Prime Borrowers Foreclosure’s Latest Victims
The foreclosure crisis raging through the United States has grabbed the attention of newscasters, politicians and homeowners from coast to coast. As foreclosure rates skyrocket and loan delinquencies pile up, our nation's leaders and economists are struggling to fix the mess the housing market has become.
Unfortunately, the latest reports from the real estate world suggest that the problem of foreclosure is getting worse, not better.
Recent reports in the Minneapolis Star-Tribune and the New York Times have detailed the increased loan default and foreclosure rates among prime borrowers, or those with solid credit histories. Until now, most media and economic focus on the foreclosure crisis has pegged the subprime market as the cause of so much woe.
Subprime borrowers, those whose credit histories are shaky or short, traditionally had trouble buying homes because lenders were reluctant to offer them large loans. But, thanks to "innovation" in the mortgage lending market and easy access to credit in years past, subprime borrowers were offered larger loans than ever before.
Now, many borrowers are finding they can't pay off their loans and lenders are beginning foreclosure action on their homes.
But, according to an economist quoted in the Times, the subprime market meltdown was just a symptom of the problem. The real problem was apparently an asset bubble (credit bubble).
This means that, while home values were going up, people were eager to "get in on" the game. Those who didn't have houses bought them; those who already did refinanced their mortgages or borrowed against the value of their homes.
Evidently, homeowners with prime credit ratings were no exception.
It seems most borrowers assumed they'd just refinance their loans before the rates reset, not realizing that millions of other Americans were counting on the same thing. When the asset bubble burst, many people found themselves stuck in a financial mess.
According to the Mortgage Bankers Association, about 4% of prime loans were in foreclosure as of September of last year. While lower than the rate of subprime mortgages in foreclosure, this is the highest rate recorded since prime loan stats were calculated separately from statistics for subprime loans.
Sources indicate that the popularity of one mortgage product can be blamed for much of the housing market's current distress: Option Adjustable Rate Mortgages (ARMs).
According to one economist, Option ARMs are the single most complicated mortgage product ever offered to consumers. The AARP has reportedly labeled ARMs "time bombs" for everyone but the most financially savvy.
Option ARMs give borrowers the option of making one of four payments each month, with the potential that borrowers will pay off their loans early - or get seriously behind. Combined with other features like interest rate adjustments, "pay up" dates and more, ARMs are extremely complex and can be disastrous for those who don't understand them.
Unfortunately, many prime borrowers have reportedly refinanced their fixed-rate mortgages into ARMs. Increasing foreclosure rates among prime borrowers is worrisome for lenders and the economy in general - those with strong credit ratings have traditionally acted as a steady force against economic hardship and recession.
Many current foreclosure-fighting efforts focus solely on subprime borrowers, so prime borrowers in similar predicaments might not benefit from political and economic interventions.
Lenders have largely blamed the foreclosure crisis on borrowers who gambled on loans bigger than they could afford; consumer advocates have cited predatory lending as the main cause of current foreclosure woes. Either way (or perhaps both ways), the United States is in a serious financial mess, and it's beginning to look like no one's safe.