The real subprime issue

12/19/2007

All this week the Wall Street Journal and Bloomberg.com have been reporting on the sub prime "mess" as it is called now.
They give two examples and they make excellent points but, what the main underlying problem is that in certain areas of the U. S. people have used their home as an ATM and now they are walking away from the home. In the WSJ report on Monday a couple bought a home in 2004 for $557,000 and in two years they had a mortgage for $835,000. In California you can borrow up to 100% of the appraised value of your home--in Texas it is 80%. So in two years there house was worth almost 67% more than when they bought it. Not a bad return! So they, like most, spent that money and now they are simply walking out on the loan. Why would they care, they have already bought all the things you could afford with $278,000 tax free dollars.
Now, the scary part, is how are the banks going to handle these losses. Translation: higher loan costs and mandatory higher down payments.
I'll discuss this more later when I talk about the true reason for the 2/28 ARM loan.