July 15, 2006
Exploding Mortgages, IV
According to this NY Times' article, the share of interest-only mortgages jumped from ten percent of new mortgages in 2003 to over 25% in 2005. In addition, a different variant of exploding mortgage -- called payment option adjustable -- represented nearly 16% of new mortgages in 2005. In total, 42% of new mortgages in 2005 had explosive potential -- that is, could blow up if the borrowers found themselves in any of the following situations: (1) rising interest rates that triggered significant increases in monthly carrying costs beyond the income capacity of the borrower (and this goes for the mortgage as well as credit card debt); (2) falling home prices that trigger similar problems or make refinancing out of the question; (3) increases in other costs such as gasoline, health insurance or home heating which force the borrower to make tough choices; (4) loss of job which, if the borrower is actually a couple who premised affordability on two incomes could mean unaffordability if either spouse loses a job; or, (5) illness that either puts the borrower out of work for too long or means a spike in uninsured or underinsured medical costs (which might arise if either the borrower or any other family member gets sick).
These are just some of the risks facing 42% of the borrowers who got exploding mortgages in 2005.
Executives in the mortgage industry who are quoted in the article, however, are not concerned. "It offers an opportunity," said Brad Brunts of CitiMortage, a Citigroup unit. According to Freddie Mac -- the giant mortgage packager that has been under a cloud for years for unethical practices -- the exploding mortgages offer a bonanza opportunity for Mr. Brunts and his professional colleagues to refinance existing mortgages -- to, in effect, wring yet more profits out of financial arrangements already unaffordable to borrowers.
Exploding mortgages were predatory by luring people into unaffordable situations. Now millions of families may lose their homes -- or be forced to drop critical expenditures such as medical or dental help or heating during winter. Millions of families. But it's not likely that many of them sit in the top 20% of society. Instead, the top 20% hold the paper - they are, directly or indirectly, the ones providing the capital and, because the top 20% hold more than 80% of the assets, we know that the capital markets in the US have huge capacity to ride out the difficulties through refinancing and streching out payments before declaring bad debt not to mention capacity to profitably write-off a lot of debt.
The current way markets work, then, favors the holders of capital at the expense of millions who cannot afford the exploding mortgates threatening their futures. One might, in theory, consider turning to courts for redress. But, such efforts to rectify predatory practices have fallen very short. Ameriquest, for example, suffered a mere few hundred bucks per bad mortgage in a settlement aimed at its unethical practices. Road kill.
So, if you're like Mr. Brunts, you look at the more than $1 trillion of likely business that will get re-financed over the next two years and see bonuses and commisions, not misery. In his lack of concern, Mr. Brunts is joined by the head of the National Association of Realtors - you know, the folks bringing you the recent wave of commercials about how comforting it is to have a broker you can trust.
As the Times article notes, "Mr. Brunts says only a minority of mortgage holders will face real problems."
Statistically, of course, 'minority' can mean any percentage less than 50. Linguistically - and culturally -- however, when a person says, "only a minorty....', the rest of us are supposed to hear: 'very minor problem that won't affect you."
In other words, 'tsk tsk... let's just move on'.