We have been hearing it for a while now, the real estate bubble has burst and the prices are going down. Alongside this, the levels of foreclosures has skyrocketed and buyers who, 1 or 2 years ago would qualify for a mortgage, are finding themselves being denied. The real estate lender industry classifies potential borrowers as “prime” or “sub-prime.” “Prime” borrowers being the more desirable ones while “sub-prime” borrowers are more at the margin of their borrowing and repaying capacity.
During the heyday of the real estate boom, the lenders specializing in sub-prime loans went full steam ahead approving loans that looked very shaky indeed. Now, we all know that the laws of interest rates work inversely to the laws of gravity; what goes down must come back up. After several years of near zero prime interest rate, the inevitable happened and the rates began to climb.
As the rates climbed, the problems became more and more apparent as the level of foreclosures climbed to astronomical levels. Several of the more aggressive sub-prime lenders could not take the brunt of the waves of foreclosures and had to go into bankruptcy or out of business. At the same time, the market prices of both, residential as well as commercial real estate began sliding downwards adding fuel to an already volatile situation.
Now the situation is such that you are beginning to see even prime borrowers be squeezed because the market value of their real estate has dropped below the level of their mortgage. In other words, their mortgage loans are higher than the value of their real estate – a condition known as “being upside down” in your loan.
Many boomers took advantage of the very low interest rates and re-financed their homes to take the equity out and use it as they saw fit. If they opted for a fixed rate at 30 years, then they should not be in too bad a shape. However, there is a significant fraction of boomers that chose to get variable-rate mortgages. These mortgages offered a very low initial interest rate that would begin to vary after a set number of years.
Well, for most of those loans, the “set number of years” is up and the monthly payments are skyrocketing to the point where the borrower can no longer afford the payment. What makes it worse is that now the house is probably worth less than when he bought it; this means that, even if he or she were to qualify for a re-finance loan, in all probability the total amount of the new loan would not cover the amount of the previous mortgage.
The borrower is left with little option but to surrender the house to foreclosure and, maybe, even declare bankruptcy. For a boomer, this means that they have just lost the biggest investment of their life and the biggest single producer of wealth. For many, being able to take the equity out of the house is an integral part of their retirement plan and, with that gone, they may quite literally be staring at bare survival income for all of their retirement – assuming they can afford to retire.
What do you think?
Are you part of the real estate “squeeze”?
What are your plans for your home when you retire?
Are you going to be able to take the equity out of your home?