linkeroo

NEW YORK (AP) -- When Domenico Colombo saw that his monthly mortgage payment was about to balloon by 30 percent, he had a clear picture of how bad it could get.

His payment was scheduled to surge by an extra $1,500 in December. With his daughter headed to college next fall and tuition to be paid, he feared ending up like so many neighbors in Ft. Lauderdale, Fla., who defaulted on their mortgages and whose homes are now in foreclosure and sporting "For Sale" signs.

Colombo did manage to renegotiate a new fixed interest rate loan with his bank, and now believes he'll be OK -- but the future is less certain for the rest of us.

In the months ahead, millions of other adjustable-rate mortgages like Colombo's will reset, giving them a higher interest rate as required by the loan agreements and leaving many homeowners unable to make their payments. Soaring mortgage default rates this year already have shaken major financial institutions and the fallout from more of them, some experts say, could spread from those already battered banks into the general economy.

The worst-case scenario is anyone's guess, but some believe it could become very bad.

"We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times -- but, as an expert on the global credit crisis, he speaks with authority.

"Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth," he said. "It does keep me up at night."

Some 2 million homeowners hold $600 billion of subprime adjustable-rate mortgage loans, known as ARMs, that are due to reset at higher amounts during the next eight months. Subprime loans are those made to people with poor credit. Not all these mortgages are in trouble, but homeowners who default or fall behind on payments could cause an economic shock of a type never seen before.

Some of the nation's leading economic minds lay out a scenario that is frightening. Not only would the next wave of the mortgage crisis force people out of their homes, it might also spiral throughout the economy.

The already severe housing slump would be exacerbated by even more empty homes on the market, causing prices to plunge by up to 40 percent in once-hot real estate spots such as California, Nevada and Florida. Builders like Chicago's Neumann Homes, which filed for bankruptcy protection this month, could go under. The top 10 global banks, which repackage loans into exotic securities such as collateralized debt obligations, or CDOs, could suffer far greater write-offs than the $75 billion already taken this year.

Massive job losses would curtail consumer spending that makes up two-thirds of the economy. The Labor Department estimates almost 100,000 financial services jobs related to credit and lending in the U.S. have already been lost, from local bank loan officers to traders dealing in mortgage-backed securities. Thousands of Americans who work in the housing industry could find themselves on the dole. And there's no telling how that would affect car dealers, retailers and others dependent on consumer paychecks.

Based on historical models, zero growth in the U.S. gross domestic product would take the current unemployment rate to 6.4 percent. That would wipe out about 3 million jobs from the economy, according to the Washington-based Economic Policy Institute.

By comparison, in the last big downturn between 2001-03 some 2 million jobs were lost, according to the Labor Department. The dot-com bust early this decade decimated the technology sector, while the Sept. 11, 2001, terror attacks hurt the transportation and allied industries. Economists said the country was officially in recession from March to November of 2001, but the aftermath stretched to 2003.

There is increasing evidence that another downturn has begun.

Borrowers who took out loans in the first six months of this year are already falling behind on their payments faster than those who took out loans in 2006, according to a report from Arlington, Va.-based investment bank Friedman, Billings Ramsey. That's making it even harder for would-be buyers to get new mortgages -- a frightening prospect for home builders with projects going begging on the market, and for homeowners desperate to unload property to avoid defaulting on their loans.

Meanwhile, the number of U.S. homes in foreclosure is expected to keep soaring after more than doubling during the third quarter from a year earlier, to 446,726 homes nationwide, according to Irvine, Calif.-based RealtyTrac Inc. That's one foreclosure filing for every 196 households in the nation, a 34 percent jump from just three months earlier.

Such data suggests more Americans could lose their homes than ever before, and those in peril are people who never thought they'd welsh on a mortgage payment. They come from a broad swath -- teachers, pharmacists, and civil servants who were lured by enticing mortgage terms.

Some homebuyers gambled on interest-only loans. The mortgages, which allowed buyers to pay just interest at a low rate for two years, were too good to pass up. But with that initial term now expiring, many homeowners find they can't make the payments. The hopes that went along with those mortgages -- that they'd be able to refinance because the equity in their homes would appreciate -- have been dashed as home prices skidded across the country.

"It's been said a lot of people have been using their homes as ATM machines," said Thomas Lawler, a former official at mortgage lender Fannie Mae who is now a private housing and finance consultant. "The risk has a lot of tentacles."

This example illustrates the distress many homeowners are in or will find themselves in: A subprime adjustable-rate mortgage on a $400,000 home could have payments of about $2,200 a month, with borrowers paying 6.5 percent, interest only. When the teaser period expires, that payment becomes $4,000, with the homeowner paying 12 percent and now having to come up with principal as well as interest.

Minneapolis resident Chad Raskovich found himself in a such a situation. He hoped -- it turned out, in vain -- to gain more equity in his home and that a strong record of payments would enable him to secure a better loan later on.

"It's not just me, it's a lot of people I know. The housing market in the Twin Cities has dramatically changed for the worse in the years since I purchased my home. Now we're just looking for a solution," he said.

Colombo, who lives in the planned community of Weston just outside Ft. Lauderdale, said the reset on his home would have "destroyed' his financial situation. He went to Mortgage Repair Center, one of hundreds of debt counselors trying to bail out desperate homeowners, to work with his lender.

"But many people in my neighborhood didn't get help, and some have literally just walked away from their homes," said Colombo. "There are over 133,000 homes on the market in Broward-Miami-Dade counties, and some of them were actually abandoned. People in this situation don't like to talk about it, and end up getting hurt because they don't."

Many Americans are unaware that a borrower defaulting on a loan can have an impact on everyone else's well-being and that of the nation. After all, the amount of mortgages due to reset is just a fraction of the United States' $14 trillion economy.

But the series of plunges that Wall Street has suffered in past months prove that no one is immune when mortgages turn sour.

Today's financial system is interconnected: Mortgages are sold to investment firms, which then slice them up and package them as securities based on risk. Then hedge and pension funds buy up such investments.

When home prices kept rising, these were lucrative assets to own. But the ongoing collapse in housing prices has set off a chain reaction: Lenders are tightening their standards, borrowers are having a harder time refinancing loans and the securities that underpin them are in jeopardy.

This has resulted in more than $500 billion of potentially worthless paper on the balance sheets of the biggest global banks -- losses that could spill into the huge pension and mutual funds that also invest in these securities and that the average worker or investor expects to depend on.

There's more pain left for Wall Street: "We're nowhere close to the end of the collapse," said Mark Patterson, chairman and co-founder of MatlinPatterson Global Advisors, a hedge fund that specializes in distressed funds.

"I just assumed banks could stomach these kind of losses," said Wendy Talbot, an advertising executive when asked about the subprime crisis outside of a Charles Schwab branch in New York. "I guess you don't really pay attention to things until your forced to. ... You put out of your mind the worst things that can happen."

The subprime wreckage could dwarf the nation's last big banking crisis -- the failure of more than 1,000 savings and loans in the 1980s. The biggest difference is that problems with S&Ls were largely contained, and the government was able to rescue them through a $125 billion bailout.

But this situation is far more widespread, which some experts say makes it more difficult to rein in.

"What really makes this a doomsday scenario is where would you even start with a bailout?" housing consultant Lawler asked.

Sen. Charles Schumer, D-N.Y., a key member of Senate finance and banking committees, said borrowers are the ones who need relief. The playbook to bail out the economy would not be applied to the banks and mortgage originators, but money could be funneled through non-profit organizations to homeowners that need help, he said in an interview with The Associated Press.

"There is a worst-case scenario because housing is the linchpin of our economy, and more foreclosures make prices go down, that creates more foreclosures, and creates a vicious cycle," Schumer said. "You add that to the other weakness in the economy -- on one end is the home sector and the other is the financial sector -- and it could create a real problem."

He also believes Federal Reserve Chairman Ben Bernanke should do more to help the economy. Bernanke said in recent comments he has no direct plans to bail out the mortgage industry, but to instead offer relief through cheap interest rates and further liquidity injections into the banking system.

There's also been talk of letting government-backed lenders like Fannie Mae and Freddie Mac buy mortgages of as much as $1 million from lenders, pay the government a fee for guaranteeing them and then turn them into securities to be sold to investors. This would extend the government's support, and its exposure, to the mortgage market to help alleviate stress.

Either way, the impact of a fresh round of subprime losses remains of paramount concern to economists -- especially since there's little certainty about how it would ripple through the U.S. economy.

"We all know that more hits from these subprime loans are coming, but are having a devil of a time figuring out how it will happen or how to stop it," said Lawler, who was once chief economist for Fannie Mae.

"We've never been in this situation before."

the exact reason you always buy with a fixed rate...

people that don't get fixed mortgage rates deserve to get raped.

Okay, can someone explain to me why someone with an outrageous ARM can't just refinance into a fixed rate??

Why do they have to foreclose?

Quoted: Okay, can someone explain to me why someone with an outrageous ARM can't just refinance into a fixed rate?? Why do they have to foreclose?

Because they bought too much house and can't afford the payment with a fixed interest rate.  

In other words, the purchasers are DUMBASSES.

If I did the math correct his mortgage was at $5,000 a month and a 30% increase would bring it to $6,500 a month. He was already living beyond his means at $5k.

ARMS originally are a lot lower the fixed intrest rate loans. That's how they hook people. It allows someone who could afford a 200k house all of a sudden, miraculasly afford to purchase their 400k house. When the sucker does just this it's next to imposible for them to negotiate fixed rate loans that they can afford.

The financial consultant I was using when I bought my house tried to get me to do just that. Then looked surprised when I told him to sit on it and spin.

The real problem this 'morgage crisis' has on anyone who had the since to look past the smoke and mirrors of an ARM is the backlash of whatever polititions decide to do to fix the 'problem'.

IMHO people who did such things don't nessisarily diserve what they get, but they deffinatly need to learn by what's happening to them. They won't, after all it's their right to own half a million dollar houses and cars.

FYI, Bill Gross (who is quoted first) has a huge conflict of interest here.  His fund owns a lot of mortgage holdings, and he's been pushing for dramatic reductions in interest rates to save his own skin, er, homeowners.  He's also one of the "doom and gloom"ers.

Not saying that he is wrong, but something to keep in mind.  

Quoted: Quoted: Okay, can someone explain to me why someone with an outrageous ARM can't just refinance into a fixed rate?? Why do they have to foreclose? Because they bought too much house and can't afford the payment with a fixed interest rate.   In other words, the purchasers are DUMBASSES.

((( DING )))

Quoted: ((( DING )))

It was probably a sub-prime loan to begin with and there is no way someone would qualify them today.

Quoted: Quoted: Okay, can someone explain to me why someone with an outrageous ARM can't just refinance into a fixed rate?? Why do they have to foreclose? Because they bought too much house and can't afford the payment with a fixed interest rate.   In other words, the purchasers are DUMBASSES.

Also possibly because of situations where someone has a $500,000 mortgage on a house that now appraises at $400,000.  They are 'upside down' and don't have the green to write a check big enough to get out from under it.  And they don't have sufficient LTV to refi.

When I was doing my refi to deal with the house in my divorce the woman doing my loan was telling me about a client who got in way over his head based on 'stated income'.  The values went down and now he can't sell it and get enough to pay what he owes on it (upside down) and the LTV (loan to value) ratio isn't there for a refi anyway.  The house isn't enough collateral to secure the kind of loan he would need to refinance his previous mortgage.

So what DigDug said plus that problem of getting upside down when values adjust down.

Timing is everything.

When I bought my first home it was with an ARM and got me in the door with zero down....

As soon as I could refinance into a 30 year fixed, I did and locked in a great rate.

About a year after property in my neighborhood peaked, I sold and made a 'profit' on my home which I poured into a new, bigger home with more land in a better part of town for less than my previous home sold for.

Now we're in another fixed rate mortgage but we're budgeted so as to pay off all high interest loans first and then sequentially retire all other debts on a 50/40/10 rate: 50% of what we spent on one credit card debt we pour into paying off the next one. 40% is put into savings to not touch (CDs or other vehicle) and 10% we use for cash or preparations, home improvements like new appliances, paint, tile, etc. to make this new house a 'home'.

Financially it's easy to get into credit card debt if you don't keep on top of your receiptsand communicate with each other (if you're married). We have a rule: either of us can spend $50 per week on 'personal stuff' but we discuss any item that's above that to check each other's 'ethusiasm' so as to keep our collective eyes on the goal of paying off all debts ASAP, and building up a 6 month reserve of savings.

I have alot of friends in California that have mortgages that are $3000 to $4000 per month. It is honest stupid for someone making a normal living to want to do that to themselves. I just don't get it.


My mortgage is $500 per month and I will not be buying anything in the short term that gets it over $1000. Anything more than that just seems like slavery to my house. It serves me, not the other way around. Damn!

Quoted: Timing is everything. When I bought my first home it was with an ARM and got me in the door with zero down.... As soon as I could refinance into a 30 year fixed, I did and locked in a great rate. About a year after property in my neighborhood peaked, I sold and made a 'profit' on my home which I poured into a new, bigger home with more land in a better part of town for less than my previous home sold for. Now we're in another fixed rate mortgage but we're budgeted so as to pay off all high interest loans first and then sequentially retire all other debts on a 50/40/10 rate: 50% of what we spent on one credit card debt we pour into paying off the next one. 40% is put into savings to not touch (CDs or other vehicle) and 10% we use for cash or preparations, home improvements like new appliances, paint, tile, etc. to make this new house a 'home'. Financially it's easy to get into credit card debt if you don't keep on top of your receiptsand communicate with each other (if you're married). We have a rule: either of us can spend $50 per week on 'personal stuff' but we discuss any item that's above that to check each other's 'ethusiasm' so as to keep our collective eyes on the goal of paying off all debts ASAP, and building up a 6 month reserve of savings.

Take all of your extra money and pay off your high interest loans.  Why put 40% away in CD's getting 5% return when you have debt with up to 22%.  Doesn't make sense.

I talked to a realtor about ARMs, and he told me what normally happens. A family will come in wanting to buy a house, the only problem is their credit rating won't allow them to get a decent interest rate. They then take on an ARM, with the understanding that before the bad interest rates start in 2 to 3 years, they will exercise some financial discipline and raise their credit scores enough to allow refinancing at a decent rate. Guess what happens then. They don't change a thing, and they can't get refinanced.

I still can't understand why banks would give subprime borrowers a loan that was meant for well-to-do real estate investors, but they have, and now we all get to share the results.

Quoted: I still can't understand why banks would give subprime borrowers a loan that was meant for well-to-do real estate investors, but they have, and now we all get to share the results.

The banks/loan originators are greedy and want to make a profit. They don't give a rats ass what the buyer's ability to pay is because they are going to move the toxic loan shit to other investors ASAP. The loan originator wants to make the commission, period. In many cases they resort to illegal practices to do it and are now just beginning to be held accountable. Investors that have no clue and are going to lose their shirts [as many big pension funds for teachers, police, county workers, etc] are now starting to do.

Once the bank/institution makes the loan, it is packaged with many others, given an investment grade rating and sold to invesment houses to put into our pension funds, sold into hedge funds, etc, etc, and the tranch of loans is likely leveraged into more financial vehicles to create even more debt, the proceeds are taken out by the BigBoyz and invested in the stock market driving it up higher so Arfcomers can post how much their investments have gone up.

It's a Ponzi scheme and the chickens are coming home.

Adjustible rate loans should be called "introductory rate" loans then people would understand how they work.  They never go down, only up.  They are usefull for young people who can realistically expect huge pay raises as they gain work experience.  I used one when I bought my 1st home.  It helped me to buy a nicer home in a nicer neighborhood. My mortgage person was kind enough to effectively school me on why we were doing it and the consequences of not staying on task. I did quickly increase my paycheck size AND was able to refi on the 1st anniversary, right before it adjusted up.  

They are not for most people though, especially when paired with inflated wage claims and bogus appraisals.

ETA: Mortgage officers routinely falsify docs to get loans through.  I have heard of several getting nailed for fudging the numbers on the application so they can get their commission.  They'll be selling used cars next week.