Her neighbors are losing interest in their lawns because they're losing their homes -- a result of the recent boom in "subprime" mortgage lending. Over the past several years, seven of the 26 households on the 5100 block have taken out subprime loans, typically aimed at folks with poor or patchy credit.
[...]
If events unfold as some predict, subprime lending could end up eliminating more homeowners than it created. One study by the Center for Responsible Lending, a nonprofit that focuses on abusive lending practices, forecasts that the subprime boom will result in a total of 2.4 million foreclosures nationwide, most of them on homes people owned before taking out the loans. That outweighs even the most optimistic estimates of the number of homeowners created, which don't exceed two million. (Emphasis mine)
Here is the first key quote:
"Individuals will resist reductions in their standard of living with everything in their power, including mortgaging their futures."
and how it manifests itself:
April Williams was feeling the pain of the downturn back in 2002, when she saw an ad from subprime lender World Wide Financial Services Inc. offering cash to solve her financial problems. At the time, production slowdowns at Ford Motor Co. were squeezing her husband's income from an assembly-line job, and they'd heard rumors that more cutbacks were coming. Still, after a loan officer from World Wide paid a visit, they became convinced they could afford stainless-steel appliances, custom tile, a new bay window, and central air-conditioning -- and a $195,500 loan to retire their old mortgage and pay for the improvements. The loan carried an interest rate of 9.75% for the first two years, then a "margin" of 9.125 percentage points over the benchmark short-term rate at which banks lend money to each other -- known as the London interbank offered rate, or Libor. The average subprime loan charges a margin of about 6.5% over six-month Libor, which as of Tuesday stood at 5.38%.
And the second key quote:
"You have two options -- to sell it or to refinance it," she says. "But if you can't do either, what can you do?"
Now the WaPo:
For a long time, Paul and Amy Woodhull's house on Capitol Hill was a honey pot. Through multiple refinancings over nearly a decade, they pulled out money to fix it up, buy a car, pay down credit cards, buy three other properties and improve them, too. Now the pot is dry. The Woodhulls are feeling squeezed by bills, but with interest rates up and home prices down, they're reluctant to touch their home equity again. They called their six children into a family meeting recently, and Amy laid down new rules: No more impulse purchases or frivolous shopping trips. "We're going to have to save our pennies," she declared.
The subprime market is where the most severe pain is going to be felt, but I don't for a second believe that problems will be exclusively (or mainly for that matter) in subprime. Alt-A and prime mortage borrowers will be put under pressure as well. Why? Because:
About a third of the free cash gained during this period was used to buy other homes, they calculated. About 29 percent was used to acquire stocks and other assets. About 12 percent went to home improvements. And nearly a fourth, 23 percent, went to consumer spending, including paying credit card bills and reducing other non-mortgage debts. The amount of free cash extracted has fallen sharply since the peak in 2005, to $217 billion in the last three months of 2006, down by almost half from a peak of nearly $400 billion in the third quarter of 2005. Analysts disagree about whether these changes will affect consumer spending. (Emphasis mine)
Analysts disagree? Sorry, but I don't see how this can't impact consumer spending. A major part of the nation's income - gains on home sales - that was used to fuel high-interest credit card spending is drying up. From where is this income going to be replaced?
How do the Woodhulls feel about this?
"Jeez, we've got all these payments every month," said Amy, 48, a radio network executive. "Now, when I look at sending my son to college in a year, I can't refinance again. Rates aren't falling. . . . I'm kind of stuck. What are my options? Sell a property into a down market? I'm really feeling quite caught -- like panicked caught."
But it's ok:
How consumers cope with these pressures will determine whether the economy stays on keel this year. In the case of the Woodhulls, they know they could sell their home if they really needed cash. For now, though, they're planning to hunker down until the housing market picks up.
So they could sell their home if they really become cash-strapped. But remember, if you can't sell it, and you can't refinance it, what are you going to do?
If you are the US economy, you are going to crash into a recession - hard.
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