| Remember when a 20% down payment was | | | | (CRL) projects that nearly 20% of subprime loans |
| expected when purchasing a house. Sometimes with | | | | made in the period 2005 to 2006 will fail. The New |
| stellar credit and maybe a special situation, like a | | | | York Times stated that "about 2.2 million borrowers |
| first-time home buyer, you could get in with a 10% | | | | who took out sub-prime loans from 1998 to 2006 are |
| down payment. I recall a few weeks after my wife | | | | likely to lose their homes". One of my favorite |
| and I purchased our first home - both cars broke | | | | commentators, Peter Schiff, believes the the NY |
| down. Saving for your first home is one of the few | | | | Times estimate are too optimistic. He says: |
| times, from a financial perspective, that both husband | | | | "The secondary effects of the "1 out of 5" sub-prime |
| and wife are clearly on the same page. Everything | | | | default rate will be a chain reaction of rising interest |
| takes a back seat to saving for that down payment - | | | | rates and falling home prices engendering still more |
| shoe shopping, night out with the boys, everything. | | | | defaults, with the added foreclosures causing the cycle |
| That's exactly why both of our cars broke down. We | | | | to repeat. In my opinion, when the cycle is fully played |
| had neglected maintaining the cars and everything else | | | | out we are more likely to see an 80% default rate |
| while saving for our down payment. | | | | rather than 20%". |
| Obviously once a homeowner, whatever is necessary | | | | I knew that there were some crazy loan products |
| to keep the house - like making timely mortgage | | | | available, but check this out: |
| payments will be a priority. After all, significant | | | | "The sub-prime market was designed with a built-in |
| sacrifices were made and no one would want to lose | | | | time bomb. In testimony to the Senate Banking |
| the home foolishly. So, the bankers have us where | | | | Committee in September, Michael Calhoun, the |
| they want us. Committed customers who pay their | | | | President of the Center for Responsible Lending |
| obligations for the most part on time. | | | | (CRL), showed an example of the most typical |
| Well the greedy little bankers knew that they were | | | | sub-prime loan, known as a 2/28, with an "exploding |
| missing out on a large opportunity with such tight | | | | ARM" (adjustable rate mortgage). Buyers can qualify |
| restrictions. There is a large pool of people who do not | | | | for this type of loan if the original ("teaser") monthly |
| have good credit, a secure job or money for a down | | | | payment is not higher than 61% of their after-tax |
| payment. The bank's bottom line could be significantly | | | | income. At the end of two years, even without a rise |
| increased by loosen their lending requirements. After all, | | | | in interest rates, the payment will typically rise to 96% |
| real estate is an appreciating asset. So, even if the | | | | of the purchaser's monthly income. No wonder then, |
| number of foreclosures increase the bank would | | | | that the study conservatively forecasts that one-third |
| would still make good by selling the house. | | | | of families who received a sub-prime loan in 2005 and |
| Does the above sound like an exaggeration? It is and it | | | | 2006 will ultimately lose their homes!" |
| isn't. Banks have always loaned to people without | | | | What a joke - 96% of your income will go to servicing |
| pristine credit histories. However the marketing of such | | | | your mortgage. I hope that Johnny doesn't need a new |
| loans, known as subprime loans, increased significantly | | | | pair of shoes. These mortgages were designed to be |
| around in the mid-90s. According to the Mortgage | | | | refinanced assuming that homes continued |
| Bankers Association, subprime loans represented 14% | | | | appreciating. That ain't happening now. |
| of the total mortgage market by 2003. In the period | | | | So, what does this mean to the average homeowner? |
| 1994 to 2003, subprime loan growth significantly | | | | I will let Mr. Schiff explain, "failures in the sub-prime loan |
| outpaced prime loan growth with a 25% rate of | | | | market will put greater downward pressure on housing |
| growth according to a report in USA Today (Subprime | | | | by increasing inventory and lowering prices." In other |
| loan market grows despite troubles, December, 2004). | | | | words, the value of your house is going down and its |
| These loans helped drive US home ownership to its | | | | not stopping for awhile. |
| all-time peak in the fourth quarter of 2004. | | | | To prevent this article form being a complete downer |
| Well guess what - the chickens are coming home to | | | | think of it this way. Your home is your domain your |
| roost. By late in 2006, the rate of subprime loan | | | | castle - it was not purchased as an investment. It was |
| delinquencies of over 60 days was up to nearly 8% | | | | purchased for shelter and enjoyment. Any appreciation |
| according to UBS. The Center for Responsible Lending | | | | gained from selling it is an added bonus. |