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By Ida Byrd-Hill
Isn’t it amazing that neither Fannie Mae or Freddie Mac provided subprime loans, but yet they are in financial trouble that requires a 200 billion dollar bailout. The truth of the matter Americans have been in a financial funk a long time while our political leaders have attempted to tell us we are in a mental recession.
Many of us built a solid retirement portfolio in the high flying 90’s by guessing on the performance of a stock or mutual fund. Everything seemed to expand profitably through the roof. The Dow Jones Industrial Average crossed the 10,000 mark. We doubled, tripled or even quadrupled our portfolio only to lost two-thirds of our retirement portfolio in 2001 due to the Enron malaise and the World Trade Center bombing.
After 5 years of toiling to get control of our lives, the bottom falls out again. We thought we could recoup our investment loss with rising home equity. We were lured by low mortgage payments into buying palatial mansions, only to be stuck with a big house and earth shattering mortgage payments? We are not alone. Many well-educated financial astute individuals with good credit are in the same position.
The subprime mortgage crisis and its foreclosure cousin has affected more than the less than perfect credit borrowers the media has presented. Subprime lenders expanded their market base by offering products exclusively for borrowers with good to perfect credit. These mortgages – option arm, no money down, and 125% home equity were offered to improve families home ownership opportunities. They did. Homeownership peaked at an all time high of 69.2% in 2004 from 64%.
The subprime crisis has become national as it affecting 60% of the American population. People are losing their dream homes and their sanity. They are stressed, attempting to cover mortgage payments that are increasing wildly, they cannot afford. Property values nationally are dropping sharply trapping people into a negative situation. Their American dream of owning a home, a major investment in America, is being crushed. People are stressed, depressed, and frustrated. People are in a financial funk.
Property values increased double and triple fold. Americans were baited into the false sense this boom would continue forever. People secured adjustable rate option arm, no money down and 125% home equity mortgages, not realizing greedy mortgage companies would increase their rates astronomically even when interest rates remained low.
Affluent well-educated people have been bamboozled by the trusted financial industry. Affluent well-educated people were baited into low mortgage payments with option arm mortgages. Option arm mortgages is the street term for the negative amortization loan which promised start interest rates as low as 1.25% to 4% compared to 5.25% to 8%. See the difference in the table below.
$500,000 Loan Amount
Rate Payment Rate Payment
1.25% $1666.26 5.25% $2761.02
2.25% $1911.23 6.25% $3078.59
3.25% $2176.03 7.25% $3410.88
4.00% $2387.08 8.00% $3668.82
People trusted mortgage companies when they should not have been trusted. Adjustable rate mortgages once adjusted annually. Along the way, mortgage companies slipped in semiannual interest rate adjustment. Instead of a maximum rate increase of 2% annually, people are realizing a 4% rate increase annually. If your rate began at 3.25% and every year the interest rate is increased 4% a year, in three years, a person will reach the maximum legally allowable interest rate of 13.99 %. For a $500,000 mortgage, the payment in three years would jump to $5920.40 almost triple the original payment of $2176.03. Most people cannot handle an adjustment of that magnitude especially not over 3 years. The interest rate cap was once 9% but the mortgage companies lobbied Congress to increase it to make more money.
Option arm mortgages were designed for the super wealthy, who understood there would be a balance of interest left over from paying only 5 percent of the interest due. The super wealthy gambled that their property value would increase faster than this interest balance increase and they would generate a sizable profit from this real estate transaction. The common individual would not be so lucky. Property values nationally have rapidly declined. People can not even refinance themselves out of this situation as their mortgage balance is higher than the worth of their house. Hence, they are stuck with a big house, a declining investment, earth shattering payment and an increasing mortgage balance.
Even when the foreclosures began to mount, mortgage companies could have renegotiated mortgages to readjust the rate annually rather than semiannually, yet they were not going to cut into their profits to save Americans.
We are suffering in silence too embarrassed to discuss our plight. We now seek remedies such as filing bankruptcy protection, credit counseling, debt consolidation loans, but we have been afraid these remedies will make our personal economic depression get even worse as you really need to make more income. Many of us are racking our brains and health working 60 hours a week or more just to stay afloat?
Our affluent lifestyles are no longer fun. They have become downright disastrous. This new panic in the economy is a good time to examine the priorities in our lives and possibly make some serious changes.
Ida Byrd-Hill, a fifteen year financial advisor/ mortgage loan officer, said a year ago this Fannie Mae and Freddie Mac bailout was inevitable, She knew the mortgage mess had more to due with the Banks’ greed rather than subprime – bad credit – loans.
Anticipating the financial funk we would eventually fall prey to, she wrote Breakin’ Out of Your Financial Funk! to help us ease our minds and create new ideas to generate money even in a tough economy. She states ‘Tough economies wipe out competition across most industries and create opportunities for new entrants.’ If you are feeling a sense of panic and stress with this latest news, join Ida Byrd- Hill as she releases her newest book Breakin’ Out of Your Financial Funk! You can purchase books www.upliftinc.org, Amazon, Borders, Barnes & Noble and Target.
About the Author: Ida Byrd-Hill is the author of Breakin’ Out of Your Financial Funk! and President of Uplift, Inc., a 501(c)3 Idea Incubator. She can be reached at
upliftinc.org
.
Source:
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