Why You Should Hate the Treasury Bailout Proposal
SImple question that I've yet to receive an answer for;
"Why are people defaulting?"
I would add, when these subprime instruments came out that allowed 100% financing WITH Stated Income, that's a really bad combination.
I know from personal experience, that I walked away from writing several subprime loans where the borrowers were essentially trying to dictate how they wanted to do business. They'd talked to several brokers before they got to me, learned the game, and then were simply pitting one broker against the other to get the best price. I've seen quite a bit of talk on this board about how the potential homebuyers were duped. From my personal experience, very, very few homebuyers were duped. They knew what they were getting into, and were actively willing to lie about their incomes on state income loans to get into a home. Where the homeowners may have gotten surprised, though, is that very few in the mortgage business expected the music to stop as abruptly as it did.
For those homeowners that used a state-income subprime, say 2 year ARM, there is no recourse for them. Period. They're going to be foreclosed. 1. They don't make the income that they stated, so now that they've got to go full-doc they can't come close to making the debt to income ratios. Also, the debt to income ratios have tightened considerably. 18 months ago you could qualify, with good credit, some assets, on a 100% full doc loan up to a 65.99% debt to income ratio. That's been cut to a max of 55.99%, with a 97% LTV (through FHA); and this ratio is going to come down again, very soon, I believe at the beginning of October.
2. The adjustable rate on their subprime loan is based on a) an index plus b) margin. Many of these ARMs were written with the 1 year Libor rate as the underlying index. At the time, it was no big deal, as libor and treasuries were very close in rate, and traded pretty much parallel to each other. Not anymore. The spread between libor and treasuries has gotten huge. If you've got a LIBOR based ARM, you're really screwed.
3. LTV. If you got a 100% LTV loan in 2006 or 2007, you've probably got a 115% to 125% LTV loan today. Even with perfect credit, and lots of money in the bank, the odds of simply being able to refinance are extrenely slim.