Sector-Specific Trends Impacting Credit Card ARM: Mortgage

Just as breathless as the calls of instant riches in the real estate boom of the early 2000s have been the calls of doom and disaster when it turned out a bunch of people who shouldn’t have bought houses did with the lure of easy credit and scant savings.

For at least two years, the usual panoply of naysayers – media economists, consumer advocates, and bank critics – have foretold the imminent demise of the American economy by way of mortgage defaults.  Folks will lose their homes, banks will struggle under the weight of charge-offs, and blood will generally flow in the streets.  And to their credit, some of that has happened.  A number of subprime mortgage lenders have gone out of business, large mainstream banks are experiencing earnings erosion, and homeowners are losing their homes in numbers greater than historically average.

The general consensus is that adjustable rate mortgages -- loans that offer attractive initial rates that increase after a short time – and “exotic” mortgages, such as interest-only loans, are the main culprits.  Folks that in no way were able to afford a home were enabled by lenders’ willingness to stretch out to an underserved and untapped market.  But when interest rates began to readjust after the initial period (typically 1, 3, or 5 years) and/or homeowners began to pay principle rather than just interest, the occurrence of delinquency increased.  Add on the fact that many borrowers bought homes with no down payment, thus necessitating a second mortgage or home equity line of credit to cover the traditional 20 percent down payment.  So many homeowners were left making not just one mortgage a month, but two.  And often, the actual payment on the second mortgage was not just a mere 20 percent of the main mortgage payment.  When lenders approved 100 percent financing, the second mortgage, or line of credit, typically carried a much larger interest rate, driving the monthly payment up to 25-35 percent of the primary mortgage payment.  Then, of course, there are other monthly payments unique to homeownership: larger utility bills, property tax, insurance, and maintenance.

Simply put, many homeowners found themselves stretched very thin just by agreeing to purchase a home.  So naturally, some other debt obligations that were previously front-of-mind were relegated to back-burner status; more pointedly, credit card delinquencies have been on the increase.