Wednesday, January 16, 2008
One might naively hope that some of the vicious moral condemnation of many lower middle income and middle income Americans that are unable to pay their ARMs will end in light of this development. But that would indeed be naive. Policymakers have often adopted the paradoxical philosophy of one rule for masses and another, more lenient one for the wealthy. For example, just look at the ability of wealthy homeowners to shield the equity in their homes from creditors in states like Texas and Florida.
With a picturesque little downtown area and large, expensive houses -- according to the Headrick-Wagner Consulting Group, the average home sale price here in the 12 months to September 30, 2007, was around $1.15 million -- Hinsdale seems a world away from the housing slowdown that may have brought the U.S. economy to the brink of a recession.
But even here, far from the housing crisis' epicenter, high earners with good credit may be heading for trouble as their adjustable rate mortgages (ARMs) adjust beyond their means, local real estate agents and others say. In a normal housing market they'd be able to sell, but now they are stuck.
"The next wave of problems will come from prime borrowers who bought too much house or borrowed too much against it," said Michael van Zalingen, director of home ownership services at Neighborhood Housing Services of Chicago. A "prime" borrower is one with good credit.
Real estate agents warn that some high-income borrowers have already been forced to sell or leave their homes and more will follow. Especially those who used their homes as ATMs, withdrawing cash via home equity loans.
"For those who utilized home equity loans for five to ten years to finance their lifestyle, the chickens are coming home to roost," said Chicago-based real estate agent Marki Lemons.
So, expect the wealthy to be portrayed as victims, with the ability, as noted in the Reuters article linked here, to quietly, and very privately, negotiate their way out of their homes by way of short sales, while middle income borrowers are villified as fraudulent scofflaws. After all, some of these same people rely upon investment income from funds holding bonds backed by mortgages. Hence, the necessity of presenting the prospect of ostracism to anyone who considers walking away from their home instead of paying ever more astronomical adjusted monthly mortgage payments.
There is, however an even more alarming aspect to this story, the prospect that the inability to contain the credit crunch to middle income subprime borrowers suggests that a brutal deflation lurks just over the horizon. Hard to believe in light of today's news about inflation, and yet, it is difficult to see the withdrawal of easy credit and the destruction of home equity resulting in any other outcome. Time to prepare for the sub-proletarianization of America?