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Here’s how it worked: The Grinning Family, with US average household income, gets a $200,000 mortgage at 4% for two years. Their $955 monthly payment is 25% of their income. No problem. Their banker promises them a new mortgage, again at the cheap rate, in two years. But in two years, the promise ain’t worth a can of spam and the Grinnings are told to scram - because their house is now worth less than the mortgage. Now, the mortgage hits 9% or $1,609 plus fees to recover the “discount” they had for two years. Suddenly, payments equal 42% to 50% of pre-tax income. The Grinnings move into their Toyota.
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I have had to explain this to so many people who think it is the fault of the family for getting a loan they couldn't afford.
These higher risk loans had a purpose. They were for people with bad credit that were still probably ok risks and they gave people an opportunity to fix their credit and then refinance later.
These loans had a lower than normal failure rate for years and then were handed out in increasingly larger numbers. Tons of people had bad loans, home prices inflated, and the failure rate started to rise
up to the previously accepted normal level. With the devaluation of those properties (that were
never worth the sticker price) and the increasing defaults the actual good risks who didn't do anything wrong can't even refinance their loans.
Which leads to more defaults, more devaluation of property, and a greater difficulty in getting a loan.
