What is the damage so far? According to a recent article from CBS News, so far this year more then 80 mortgage lenders , ranging from small, local mortgage brokers employing just 50 people to American Home Mortgage, the Melville, N.Y.-based lender that announced it is no longer taking loan applications and laid off 6,500 employees, have restricted the terms for loans they will accept, stopped taking new loans altogether, or simply closed their doors. In August alone, home loan companies have cut over 25,000 jobs. These companies were engaged in "subprime" mortgages, adjustable rate mortgages offered to people with lower credit scores who have little, if any money for a down payment.
How did it happen? After the Federal Reserve Board increased interest rates and the housing marked slowed, many home owners found that, as their ARM payments increased, one of their escape routes -selling the home quickly - was cut off. And now, while still struggling with a mortgage they can no longer afford, the other escape rout - refinancing the mortgage - is no longer an optioneither.
What does this mean in the future? Over the next several months, banks will be changing the "teaser rates" that homeowners received two years ago.
The peak for resetting loans will be in October, when the rates on some $50 billion worth of mortgages are likely to rise by 2 percentage points or more. This could mean a rise of several hundred dollars a month for many borrowers.
For example, on a $210,000 loan balance (the average subprime amount in 2006), the additional 2.5 percentage point increase on the interest rate adds about $4,560 a year, or about $380 a month, estimates James Kragenbring, senior investment officer at Advantus Capital Management in St. Paul, Minn.
That means the median household would have to devote an extra 9.5 percent of income just to pay the extra interest.