One Home Loan at a Time: The Making of a Credit Crunch
Just three years ago, Martin and Jennifer Cossette took out a Connecticut mortgage and officially bought into the quintessential American dream of home ownership.
Their modest Cape Cod-style house, in Meriden, Conn., had three bedrooms and a backyard for their young son, Steven. Like so many families, they stretched to buy their first home.
In the red-hot Connecticut housing market at the time, they put no money down and got a home loan for its entire $180,000 price tag.
They had some qualms, but too few, as reassuring lenders spoke of rising home prices, falling home mortgage rates and easy access to future loans.
None of it turned out that way.
There were unforeseen expenses: a new furnace, stove and garage door. Bills mounted and credit card debt got out of hand.
They applied for mortgage refinancing in late 2005, folding other debts into the home loan, but that proved to be only a stopgap.
Earlier this year, the Cossettes filed for bankruptcy under Chapter 13, used by wage earners who want to hold onto their homes.
But the monthly payments on the $230,000 mortgage were $1,800, 40 percent higher than the first mortgage, and headed even higher.
So they decided to let the house go. “We were totally naïve,” said Mr. Cossette, a purchasing agent for a warehouse company.
Families like the Cossettes are the individual faces of the American credit crunch of 2007, the economic bite of which continued to intensify last week.
Stock markets around the globe were pummeled by worries about the squeeze’s ripple effect. Businesses and savers far removed from the housing fallout are starting to suffer losses.
Consumer confidence is slipping. Countrywide Mortgage, the nation’s largest home loan lender, was forced Thursday to tap $11.5 billion in emergency loans from 40 of the world’s largest banks.
The Federal Reserve took a dramatic step Friday, cutting the interest rate it charges banks for home loans to add liquidity and steady financial markets.
The fallout extends from hedge fund managers to rank-and-file investors, but the most personally punishing setback is a family losing its home.
About 1.7 million households will lose their homes to foreclosure this year and next, according to estimates by Moody’s Economy.com.
That would be nearly double the number of the previous two years.
Looking at foreclosure warning signs like home loan delinquency and default rates, which are spiking, Mark Zandi, chief economist of Economy.com, said the outlook was “very dark.”
There are regional and local differences, to be sure.
Problems tend to be more pronounced in Midwestern states with weak economies, like Michigan and Ohio, and states with the greatest concentration of bad credit home loans, like California, Florida and Nevada.
“But the trouble is not just a few places. It’s coast to coast now,” Mr. Zandi said.
As the squeeze on homeowners becomes worse, the political debate over how to address the problem will intensify.
Earlier this month, Senator Hillary Rodham Clinton, Democrat of New York, called for a crackdown on predatory mortgage broker practices, and $1 billion in federal funds to help American families avoid foreclosures.
Follow our link to continue reading this New York Times article on the widening impact of bad credit mortgages …