Saturday, November 26, 2005

'People Are Maxed Out With Debt'

The Associated Press looks at the changing environment for mortgage firms. "With the housing market cooling and loan demand shrinking, banks and other lenders are turning to nontraditional and sometimes riskier mortgages to bring in more business and make up lost revenue. 'We're at a pretty difficult time for the mortgage industry,' said Stephen Rotella, president and COO of Washington Mutual Inc."

"The slowdown in home sales and lending was first apparent during the summer and has become even more evident in recent weeks. To make up for the drop in borrowing, lenders have resorted to what the industry calls alternative payment products, loans designed to lower monthly payments to help borrowers qualify more readily."

"The industry's gravitation toward non-traditional mortgages raises concerns about whether some borrowers will be able to keep up with their payments. 'When the industry is topping out, people stretch to get that last unit of output, and the result is you find yourself in a situation where there will be definite problems in the next six to 12 months,' warned Richard Bove, banking analyst at Punk Ziegel & Co."

"David Olson, co-founder of a Columbia, Md. based firm that tracks the mortgage industry, predicted that mortgage defaults will increase. 'As long as we had the mantra that prices only go up, you could have the most stupid mortgages and it was great,' he said. But going forward, 'the public will see more foreclosures. People are maxed out with debt.'"


At 4:40 PM, Blogger Chip said...

It will be interesting, some day, to read a retrospective analysis of the mindsets of people who went down for the count in 2006 and 2007 -- those, for example, who knew by November of 2005 (now) that they were looking at big trouble with their mortgage/ HELOC balance, their equity (if it still existed), and the possibility of losing their home, let alone be pursued for the unpaid difference, and who, despite all that, continued to spend from their housing ATM for the '05 Christmas season.

(Sorry about the extended sentence. It will give English teachers something to do. Didn't want to break the stream of thought.)

At 10:38 AM, Blogger Metroplexual said...

Add to this recipe for disaster that minimum payments on credit card will double in january. That might just be enough to tip these ultradebtors over the brink. That new bankruptcy law is going to be an albatross on thge republican party.

Nice move wienies!

At 1:42 PM, Blogger NurseLiz said...

Won't more foreclosures cause prices to go down also? I'm just a nurse trying to figure out this whole thing - even with a background in finance/legal, it still is mind boggling!!

At 3:44 PM, Blogger processor said...

chip - It's called the "wing and a prayer" approach to managing one's finances / life.

At 6:14 PM, Blogger Chip said...

Processor -- that's a good topic title, your "A Wing and a Prayer."

At 7:16 PM, Blogger Tom said...


Foreclosures will cause prices to drop. Banks will have no choice but to get some capital from nothing and cut their losses. Many will be forced to go under. 401k's and hedges tied to financing will also take huge losses.

But will housing drop? The cost will but when you factor in interest rates rising to make up for the losses the banks must recover and the risk that is priced into the loans along with more people with bad credit. It's a nasty nasty scenario.

What can you do? If you just bought a home then you need to get out of it now. If Interest Only or ARM then pay the penalty and refinance it fixed.

Hold on to your money and look for a good deal on rent. When prices drop you will then have the credit and hopefully cash to buy a good house at a distressed price. Then when interest rates come back more inline the refinance to take advantage and voila the cycle starts all over again : )


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