Subprime Fallout: The Borrower's Side
Maybe somewhat lost in the subprime fallout picture is what's actually happening to the debtors that are defaulting. If you're anything like me you have a pretty easy time picturing the greedy homebuyer trying to get more house (or more houses) than they can afford, but a lot of the cases are likely buyers for whom purchasing a home was previously out of reach.
When interest rates dove and the market got crazy, suddenly it was all within reach -- but not really. I'm not sure that I agree with this article that the Fed's tightening of rates is what is pushing the subprime borrowers over the ledge though. I think the big problem was the teaser rates that the lenders put on those loans. Sure the higher Fed Funds Rate has pushed up the rate at which the loans are resetting, but those loans were a timebomb even if the Fed kept rates low.
I'm as cynical as the next guy (ok, maybe a little more sometimes) but I've just been going through the home buying process (good timing, huh?) and a lot of the fine print was difficult enough to throw me for a loop. Now put somebody in the same situation that isn't financially savvy, is very intent on owning a home, and has a real estate agent working "for" them who is eager to collect that commission check.
That's trouble waiting to happen.
I doubt the Fed is going to do anything with rates unless it looks like the subprime problems are going to spread into other areas (which I don't count out). But even if they did, I don't think it would do a whole heck of a lot at this point for Joe and Jane Subprime who can't afford their mortgage now that principal payments and a reset interest rate have doubled their monthly payments.