Following nearly a decade of exponential growth in the housing market, the laws of gravity have returned and we are now potentially confronting one of the biggest financial crises of the past half century. After years of expanding homeownership, foreclosures are now hitting record levels, and the losses to homeowners, communities, and investors are threatening to throw the economy into recession.
As opposed to earlier housing crises, when high unemployment took away borrowers’ ability to pay their mortgages, the main cause for the current crisis is that people are trapped in adjustable rate loans that may have had low initial “teaser” rates, but now are resetting to levels that exceed their ability to pay.
Leading up to this crisis was a period in which loan originators offered increasingly exotic loan products and loosened underwriting standards, in many cases steering borrowers into loans that did not offer them the best deal and making loans without regard to the borrower’s ability to repay once the interest rate reset. Minority communities and the elderly were frequent targets of these sometimes predatory practices.
Aggravating the situation now are plummeting home values in some areas, a sharp rise in interest rates on jumbo loans, and in some cases excessive prepayment penalties, all of which are restricting the ability of borrowers in adjustable rate mortgages to refinance into more affordable fixed rate loans.
And many believe the worst is yet to come. The Center for Responsible Lending has estimated that as many as 2.2 million subprime home loans made in recent years have already failed or will end in foreclosure – over 460,000 of those in California alone – and that one out of five subprime mortgages originated during the past two years will end in foreclosure.
