From the Home News Tribune:
Many home owners suffer under high-interest loans
Expensive, high interest rate mortgage loans continued to grab a larger share of the market last year, and thousands of homeowners like Paul and Elizabeth Duncan are feeling the squeeze.
The Toms River couple are finding it increasingly hard to make the $3,200 monthly payments on their $327,000 mortgage, which they refinanced last year at a 9 percent interest rate. They are not sure how they are going to make this month’s installment.
“We have more going out than coming in,” Elizabeth Duncan said.
Soon, the Duncans say, they may be forced to sell their new dining room furniture, or take out a cash advance on a credit card in order to make payments and buy some time.
One in four mortgage loans in New Jersey last year were given to subprime borrowers like the Duncans, an Asbury Park Press analysis of new federal mortgage data shows. The loans typically come with interest rates higher than the prevailing market.
The housing and mortgage markets have struggled this year with the effects of those loans, usually granted to borrowers with poor credit or those who had borrowed more than they could afford. Nearly 15 percent of homeowners with subprime loans are late or in default on their payments.
Subprime lending continued at a breakneck pace through last year: 29 percent of all loans nationally, worth $600.2 billion, came with high interest rates, according to the federal data.
That could indicate that many new borrowers will face tough times. The cost of the loans could likely drain family income and force those who are not in trouble yet to begin to default.
The current rise in foreclosures — the highest in 10 years — and late mortgage payments is a ripple effect caused by borrowers who took out loans in 2004 and 2005, experts say. If the 2006 borrowers follow the same pattern, the housing market could see an overwhelming number of defaults in the next couple of years, experts say.
The Press analysis found that in Monmouth and Ocean counties last year:
One in five home loans were granted to subprime borrowers, for a total of $3.1 billion. In 2004, about 1 in 10 loans had gone to subprime borrowers.
The income of subprime borrowers was 5 percent lower than those taking out traditional mortgages, yet the subprime borrowers took out loans that were 10 percent larger. That means subprime borrowers, already facing higher interest rates, will be further strapped to make mortgage payments, especially if their mortgage interest rates adjust upward in the coming years.
More subprime money was lent in 2006 than the prior year. The median subprime loan of $221,000 in 2006 is up from $203,000 in 2005. A median means half borrowed more, half borrowed less.
…
Richard G. Stafford of Capital Home Mortgage in Spring Lake said he believes many borrowers were addicted to shopping.“They didn’t change their lifestyle,” Stafford said. “The appraisers were generous to them. They just kept refinancing and then maxed their credit cards out again.”
Phyllis Salowe-Kaye, executive director of the consumer advocate group New Jersey Citizen Action, called such comments “blaming the victim.”
She and other advocates fault mortgages sales staff who gave loans to borrowers who never could make the payments long term or made promises that were not kept.
“These people are in business to make money, but they’re in the business to make money on the backs of people,” Salowe-Kaye said.
The Duncans appear to be an example for both arguments.
The couple married in 1999, but with two children each from previous marriages, they soon found that their two-bedroom mobile home was much too small. They bought the three-bedroom colonial in 2004 with $28,000 down and a $211,000 mortgage, land records show.
The Duncans earn $80,000 a year. Paul, 47, works as a dairy manager at a local supermarket. Elizabeth, 43, is a teller at a local bank.
They said they so enjoyed owning the house that they took out a $50,000 home equity loan to build a 450-square-foot family room extension.
They also racked up another $46,420 on five credit cards as they landscaped their front yard, and purchased new televisions, a $5,500 dining room set and a $5,000 pool table.
With bills piling high, a telemarketer called one day and offered a mortgage refinancing to Elizabeth. The woman told her they could refinance all their debt and pay $400 a month less than they were before.
25% of NJ mortgages were subprime in 2006? 20% in Monmouth and Ocean? I wonder what the total is when you include Alt-A? Close to 40-50%? What a F#*#*#* mess. Dancing along the bottom? Forget it. The declines/duration will be much worse and longer than most can imagine. When I sold in 2005, I thought it was comical, bidding up prices for a roof. Unfortunately, this comedy has turned into a nightmare. Is is possible that I may have been too conserative when I originally said 30-40% off 2005 highs. There are short sales in my area, asking 25% off 2005 highs. What will 2008/2009 bring?
JB,
Too bad many will miss this article.
Am I supposed to feel sympathy? They bought a loan they cannot afford and then they bought new furniture?
BC Bob,
Add to this mess the growing exodus and you have less demand for housing. How much impact do you think that will have on prices?
I dont feel sorry it was thir hole to dig
But I do feel that as a nation we need to educate people
“They also racked up another $46,420 on five credit cards as they landscaped their front yard, and purchased new televisions, a $5,500 dining room set and a $5,000 pool table.”
no need to save for junior’s education
would they be eligible for a bail out?
i’m renting and feel like life is on hold for me and my family.
i’m being punished for having basic math skills that stopped me from getting in over my head but my taxes will help these idiots (victims) if anyone is a victim its me.
“These people are in business to make money, but they’re in the business to make money on the backs of people,” Salowe-Kaye said.
basic math should have told them not to take the loans. I get anxiety when I have 2,000 on cc’s nevermind 46,000 are we kidding??
“We have more going out than coming in,” Elizabeth Duncan said.
they couldn’t see this was going to happen?
The amazing thing is they actually had more than a 10% downpayment. It was their stupidity and living beyond their means that got the better of them.
Phyllis Salowe-Kaye !?——If my memory serves me right, Wasn’t she the troublemaker who in the 1970’s was fighting for so-called “tenants-rights” in Fort Lee. She ‘pushed’ the boro to pass a rent control law…..They did and the landlords in that town decided to turn their buildings into coops and condos, thus taking hundreds of rental apartments out of circulation–The bich got her and her rightous followers to make matters worse for the poor ‘down-trodden’ tenents of Fort Lee———-So now she found another niche for herself—-‘Helping’Jack-asses who are now “victims” because that can’t (or won’t) read the fine print on those hideous toxic mortgages —–Ha Ha, Serves all of them right to lose their bank-owned “home” !!!
$3200 a month mortgage for a 3BR house in Toms River… I wonder if they could have rented one for less.
Suffering??? Exactly how much landscaping can you do to a front yard of a townhouse??? Sorry, but nobody should feel sorry for these people…I mean idiots.
The Duncans’ problem is not their mortgage. We had a joint income of $70K the year we bought our house. We took a mortgage for $178,000 and mortgage companies were telling us we could borrow up to $240,000. The size of their mortgage is not unreasonable at their income. The $50,000 addition is, as are the additional expenses.
We’ve been in our house for 11 years, and except for the year we did windows, siding, and a roof (all but $8000 paid in ready cash), we’ve been updating at a rate of $2000-$5000/year. Yes, it means we’ve lived with a 1970’s kitchen and 40-year-old red carpeting. But at least we’re not going to lose our house.
The full effects of this housing mess have yet to be felt. Due to Wall Street’s securitization & basketization of these subprime loans, the risk is spread out very far, even across the globe. But the margins of error are very tight, and thanks to the power of leverage, both positive and negative developments will become highly amplified.
Regarding home prices, although I’m no economist, it is easy to see prices continuing to fall to an equilibrium point where supply meets demand. Of course, with real estate being illiquid and not an asset that can be unloaded in seconds (like a stock), the inventory buildup will continue and prices will continue to fall, even after the inventory maxes out. As units sit on the market and inventory builds, more owners will get nervous or be foreclosed on…and more units will hit the market, feeding the cycle.
This “mess” seems much like an out of control freight train headed towards an elementary school playground.
And regarding $100K of consumer debt (yes, HELOCs are a kind of consumer debt in my book) on top of a $300K+ mortgage with less than $100K in income…well, the numbers speak for themselves.
When will balancing a checkbook and learning about credit cards be a semester long, mandatory course at the HIGH SCHOOL level in this country? Until then, the ignorant and foolish will continue to make mistakes. Oh, well, maybe the savvier among us will profit from others’ missteps…