The NY Times reports an unsettling, yet growing trend for banks and borrowers. Reeling from a sub-prime mortgage crisis, in which banks wrote loans based on little or no collateral and questionable tangible assets, loans that once reset, were impossible to keep current, the same banks loaned less-gimmicky, safer PRIME loans to borrowers considered good bets, only to find them fall behind on their payments as well, due to job losses.
The first wave of Sub Prime (risky) loans with low teaser rates sucked in speculators looking to flip properties for quick profit (who quickly got in over their heads) and poorer families, just looking for a shortcut to the American dream.
The second wave featured balloon rates that again teased borrowers with a low front end rate that reset usually with 3-5 years, usually to a Prime+ level. The third wave is the most conservative, considered the safest mortgages going…a fixed rate, locked in at the point of acceptance. As borrowers “age,” fixed-rate loans allow predictable payments. As incomes grow, equity builds and homeowners can even borrow against built-up equity for short-term purchases.
The sub-Prime crisis is old news. As catastrophic as the bundled liabilities became when traded/sold, thanks to govt.-sponsored bailouts, most larger lenders survived. The less fortunate, upside-down speculators and families chasing their dreams? Not so much.
As the second wave looms, early specters of the third wave–two income families who have great credit but recently lost their jobs, are quickly falling through economic cracks in the basin of our nation’s economy. In the meantime, property values continue to slide, unemployment ranks continue to grow along with personal and business bankruptcy filings.
As unsettling as all of this is, what disturbs me even more is that we appear much closer to the beginning than to the end.