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.
Ida Byrd-Hill, President of Uplift, Inc. a 501(c)3 Idea Incubator has published a book, Breakin’ Out of Your Financial Funk, to help people mentally and emotionally deal with the financial panic they are now feeling due to the mortgage crisis.
Ida Byrd-Hill spent 15 years as a financial advisor and mortgage lender attempting to educate people to view their mortgage as a part of an integrated financial plan and not the plan alone. She believes when 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
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 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 adjust the rate annually rather than semiannually. They were not going to cut into their profits to save America.
Before you react irrationally and enter into a business decision that will ruin your life forever. Fight the funk. Read Breakin’ Out of Your Financial Funk, a book written to ease people out of the financial panic into a thinking, dreaming, and planning mode again. Or, better yet, give yourself a mental break at one of our Breakin’ Out of Your Financial Funk seminars coming soon to your region. Purchase the book or register for the seminar at www.upliftinc.org