for 10 per cent of loans.
© 2007 Independent News and Media Limited
22 Comments so far
Show AllHey neoconned, you misinterpreted my extreme sarcasm. I repeat my touche' to frank below. Please re-read and see that I agree with you, not frank. And pay attention to my quotation marks :)
------------------------
Hey frank: "No one forces anyone to apply for glorified pyramid scheme mortgages?" Right. And no one forced Eve to take a bite out of the apple, either. Right?
Just WHOSE side are people like you on, anyway?
I think common sense and being as educated as possible before entering into such a large purchase as a home is the only real defense people have. Unfortunately predatory marketing can be mighty powerful to the unaware and should be illegal.
That said I've also noticed my escrow and insurance steadily climb on my low interest fixed rate mortgage, it seems there's never a shortage of ways to get money from honest hard working people. Foreclosure for a great number of Americans is only a job lost away.
Pay off your credit cards and stash away money for an emergency, it's our only weapon against greedy corporations.
ref Whattheheck: If the following have not got people's attention, I don't know why you think one more example of our government's failure to perform its duties would awaken the American people from their dream: current accounts crisis, ag subsides, loss of mgf jobs, green house gases, immigration, loss of energy security, imminent medicare failure, "theft" of social security trust funds, gross maldistribution of income (48.5% to top 10% of income earners in 2005, the most recent data available), epidemic obesity and coming reversal of decades of improving health statistics, failure to respond to Katrina in both the short and long term, the use of National Guards as if they are reserves, failure to uphold international treaties, precipitous loss of international prestige, a failing auto industry, failure of our fisheries,
jon
Connecting the dots: from human behaviors to ecosystem decline
http://StudentsForTheEarth.org
one of the most important points being made here is that nobody "buys a home". (First of all, there's the misuse of the word "home", which of course can only be made, not bought, and has no relation to real property ownership.) As has been said earlier, you do not own your property until you pay off your mortgage. But then you still don't really own it, because it can be taken from you for delinquencies in taxes. In so many jurisdictions, property taxes are so high that the risk of losing one's house remains serious even after you've retired your debts.
Perhaps the current crisis will awaken us from the American dream (delusion) of home ownership. It was a crock from the beginning: a mere change in landlords disguised as a pillar of freedom. If we do awaken, some interesting things might happen, like ending the home mortgage deduction and instituting long overdue rent control regimes that would address the reality of living in a place that you don't own -- that is, anyplace that you actually could live. In other words, we are all renters, and if we stopped being complicit in the home ownership charade, we might stop allowing ourselves to be divided and conquered. The results could be revolutionary.
I neglected to mention the other predatory group involved with home purchasing and loans.... Insurance companies!! Read Jackox above about what happened to the victims of Katrina, then realize that the entire industry is designed to operate this way. Hugo, Andrew, the SF Earthquake in 1989 and the earthquakes in LA in 1994, Rita, and more storms and hurricanes to come. If you flooded and had flood insurance your disaster falls under wind damage they won't cover. If you had no flood insurance then your damage was caused by flooding and not wind. If you had earthquake insurance - now legally required in California - then some other cause was used as the source of damage to your home. What ever was not specifically covered by your policy in such a large scale disaster is what is used by Insurance as the source of the damage. The reality is that you can say no one forced anyone to buy anything such as psilver58 said above, but this is false on its face. You cannot take out a loan on property without certain required purchses such as homeowners insurance, disaster insurance in some locations and mortgage insurance if you don't have 20% to put down on the loan. All legally required. Also, where psilver58 is really wrong is that if I tell you I am selling you an orange and I give you a lemon shouldn't I be held to account for lying? Basically we are living in some weird kind of predatory economy where the consumer is held responsible for the sellers lies if we listen to psilver58.
The only growing sector in housing today is forclosures. Forclosures used to be caused by tragic and rare circumstances, or by the individual for not keeping their finances in order. Unfotunately now, predatory lending is the major cause of foreclosed loans. True people should educate themselves on what they are getting into. Often though, they are told one thing and 3 months later at the actual closing they are presented with loan documents far different than those they were told about. The truth is far deeper than that though. When did it become so common that people would be able to sell things, be it products or services, without any accountability? Too often it is the victim of predatory sales that must prove they were hit with the old bait and switch. Only this time we are talking about people's homes and not a dryer or washer. Then we can add to the mix people who have lost their jobs or worse, been severely injured AND lost their job due to the injury or sickness, made the mistake of living check to check. The common misperception is that peopel choose to live check to check irresponsibly. The reality is that loan companies across the board are approving people for more money than they can afford to pay. Real estate agents are reticent to say anything since their own commission is based on the price of the sale. it's a win win situation for Realtors and Mortgage lenders. The loser is the home buyer who actually believes the lending institutions will only lend you what they think you can afford. that no longer is true. If I would have borrowed as much money as my lender had approved I may have had to foreclose 5 years later on a fixed rate loan. I think the language used is irresponsible as well and all of that comes from industry. I did not buy a home, I took a loan out on a property and IF and when I pay that off, I then own a home and not until then. It is unfortunate but people need to treat banks and mortgage companies as they act, like predators. When you enter their environment - ou truly swim with sharks.
I am new here and my father sent me this article as I recently purchased a home on Maryland's eastern shore. What a nightmare! We were caught right in the middle of the meltdown! The only thing that saved us was a private lender. The rest backed out for really stupid reasons.
I agree with all the posts about it being a racket. Boy is it! You got to keep your head when in the game. No doubt. Now, normally I am a very conservative free-marketeer. But in this case and after my ordeal I think a little bit more regulation is in order. Too many people are getting hurt.
Dave
When China decides to call in our umpteen trillion dollar debt they hold, none of this will much matter. Nor will my mortgage-free retirement home. The only upside is that global warming will make it easier for me to survive in a tent.
Yes, it is quite curious that people who grow up in a society that is based upon the lie (see your average ad) would not understand that a salesman might be lying to them.
This is another Bush Administration fiasco. In order to boost the economy when it was coming apart before 911, the Federal Reserve Bank at the urging of the White House reduced interest rates to almost unheard of levels. This reduction boosted the economy by encouraging not only home construction industry, but it fostered refinancing of mortgages. Average Americans removed billions of equity dollars and spent them to maintain their declining standard of living. This can not be maintained forever and the end is near. The next governmental boost of our economy will simply come from a declining value and its resulting inflation.
I leave you with one thought, although simplistic. With 90% of the wealth of our country now in the hands of 10% of our population and that 10% wants a return on their equity (the low side of acceptability), where does it come from?
I was in New Orleans in my French Quarter house during Katrina-- I am now in Albuquerque. Right after the storm many people said that I got what I deserved because I lived below sea level.(Tell that to the people in the middle of the country who have just lost their homes to very unusual tornadoes) Actually, in the FQ we did not flood- and we New Orleans people all made it through Katrina- What we did not make it through was the man made disaster created by the Army Corp of Engineers and global warming. The second attack was after the storm- when my real estate taxes actually went up, and of course, so did the insurance. I cannot sell my house. The government made many promises to help, but all were lies. Afterall, Louisiana has a Democratic Governer, so I guess we deserve to be treated like this by Georgie porgie. The truth is people, that this government has been taken over by corportations, like the truly discusting Country Wide Mortgage company, who froze my equity mortgage after the storm- (being sued in a class action suit in NOla by Charles Foti- and noone really cares what happens to individual people. Grow up folks- I have heard that in order to get "road home money" in La- you must grovel like a welfare person and have the sophistication of real estate lawyer. This is where the monkey pres has put billions of dollars to help the victims of the government. It is there, but no one can get to it. Stop attacking poor individual citizens who don't stand a chance.
The average American is about as fiscally responsible as their leaders in Washington. Do you think there is any connection ?
I see no mention of those who own manufactured homes on rented sites in "parks." In most states, that is a difficult situation as well. Affordable housing for many of us are single wide, double wide and other variations of factory-built houses. The latest versions are virtually indistinguishable from stick built onsite homes which frequently have deck, porch and garage additions built on site. The problem is that in many states there is no rent justification law (not rent control), reliable process for settling disagreements with park owners or method of recovering true equity if owners decide to convert. There's need for new laws to prevent unscrupulous land owners from forcing people to walk away from their homes. In my state, Delaware, one of every five citizens lives in an owned home on rented land. I live in a resort area where it is difficult to attract teachers and other less well-paid professionals to come because of the prohibitively high housing rental costs.
"According to a study released last month by agencies devoted to fair housing, racial minorities are more likely to be given high-cost, subprime mortgages - in six major American cities, black borrowers were 3.8 times more likely than whites to receive a higher-cost home loan."
Does lending money at a higher interest rate to minorities who are earning less than the average citizen make sense to anyone? If these borrowers were a risk to begin with, why the hell would anyone think that charging them a higher interest rate would make the lending less risky? If anything, it places lenders at greater risk of having to foreclose on these mortgages.
"On Monday, New Century Financial, one of the largest US subprime operators, filed for bankruptcy protection."
Oh, and make no mistake, the Bankruptcy Reform Bill that was passed by Congress (in a hurry) last year kept the bankruptcy protection laws alive for corporate preditors. The new laws focused on abolishing protection for "We the People". Do you think that Congress didn't see this disaster on the horizon when they filed this reform bill?
"The Connecticut senator Christopher Dodd, the chairman of the committee and a Democratic presidential candidate, condemned such "risky, exotic mortgages". He accused the Federal Reserve of failing to use existing laws to regulate the market and maintain proper standards."
And the privately owned Federal Reserve that controls the economic policy in this country with no government oversight, will once again get a slap on the hand and roam free to develop another money-making scam which will be perpetrated upon the people.
The larger question is this: How much money did private equity firms make on this scam before these loans got pooled and bought by government backed, Fannie Mae and Freddie Mac? How much more debt did our government accumulate for present and future taxpayers of this nation?
pbram is right.
The scam has certainly hurt the imprudent or greedy....and the desperate. In some markets, if you are a renter, you have no protection: you landlord can raise your rent by an unconscionable amount, or turf you out and 'remodel' (=paint and replace the fridge) to be able to get much higher rents.
So you think: we have to buy a place to get off this conveyor belt. Then you enter the world of bait and switch, and guys with lies.
Even if you were already a homeowner, your assessments go up and up because o the artifically pumped up prices (and no, they never come down). Insurance goes up because you have a 'more valuable' house, etc.
I am not in a storm-prone area, or even near one. I live in a small house in a non-ritzy place. My assessment has increased my taxes by 50% in the past six years. And insurance is 300% higher.
The corporate thefts and deceptions hurt EVERYONE but the fatcats who run these schemes.
I partly agree with Frank about jumping in the water. Whether your 70 or not, you got to use your common sense. I am almost 70 and I know what I can afford next year. By now, most people my age is on a fixed income and if you can't afford it, don't buy it. However, taxes and insurance is another matter. My home insurance went from $700 a year to $4,303 in 18months. Those things you don't expect. I live in Florida and a lot of people here are losing their homes just for that reason. A large percentage of the homes in forclosure are people that thought they could make a buck on their homes before the big note came around, or flippers that are getting flipped. Look at all the "fixup and sell" programs on tv. That alone has encouraged people to go for the gold with subprime loans ... and lastly, I know that the Denver market was around the top in 2004, so the Snearys bought a house they had to take on extra work to pay for and all the while, they are getting older and the payments are staying the same or getting higher. They should have walked out at the closing when they saw the higher interest rate than they were expecting. It is a racket.
I've noticed "home ownership" bantered around without linguistic correction. Nobody OWNS a home until the last payment is made, and some studies indicate that most Americans haven't owned so little equity since the Great Depression.
The sub-prime abuses affect all of us. My fixer-upper ranch home (bought responsibly) in Minnesota was annually reassessed by the county more quickly than I could actually repair it, home prices have shot up artificially, my homeowner's insurance (and escrow) have also shot up, etc. I borrowed responsibly with a low-interest fixed 30-year mortgage -- but the reassessments, escrow and insurance have increased my monthly payment like 20% over a 5 year period.
Not only has the sub-prime market, and the suckers who fell for it, shot up MY own assessments, but the investment groups which own some of the new construction near me are sitting on townhomes for 1-2 years that have never been occupied -- and refuse to lower the price to genuine supply/demand values. Sadly, I've seen nearby McMansions actually UNDER assessed (assessed by the county for less than their last selling price). It's a racket, no doubt about that.
Hey frank: "No one forces anyone to...apply for glorified pyramid scheme mortgages?" Right. And no one forced Eve to take a bite out of the apple, either. Right?
Just WHOSE side are people like you on, anyway?
Hey Frank...
Maybe if people weren't so gullible and greedy and stupid, we wouldn't be saddled with a monkey-boy no-nothing war-criminal of a President.
Your right though, screw these people. They are after all only fellow Americans and human beings. I don't blame the shark for being a shark, but you seem to like blaming the lamb for being a lamb; hope you're not a Christian, with that attitude!
And furthermore, Frankie-boy, this ain't the Army, and one of the 'whiners' who you are telling to grow up is a 70 year old retiree (good thing she's not your mom!).
Guess when ole Georgie Porgie called himself a 'compassionate conservative' it was to distinguish himself from the likes of youse.
Hey, here's a thought - maybe if so many weren't so gullible and greedy and stupid, they wouldn't be crying "victim" now that they find themselves screwed.
Sorry, folks, but it's a volunteer army. No one forces anyone to use credit cards, or apply for glorified pyramid scheme mortgages, or eat fast food. Grow up. The waters are filled with sharks and you jumped in. Don't blame the shark for being a shark.
As a freelance writer (with good credit) I had difficulty obtaining a recent home loan. The run around from banks and the homeowner insurance rates were all like legal extortion. When the loan was granted, I was advised I had to move my remaining money to the bank and get this... its savings interest rate is .2% (not 2.) I told the banker, they might as well forego the interest and just pass out candy bars. He thought that was a very imprudent thing to say, meanwhile if we're lucky, our credit card interest is 16%. I lost my acumen for HS math... can anyone tell me what the rate of comparison is between the 16% on credit cards in relation to the bank interest payment of .2% USURY sure is in style in the USA.
Its interesting how the ads on the radio (particularily) have shifted from the bait and switch low ball home loans, to the "debt consolidation" services ads. Either that, or they are offering counseling on how to stop gambling, dealing with your depression, or your feelings of inadequacy.
We are a nation in denial - wanting to wear big hats, with not a cow in sight.