Subprime lending mess will be worse than predicted

Agreed, I have been thinking that this was coming due for along time. Too many speculators watching late night infomercials about getting rich quick in real estate. Classic asset bubble follows, then pop!Add in easily available credit, and lax lending standards and you have a big problem with lots of zero's coming after you. Many people who think they are not going to be affected by this will find that they are wrong because thousands of these mortgages were securitized and sold in tranches to hedge funds, mutuals, pension funds, etc.

I think using subprime rate lending as an excuse for the collapsing housing market is just the tip of the iceberg. Teaser rates begin at 5% and then adjust upward just like adjustable rate mortgages (ARMs)when they increase to meet fixed rates or even higher. The reality is, most people who live in a home for five years or less are duped into taking out re-financing loans plus cash out to purchase more amenities for themselves such as upgrading their homes, buying new cars and taking lavish vacations. They are duped into believing they have equity in their homes when in fact the so-called equity isn't based on the principal paid in, but on the quirks of reappraised market values. In some cases, there is little gain in the market, but that doesn't stop banks from making home refinancing loans, often at amounts far exceeding the home's actual value. In other words, if home prices fall and the borrower can't sell it for the same price the bank appraised it for the buyer is going to lose money. It's called being upside down -- the same problem that people have when they turn in a leased vehicle which isn't worth the residual owed. If the actual market value of the car is lower than the residual the leasee absorbs the difference.

The big problem can be seen in a couple of very simple statistics: wages, total income and total debt. If wages remain stagnant (which they have over the last 5 years) annual income may not cover the monthly mortgage payment nor take into account other factors like home owner association fees and increased property taxes. Total debt, usually on plastic credit cards that carry 10% or more interest and financing charges, piles up, even if the home has a fixed 6.5% 30-year loan.

Let's face it: we are all gluttons and the reason why we're in such a big financial mess is mostly our own fault for letting our eyes become bigger than our stomachs. Eventually, though, someone has to pay the piper and bankruptcies will continue to rise.