Housing Bubble Leaving Scattered Carcasses of All Income Levels

Most of the press of late has focused on the collapse of the sub-prime mortgage lenders and the increase in foreclosures across the country. What they aren’t really talking about is what Lou Dobbs would call the “War on the Middle Class.” It seems that there is a large segment of the population that fall somewhere between being sub-prime and prime borrowers - I’ll refer to them as the “mortgage middle class” but they fall under the label of having mid-level loans.

These folks consist of the average family with decent to good credit, and steady employment. The problem that this group of people are having, it seems, is the attack of the option ARM. Lured by low-indroductory rates, people bought more house then they were able to afford and are now starting to pay the price.

It couldn’t last . . .

Housing counselors and bankruptcy attorneys say they are seeing an increase in troubled borrowers who previously had good credit. “We have clients with 720-plus credit scores, and they are in awful products,” says Jennifer Harris, executive director of the Home Loan Counseling Center in Sacramento, Calif. Some of these borrowers took out option ARMs with low introductory rates and are likely to fall behind when their monthly payment resets at a higher level, she says. (Yahoo Finance)

We’ve all heard the stories. While living in Los Angeles, my favorite story demonstrating this is that of the police officer who bought a $900k + home on an option ARM. There aren’t too many cops who can afford that kind of action. Sadly, the mortgage industry took advantage of people and allowed folks like the officer I mentioned to get in well over their heads.

Borrowers who take out Alt-A mortgages are considered less risky than subprime borrowers because of their higher credit scores. But as the housing market cooled and loan volume declined, some lenders lowered their standards for Alt-As. Now a rising number of borrowers who took out these loans are running into trouble.

Data from UBS AG show that the default rate for Alt-A mortgages has doubled in the past 14 months. “The credit deterioration has been almost parallel to what’s been happening in the subprime market,” says UBS mortgage analyst David Liu. The UBS report contrasts with testimony Federal Reserve Board Chairman Ben Bernanke gave to Congress yesterday. “Our assessment is that there’s not much indication that subprime issues have spread into the broader mortgage market,” Mr. Bernanke said.

I guess Mr. Bernanke needs to get out of Washington for a minute and take a reality check (along with the NAR who also seems out of whack with reality).

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