Sub-Prime Mortgages Coming Home To Roost

It's not surprising to me that a large percentage of what are called sub-prime mortgages go into foreclosure after the introductory low payments end and the mortgagees have to start paying at higher interest rates and start paying on the principal. Here in New Hampshire hundreds of homeowners are losing their homes to foreclosure or will sometime in the near future as their payments outstrip their ability to make their mortgage payments. With the softness of the real estate market, the option to sell before the mortgage converts or before foreclosure is not there for many sub-prime homeowners.

This is an echo of what happened back during the recession and housing bust back in the late 1980's and early 1990's. Banks by the hundreds failed because of mortgages that were issued to borrowers that were not really qualified to get them. The housing boom blinded a lot of banks to the dangers they were facing by giving out mortgages like someone at a supermarket handing out free samples. The end result here in the Granite State was the failure of five major banks, none of which exist any more. And so it was across the country.

When people lost their jobs as the recession became deeper, many homeowners walked away from their homes, handing the keys to the bank and saying “Good luck!”. People that had bought during the height of the housing boom saw the value of their properties plummet to the point where they owed more for them than their market value, meaning they couldn't sell them without still owing thousands to the bank. The housing market collapsed, and particularly the condo market, which saw some values drop 60% in a little over a year. Before it was over $1.3 billion in real estate was foreclosed upon in New Hampshire.

When I say that the present foreclosure crisis is an echo of the one in the 1980's/90's, I mean that there are a number of financial institutions that are feeling the effects of the foreclosures. But this time around it is not the banks. They seemed to have learned the lesson of the last time. This time it is other financial institutions taking the heat, and rightfully so. This is only the beginning.

... experts say it's going to get worse before it gets better.

"We're in for a Nantucket sleigh ride," declared Ben Niles, past president of the Mortgage Bankers and Brokers Association of New Hampshire.

He explained the metaphor: Picture a whaling ship that has just harpooned a whale. "The harpoon would stick and the whale would take off and take them for a ride. That's a Nantucket sleigh ride."

One of the biggest clues that the sub-prime mortgage market is rapidly crumbling is the number of foreclosures on this kind of loan. As stated in the article linked above, only 10 percent of the mortgages in New Hampshire are sub-prime, but 60 percent of the foreclosures are on sub-prime mortgages. It would not be a surprise to find that those numbers are probably the same throughout most of the country.

This 'crisis' is yet another reminder of the old Latin saying: Caveat emptor.

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