What do you get when you combine predatory lending practices and uninformed consumers? Simply put, you get what some financial experts are describing as "the perfect storm." More specifically, you get a nationwide housing crisis in which about one out of every 100 mortgages are expected to end in foreclosure.
From 2001 to 2005 many areas of the country experienced a "housing bubble" in which property values increased dramatically – fueled in part by low interest rates and poor (subprime) lending standards. When the increase reached unsustainable levels the bubble inevitably burst. In 2006 the housing market began to correct itself, and over the past 9 months home sales and prices have continued to fall (the drop in existing-home sales is the steepest since 1989). Because of rising interest rates, many homeowners with adjustable rate mortgages have been unable to meet their financial commitments. At the same time the decline of property values has left lenders without a means to recoup their losses.
This "perfect storm" has resulted in the collapse of the subprime mortgage industry. Since 2004 about 20 percent of all mortgages in the US have been subprime. Subprime lending is essentially the practice of making loans to borrowers with poor credit histories - usually at higher-than-average interest rates and sometimes on less than scrupulous terms. Subprime lending is considered risky, and such lenders have been accused of engaging in fraudulent and predatory lending practices - leaving many borrowers in over their heads and in danger of losing their homes.
The past two years have seen a dramatic spike in the number of homeowners facing foreclosure. The mortgage delinquency rate (the number of borrowers who are falling behind in their payments) has doubled in the last year and is expected to continue to rise. So far this year more than 355,000 homes have been repossessed nationwide and there are more than 730,000 currently facing foreclosure (some sources put this number even higher). That means well over a million homeowners will lose their homes before the year is out.
The mortgage disaster has forced many lenders and investors to tighten their belts - already tens of thousands of jobs have been cut throughout the housing industry. The country's largest mortgage lender, Countrywide Financial, announced it would cut as many as 12,000 jobs. In addition, some companies, like American Home Mortgage and New Century Financial, have filed for bankruptcy. These are just a few examples, according to BusinessWeek: "At least 25 subprime lenders, which issue mortgages to borrowers with poor credit histories, have exited the business, declared bankruptcy, announced significant losses, or put themselves up for sale. And that's just in the past few months."
The fallout from the mortgage crisis has also hit a number of commercial banks and hedge funds. Warren Spector, co-president of the Bear Stearns investment bank, was forced to resign last month following the collapse of two of the company's hedge funds. Some experts believe that this is just the beginning, one mortgage industry insider described the crisis as a "meltdown of unparalleled proportions" that would result in the loss of billions of dollars. Countrywide Financial has warned that home prices are falling "almost like never before, with the exception of the Great Depression" and that the market probably won't begin to recover until 2009.
So where does that leave us? If the United States is indeed facing a financial crisis, what should we do about it? How can we prepare for times of economic uncertainty? Chuck tackles these tough questions in his new briefing titled The Vortex Strategy (see description above).
This is the second installment in a three part series on the state of our economy. Next week we will conclude this series by examining the problem of consumer debt in America.
Disclaimer: Worldview Weekend, Christian Worldview Network and its columnists do not necessarily endorse or agree with every opinion expressed in every article posted on this site. We do however, encourage a healthy and friendly debate on the issues of our day. Whether you agree or disagree, we encourage you to post your feedback by using the feedback button.
I don't think the lenders are the only ones at fault, you have to look at greedy people wanting more house than they can afford. People know their income and financial obligations, but still take out a loan that puts them a dangerous financial situation. Then add the ARM feature and you are really stretching things. No wonder families split from financial stress, credit scores are destroyed, etc. Just like using your credit cards, you have to be smart or they will do you in. And as Christians we must be especially careful..following Biblical principles, as always, is the way to judge how to deal with these things. Click here to reply to this post
Re: Economic Upheaval: The Mortgage Mess
Posted On: 09/26/07 01:29:27 PM
Age 44, TX
Chuck, you write interesting articles dealing with financial matters, but you are always short on specific concrete advice. I know that getting out of debt is always the best thing to do, but after achieving that, what specifically should we do now? Specific suggestions would be appreciated rather than generalizations. Click here to reply to this post
Re: Economic Upheaval: The Mortgage Mess
Posted On: 09/25/07 04:43:49 PM
Age 49, TX
Lord have mercy on us, because the church is right in the middle of this one...wrong ideas and teaching on finances is one of the bigger issues facing us today. Is it biblical for a Christian to be in debt? If you look at the Scriptures its clear that the resounding answer is no. That's not a trendy answer and its not a popular answer but it is the biblical answer. We talk of having the proper worldview and talk about wanting God's best, but in this country oftentimes when it comes to money - hands off! I have heard many people say over the years that God blessed their businesses and their educations and their etc., etc. even though they had to get into debt to obtain it/them. And, it often appears that God did bless them. BUT, two things from the Scriptures are also very clear: First, God often blesses in spite of our failures and second, there are always consequences for disobedience - a lean heart (Ps 106:15) as well as the law of sowing and reaping (Gal 6:7), and in the financial case bondage (Prov 22:7). A quick overview of the Scriptures concerning debt: In Rom 13:8, in context and grammar, we are commanded not to owe anyone ANYTHING but the debt of love. Review Proverbs 22:7 and Matthew 4:10, 6:24 and ask how can a man serve two masters and be right with God? Third, Deuteronomy 28:44 shows that debt is a curse on a nation (that's no surprise considering the financial and spiritual state of ours). Lastly, if God is indeed sovereign over everything we have (and He is) why can't we accept that the lack of funds (i.e. cash) can, and usually does, indicate that He may not want us to do what we have in mind at least for now? Click here to reply to this post
Re: Economic Upheaval: The Mortgage Mess
Posted On: 09/25/07 01:25:36 PM
Age 54, OK
The mortgage mess has been building for many years. And the immediate impact - job loss in the industry and soaring foreclosures - is just the tip of the iceberg. What about all the people who can no longer afford housing and rental rates on a realistic budget? Unreal estate prices are a major factor killing the real American economy. How are our children supposed to afford housing when they grow up - demand an extra $1000 a month income?
Several years ago ABC reported how real estate costs since the 70s had advanced three to one over income. A recent article from AP said homeowners have been in trouble since 1990 when real estate values stopped climbing in relation to rise in income. Instead, low interest and subprime lending fueled the growth.
Exorbitant housing prices coming back down a bit is a long way from making housing affordable to the 58% of Americans whose household income is under $60k.
Meanwhile evangelicals keep quoting verses about how wonderful life is for Christians.
We're in a sinful fallen world. Life is hard; there are no guarantees and believers have no exemptions to life's hardships. Click here to reply to this post
Re: Economic Upheaval: The Mortgage Mess
Posted On: 09/25/07 11:26:37 AM
Age 47, MO
Friend, you're just touching the surface; how about consumer debt, national debt, falling dollar, trade imbalance, crumbling economy and infastructure, moral depravity, loss of freedoms, looming anarchy or socialism, etc. Yea I know, I rain on everybody's parade. Friendship with the world is emity with God. John Click here to reply to this post
Woodrow Kroll, David Jeremiah,Sean McDowell, Josh McDowell, David Barton, Carl Kerby, Frank Harber, Kerby Anderson, and the Branson Family Reunion DVD Set! This is a $74.95 value for only $34.95! FREE worksheet with purchase!
Russell O'Quinn, Steve Saint, Dr. Michael Youssef, Dr. Erwin Lutzer, Bob Lepine, Star Parker, Kirk Cameron, Ray Comfort, and the Branson Family Reunion DVD Set! This is a $74.95 value for only $34.95!
