The Homeowner Everybody Loves to Hate

As the mortgage default and, accordingly, the foreclosure rate rises, one party has emerged to take the fall — the at-risk homeowner.

Some are homeowners who used their home’s value to fund other purchases. Others are new homeowners who bought using a loan that, given booming home prices, assumed their property would appreciate significantly before being refinanced or sold. Many are people who took out a subprime mortgages, loans typically made to people with weak credit histories that will rise in a few years.

And rise they did. More than $350 billion adjustable rate mortgages will reset to higher rates in the next 18 months — and the economy is bracing for the result.

And, while bracing, it’s blaming a little, too. Prime homeowners are wondering: How did these at-risk homeowners get in this situation? And why haven’t they gotten out of it?

Consider the following possibilities:

• They bought because they needed the money. Joseph Mason, an associate professor of finance at Drexel University and a senior fellow at Wharton, said last week that many subprime borrowers’ home payments were less or about the same as renting, and they felt they could use the equity to pay other bills.

• They bought a home on the bubble’s peak. The markets that had the biggest housing price and value spikes are the ones most dangerous loan-wise. The harder they rose, it seems, the harder they are falling.

More than a third of all adjustable subprime loans in the U.S. are in California,
Nevada, Arizona and Florida, according to the Economist. Given those states are some of the hardest hit in the housing slump, with the largest home value and price drops, it pushed at-risk homeowners right to risky. California alone has 17 percent of the country’s subprime ARMs, which is why in Riverside and San Bernardino counties, 1,900 houses were repossessed in August — compared to 31 in 2006.

• They tried to refinance and couldn’t. Homeowners who had signed up — either knowingly or unknowingly — for high-reset-prone loans several years ago under programs now deemed too risky may have found their finances didn’t lend to more traditional loans.

Roughly 57 percent of mortgage broker customers couldn’t refinance
their adjustable-rate loans to avoid higher monthly payments in August due to loan programs being discontinued, Reuters reported in September. Half of prime borrowers were turned away from ARM refinancing; 64 percent of borrowers with subprime, or weak, credit couldn’t refinance.

In fact, 14 percent of brokers back then said they had no available subprime lender — not one, according to the poll of 1,744 brokers by Washington-based research firm Campbell Communications. 

• They defaulted because they didn’t know. Is it possible that a large percentage of homeowners had no idea the rate change was coming, and once it hit, weren’t financially prepared to pay it? Data showed that up to 10 percent of borrowers who didn’t refinance but
  were making payments before the reset defaulted once it hit, says ratings agency Moody’s — who also found that most large servicers sent letters to borrowers warning them their interest rates were about to reset, not phone calls, which would have offered confirmation that the rate change was conveyed, according to the Financial Times.

The possible reasons are varied; but one thing is clear — much of America doesn’t feel too sympathetic.

Just take a look at the comments CNNMoney.com readers are posting: "To all of those people who use their property as an ATM machine or
obtained very low initial rates mortages, keep in mind that you always
have to pay the piper … you already enjoyed quite
a bit now is time to pay," one New Yorker wrote.

"Nowhere in the constitution does it say that the government has the power to bail out stupid people and greedy corporations," another poster from Utah said.

"People taking out these ridiculous loans during the housing bubble were morons and they deserve to lose their money" — that one came from Seattle.

The sad truth is, even if they don’t deserve to lose it, it’s looking more and more like they will.