I laughed today when reading the headline, “Pace of foreclosures slows in California”
Los Angeles Times has a bunch of great writers…
…not financial analysts.
Seriously, I laughed.
What the article fails to mention is that most of the folks who have lost their home were on what are know as variable interest rate loans (VIL). And their mortgages payments have dropped DRAMATICALLY over the past year.
Now there are SEVERAL reasons why home foreclosures have increased so much; especially in California.
But one of the factors that doesn’t get enough “pub” (isn’t that what the kids call it today?) has more to do with Vegas than anything else.
Vegas? you ask?
Yes, VEGAS! See…
…People bet that interest rates would go down or stay low forever. You could say they bet. Most people “bet” interest rates would stay the same or go down.
The problem was that folks not only “bet”, but they took bad bets.
You see, a lot of folks in 2003-2005 were buying out of fear. As in the fear that “their” home would be outbid by somebody else. So they bid even more. Problem…
…they COULDN’T afford it!
Now, would affordability ever stop a loan broker?
HELL NO!
So, these loan brokers came up with crazy loan programs. Programs so crazy that enticed buyers by offering these crazy loan interest rates for the first couple of years, and then added the interest in later years.
By the time 2008 hit, home owners not only had their interest rates adjust, but they adjusted from crazy low rates to a bit higher than average. Where people could once BARELY afford the payments, now they didn’t have a chance.
So 2008 foreclosures spike. And then the stock market takes a shit. And then…
Fear. Man, fear can do crazy stuff to a man.
Fear hit main street and wall street at the same time.
And you know what fear does?
STOP! It makes you stop doing what you were doing.
And in this case, people were buying LOTS of stuff…which they STOPPED.
When people stop buying, owners decrease production…
…and fire people. Which turns this cycle into a cancer.
Now its late 2009, and money is cheap again.
Why, because people are scared. Businesses don’t want to invest. Consumers don’t want to buy.
Interest rates go down.
And here’s how the whole things ties together…
People with variable rates have seen their mortgage payments decrease substainally over the past year due to the decrease in interest rates. Because of lower mortage payments, families can afford to make their payments, which is a hidden factor in why foreclosures are down in California.
Every story has another story…
…The untold story.
