December 21, 2006

Possible Rise In Foreclosures Shows Consequences of Not Planning

Filed under: Biz Weak,Economy,General,Money Tip of the Day — Tom @ 2:42 pm



YES, you need to take this press release with a grain of salt, because it’s from the Center for Responsible Lending, which, though it has its moments, has also been known to go off the deep end (unless you think color-coding credit cards green, yellow, and red based on their “safety” is a good idea).

Nevertheless, the subprime mortgage market is a mess, and there’s a bigger message:

A new Center for Responsible Lending (CRL) study reveals that 2.2 million American households will lose their homes and as much as $164 billion due to foreclosures in the subprime mortgage market. Titled, “Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners,” the CRL study is the first comprehensive, nationwide review of millions of subprime mortgages originated from 1998 through the third quarter of 2006.

CRL’s research suggests that risky lending practices have triggered the worst foreclosure crisis in the modern mortgage market, projecting that one out of five (19.4%) subprime loans issued during 2005-2006 will fail.

CRL is really good at blaming lenders, and they deserve their fair share. But let’s cut to the chase: How many subprime borrowers sat down and figured out if they could afford to take out the loan being offered? The answer is surely very, very few, because if they had, in most cases they would not have done the deal.

Don’t make a financial decision like buying a home, or refinancing (especially if it’s a “cash out” refi where you borrow even more, without making sure that you can afford to do what you’re considering. Fortunately, there’s an easy way to do that:

CYMnow allows you to create what-if scenarios in addition to your basic “budget” and debt elimination schedule. There IS no better and more affordable way to get your act together, and to see if you’ll be able to keep it together after making an important financial decision.

It may seem dreadfully obvious, but it’s also obvious that a lot of folks during the home-price run-up relied in a sense on their lenders to decide if buying or refinancing their homes would work. The problem is that the lenders want to get deals done — Just because the lender’s formulas say you can afford to buy that home or refinance your existing mortgage, that doesn’t mean you can. You have to figure that out for yourself. — Don’t buy or refi a home without it.


UPDATE: Sensible Mom busts Biz Weak for not doing its homework on a couple portraying themselves as deceived by subprime lenders who in all probability knew what they were getting into, and should have known better. There’s no denying that you have to want to get things together for anything to work.



  1. Check out Business Week’s recent article about the looming mortgage default crisis. The magazine features a couple whose home was foreclosed because of their failure to make their payments once their adjustable rate mortgage increased. Under the title “The Foreclosure Factories Vise,” Business Week says,

    “Randy and Jennifer Rimstad of Minnetonka, Minn., refinanced their mortgage in 2004 to replace a 50-year-old furnace and pay for their youngest daughter’s wedding. In May, their interest rate jumped to 8.55% from 5.55%, pushing their monthly payment from $1,654.81 to $2,295.68…”

    So after reading that paragraph you feel bad for the Rimstad’s right? After all, Business Week claims they only wanted to pay for their daughter’s wedding and stay warm in the winter.

    However, if you do a search of the Rimstad’s property and some simple calculations in excel and you learn that Business Week has hidden the Rimstad’s poor financial decisions to garner sympathy for them.

    According to the Hennepin County property tax website (input the address to see the data) the Rimstad’s purchased the property at 3642 Robinwood Terrace, Minnetonka, Minnesota in June 1983 for $84,000, their taxes due in 2006 total $3,555.24 and the house is currently valued at $257,700.

    We know from the article that the Rimstad’s interest rate and monthly payment at the time of refinancing were 5.55% and $1654.81, respectively. Assuming they chose a 30-year mortgage and assuming that they escrowed their property tax payment as part of their new mortgage, they would have refinanced $238,000. That’s one hell of a wedding and furnace!

    To be sure there are some loan service companies that are acting illegally, but the bulk of the defaults will occur because borrowers, like the Rimstad’s, wanted more than they could afford.

    If only Business Week would be honest in its reporting and properly acknowledge that many foreclosures occur because of bad and greedy decisions by consumers, not only because of unscrupulous lenders.

    Comment by Sensible Mom — December 21, 2006 @ 2:07 pm

  2. #1, That’s interesting and I’ll bet not unusual.

    There is a greed factor that’s undeniable, driven by by wanting stuff but also my not looking at (or not caring to look at) what you can afford. I won’t deny that what I’m offering won’t help people who don’t want to know, or don’t care to know.

    I call it Biz Weak for a reason.

    Comment by TBlumer — December 21, 2006 @ 2:43 pm

  3. Thanks for the link!

    Comment by Sensible Mom — December 21, 2006 @ 2:56 pm

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