Mortgage Crisis and Greedy Banks

The big crisis these days is the ‘Sub Prime’ mortgage fallout that is about to cripple the American economy.

Let’s take a look at what caused this disaster that the banks are blaming on the home owners for not holding up their part of the bargain.

Step 1. Joe wants a house. He can afford 1000 per month for a payment. This situation leaves Joe with very limited in his choices for a house. He looks around for about 6 months and finally takes his case to the bank.

Step 2. The bank gives Joe 6 pounds of paperwork to fill out. He has never owned before, has marginal credit and no assets to speak of.

Step 3. The bank figures out that Joe cannot afford the fixed rate 30 or 15 year mortgage, but they still want his money so the make an offer to Joe

Step 4. The offer. Joe, I just cannot get you into a mortgage under these conditions, but we are running a special on Adjustable Rate mortgages or ARM’s this week. Let me explain. We will give you a loan for this house. You can move in tomorrow. The loan rate is adjustable, meaning that we will fix the rate for 3 years, and then according to the economy, we will adjust that rate and your payment according to the rules laid out in the 601 page document. You can move in tomorrow. I suggest you take this offer, and then if you think the rates will not be in your favor, come back in and we can refinance this loan for a fixed rate that will get your through the rest of the way.

Step 5. Joe moves in tomorrow.

Step 6. (Move ahead 2 years and 11 months) Joe get’s notice in the mail that his rate and payment will be adjusted according to the rates on the day of year 3. Joe figures that it can’t go up that much and I will be fine.

Step 7. Joe gets a new payment book for the adjusted rate and payment. His mortgage payment goes from 1000 dollars a month to 3500 a month.

Step 8. Joe begins to default on his payments.

Step 9. Joe goes to banks trying desperately to refinance, but the market has adjusted so that Joe owes more than his house is appraised for. No bank will touch Joe’s loan.

Step 10. The bank forecloses Joe’s property, his credit goes to the toilet, and the bank sells Joe’s house to an investor for 100,000. (30,000 less than Joe owed on it, so the bank loses 30,000)

In ten steps and three years, the bank has lost 30,000 and Joe has lost his home, his credit history and probably his self esteem. He will probably never be able to own a house again.

Now, as I think about this situation, who is really at fault here. I believe the greedy bank. If the bank thought Joe was not able to make payments on a regular 30 yr. fixed mortgage, the message to Joe should have been either save up for another year for a better down payment or move your affordability marker down a bit and get a house you can afford with a fixed rate.

Washington Mutual today had to increase its credit line to start covering these loans that are defaulting. So their credit is going into the toilet. A good example of ‘Reversal of Fortune’.

I do not feel sorry for the greedy banks.