What Happens When The Music Stops?

From ABC News:

Housing Woes: Interest Rate Increases and Foreclosures

Heidi never imagined that she could lose her home outside Dallas. But rising interest rates and skyrocketing monthly mortgage payments have left her staring at foreclosure. She’s just one of many Americans who might be forced to move as the housing market cools.

“We couldn’t keep up with the payments,” she explained one dreary, wet Sunday morning in late winter. “The payments went from $1,700 a month almost to $3,000 a month, so this being my first home, my dream home, I had to lose it.”

Heidi’s situation is not unique. She is one of millions of Americans who took out ARMs to purchase a home during the recent housing boom.

As those initially low monthly interest rates started to get reset, homeowners could see their monthly payments rise to levels beyond their ability to pay. Interest rates for nearly a quarter of all mortgage debt, or $2 trillion, will be reset in 2006 and 2007, according to Moody’s Economy.com.

As home prices soared at double digit rates during the recent, red-hot housing market, many stretched themselves financially to purchase a home. The use of lower-interest rate ARMs, interest-only mortgages or option-ARMs that allowed home buyers to choose how to pay each month soared during the same period. According to the Mortgage Bankers Association of America, ARMs now represent 25 percent of the more than $8.5 trillion in outstanding loans.

“I think it’s a bomb waiting to go off,” said William Apgar, reflecting on the future of interest rate increases for those with ARMs. Apgar has studied foreclosures in Atlanta and Chicago as a lecturer at Harvard’s Kennedy School.

From the Christian Science Monitor:

Homeowners stretched perilously

If the nation’s real estate boom collapses, its first victims may well be low-income minorities and immigrants in a big US city like Boston.

The trend is especially worrisome, the analysis shows, because these vulnerable homeowners tend to be minorities and immigrants who, experts say, often hold the riskiest mortgage loans.

Homeowners “call us and are heartbroken,” says Robert Pulster, executive director of the Ecumenical Social Action Committee, which works with Boston residents on the brink of losing their homes. “They thought it was their dream.”

More trouble lies ahead, some experts warn.

“I would suspect that as home prices soften, you are probably going to see a ramp-up in defaults, delinquencies, and foreclosures,” says Nicolas Retsinas of the Joint Center for Housing Studies at Harvard University. “It is not that they were not stretched before, but if you couldn’t make the mortgage payments, you would sell. If the market is softer, it is not as easy to do this.”

“A lot of them just do not listen. They want a house,” he says. “I try to advise them: You can get a house, but you might not be able to stay in it.”

Caveat Emptor!

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25 Responses to What Happens When The Music Stops?

  1. Anonymous says:

    It’s the hidden story of the housing bubble — if so many educated, established folks fell for these loans, imagine how many uneducated/new immigrants fell prey. I could see this unfold in the classifieds of the Daily News (no money down! Owner pays closing!) and in a kind of mirror image on craigslist, where there were tons of misspelled ads posted by realtors who were clearly new arrivals to the country getting into the best job they could — real estate– and then probably preying on their fellow immigrants.

    A sad story we’ll see played out in NYC in a huge way– the News just had a big story about a rash of arsons on Pacific St. in Crown Heights– may be housing bubble related, may not be, but gave me shudders to think of neighborhood blight coming back — either by foreclosure or fire.

  2. Richie says:

    So much for gentrifying.

  3. Metroplexual says:

    “I finally, just, you know, had to make my peace with the fact that we were going to lose our house, so that’s what we did and we just had to walk away.”

    She may still owe money on the property, and she knows that her credit will be damaged. She only hopes she’ll be able to own a home again, but with one noticeable difference.

    “I would not get an adjustable-rate loan,” she promised. “I would get a conventional loan, a fixed loan.” ……………..

    This just makes me sick. Here we go with the people walking away. BTW Dallas is very affordable. Palaces go for $250 K. I note she is from our region. Maybe a housing refugee?

  4. Anonymous says:

    Lots of sleepless nights ahead for many bagholding homeowners in over their heads.
    many were duped by the industry spinmeisters to purchase a home. it’s the best investment. Righto.

  5. grim says:


    Most certainly a housing refugee, and like many refugees that moved to more affordable areas, she probably bit off more than she could chew.

    What do I mean? Well.. Take a look at Texas homes on Realtor.com. Say you were planning on purchasing a $500,000 house here, so you look at what you can get for $500,000 there, which is undoubtedly a brand new 6,000sq/ft MegaMcMansion.

    You get excited at the opportunity, go down there, and plunk down 500 big ones, biting off way more than you should have.

    Selling the home is an easy way out of foreclosure up here.. But down there? Nobody buys used houses down there.


  6. Metroplexual says:

    It’s funny you say that nobody buys used houses. My brother in law who is very networked in the country was given a tour of Dallas by the North Texas Council of Government and that was the explanation given for why banks keep lending the developers money down there.

    My bro-in-law was pushing me to look down there because of the affordability. But I don’t think much of the city.

  7. RentinginNJ says:

    I saw this piece last night. I still have a very hard time understanding how one could take a mortgage without thinking about how one will deal with higher payments once the teaser period ends. By the way, based on the big jump, this mortgage was most likely an option-ARM.

    While I don’t like to see people lose “their” homes, I find it hard to feel too much sympathy. These “savvy investors” have priced me out of the market because I refuse to jump on the exotic mortgage bandwagon. I’m sure my tax dollars will be funding some kind of bailout program once this thing gets ugly.

  8. Anonymous says:

    No sympathy for these want it now crowd. These imbeciles have pushed up prices to unaffordable levels. Only way in is a risky roll the dice type of loan. i not playing so i not able to afford.


  9. skep-tic says:

    in all fairness, it’s probably a stretch to say that most people really understand the terms of their loan.

    they’ve got their mortgage broker and realtor telling them that they can always refinance or sell before the payments reset (if the buyer even thinks to ask about this).

    the level of ignorance most people have concerning even the most basic personal finance is truly amazing.

    and if your advice to them is “don’t sign anything you don’t understand,” then none of these people would ever own a home, a car, hold a credit card, etc.

    I don’t think we should have to bail them out, but I do think that there needs to be mandatory plain-language disclosure on credit agreements that puts the basic terms in a way that the average person can understand. if we did that, then maybe we wouldn’t have this mess in the first place.

  10. skep-tic:

    Ignorance? Don’t tell the people that visit my office. I get lectured by about 1 in 4 people.

    Ultimately, the easiest way to explain concepts to people is to attempt to separate the subject from the price. Something can be a good idea, but if the price is wrong – it transitions into a bad idea.

    Many people approach decisions as black and white. People don’t seem to process “gray”.

  11. NJ Sucks says:

    People are no longer living on what they can afford; instead they are living the lifestyle they think they deserve, costs be damned!

  12. Metroplexual says:


    I agree completely with you. B&W world view because gray is too much work to process. When people ask me my opinion on some topics and I reply “it depends” the eyes glaze over because they want a grunt instead of a well reasoned explanantion. It is to the point where I almost don’t bother with alot of people anymore. Subtlety requires thought and we have become a society that is incapable of subtlety (thus critical thought).

    Just listen to radio and TV commercials where they are yelling at the buyer. Add to that the laughtrack on sitcoms which laugh when it is clearly not funny. The evening news is infotainment, which got dissed last year when the Daily Show won a journalism award. The Colbert Report mocks this lack of subtlety every night.

    Big houses, big cars, big meals. That is why blogs rule, I can read some very thoughtful insights from bright articulate people. (most of the time anyway)

  13. Metro:

    You would be shocked how improved NPR [National Public Radio] has become. Ever since Joan Kroc passed away in 2003 [a.k.a. Mrs. McDonald’s] and left those guys $230M, it has become a destination for journalists who want to do serious reporting. The audio only is a drawback, but you may also want to give three websites a whirl.


  14. Metroplexual says:

    That is my primary source for real news. Everybody else is suspect.

  15. Just a warning – it can be a little lefty/tree-hugging at times, but they have appropriately moved more toward the center.

    I think that most of the news programs are balanced, it’s the special programming and NYC/New York produced material that loses it’s objectivity/focus.

  16. Metroplexual says:


    I am blocked at work from two main things. Livestreams, and RE sites (would you believe it?). WNYC rules. Leonard Lopate, Brian Lehrer are both the best interviewers. I listened to an interview about hotdogs and their variation regionally in the US once. I was totally sucked in. I don’t know how they do it.

    But as far as mainstream news I feel Art Bell or Phil Henry are about as trustworthy.

  17. I find if I go out from work for an errand or lunch that I will sit in my car for a few extra minutes to listen to a segment.

    Still remember listening to Michael Lewis talk about Moneyball for 45 minutes on Fresh Air, no commercials. Where do you get that today?

  18. Metroplexual says:

    My other source for news, and I am ashamed to say it used to be Robin Quivers from Howard Stern. Although they would cover it from show biz and showbiz for ugly people.

  19. Anonymous says:

    Buyers can be starry-eyed idiots, and realtors can be greedy fools, but it used to be the banks took a role in stopping both of these in their tracks, because it was the banks that would suffer if loans went wrong.

    Let’s blame the real culprits of all this – the lending and banking industries, and whoever let them pass on the risk to the govt. These are the greatest fools, and we’ll all be paying a price for their idiocy.

  20. Roadtripboy says:

    How realistic is it that these FB’s (f@cked borrowers–I’ve been reading SoCalMtgGuy’s blog also!) will be able to just “walk away”? The new bankruptcy laws will force many borrowers into chapter 13 rather than chapter 7–which will result in them having to bear at least some of the burden of their bad choices.

    I don’t want to see anyone ruined financially, but housing prices have to return to earth for the overall long-term good of the economy. Furthermore, I think people need to be held accountable for their choices.

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