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U.s. Sentiment Definitely Turning

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The U.S. press is publishing lots of articles now about debt, the housing bubble, foreclosures, etc. I sense a great unease.

Yesterday, the entire (well, almost) NYTimes Sunday Magazine was devoted to debt and the economy. (There's even an article for you internet gamblers.)

Link to all the articles:


You can start with "Reasons to Worry" by Niall Ferguson

Why you could be excused for feeling a little uneasy about the collapse in household savings, the rise in home-mortgage debt, a large and growing trade deficit and the fact that Asian countries hold so many U.S. treasuries.

Also, I stumbled across this article (http://www.startribune.com/535/story/482605.html) from the American Midwest (Minnesota) about the rise in home foreclosures. This is not an area of the Midwest that's in economic trouble (like, say, Detroit). Nor is it one of the U.S. housing "bubble spots," such as Florida, Boston, or California. If foreclosures are on the rise in Minnesota, the entire country is in trouble.

Kelly Casey and her family managed to save their Cottage Grove home from a foreclosure sale this month. But she's not sure for how long.

Like many homeowners around the country, Casey and her husband had taken advantage of the historically low interest rates of recent years. They'd swapped their 30-year fixed-rate loan for a three-year adjustable-rate mortgage with lower payments.

But after a rough stretch that included a layoff and work injury, they're uncertain what will happen when their interest rate resets upward in February.

"It is a good loan; it's just that it's an ARM, and when it's up, I don't know what that means," Casey said. "I don't even understand my ARM loan like I should."

During the housing boom of the past five years, mortgage brokers flooded mailboxes and called homes offering once-exotic products such as adjustable-rate mortgages, interest-only loans, no-cost loans and loans for more than 100 percent of value. Such loans -- often at extraordinarily low rates -- allowed people to buy more house than they could have afforded under traditional lending terms.

Industry experts say some people took out those loans without fully understanding the terms or with inflated expectations of their own finances. While adjustable-rate mortgages allow people to borrow more money than traditional mortgages, they are riskier. The most popular ones have fixed rates for three or five years, though some are fixed only for one year. At the end of the fixed period, the loan resets at prevailing interest rates.

As interest rates rise, somebody who took out a $300,000 loan a year or two ago and might have been paying $1,300 or $1,400 a month, for example, could now pay from $1,800 to $2,200.

Adjustable-rate mortgages now account for a quarter of the more than $8.5 trillion in outstanding loans, according to the Mortgage Bankers Association of America.

"We're talking about potentially 2 to 3 trillion dollars of mortgages being these adjustable rates that are going to come due to reset in the next 18 to 24 months," said Rick Sharga, vice president of RealtyTrac Inc., a database on foreclosure properties.

"And we really don't know what's going to happen with them, because we've never had this particular set of circumstances."

Paycheck to paycheck

The first signs of trouble are showing. In Hennepin County, sheriff's foreclosure sales totaled 1,042 in the first five months of 2006 -- up 62 percent from the same period a year ago.

Nationwide, 323,102 properties entered some stage of foreclosure in the first quarter of 2006, according to RealtyTrac. That's a 72 percent year-over-year increase from the first quarter of 2005.

The first quarter of this year brought at least one foreclosure for every 358 U.S. households, a rate higher than in any quarter of 2005, RealtyTrac said.

"There's a much greater risk of people facing default," said Lowell Yost, executive director of the Minnesota Home Ownership Center, which educates consumers to prevent foreclosures. "Just the littlest stumbling or tripping can put people over the edge."

Notice of foreclosure, however, doesn't mean being out on the street immediately. Foreclosure can take up to a year, during which the owner can get back into good standing and avoid losing the home.

Casey and her husband are just getting back on their feet after she was laid off in 2004 and he was injured, leading to months of unemployment. They juggled bill payments and cut all extra spending, including for their two teens, after falling behind on their $213,000 adjustable-rate mortgage.

Today, they can handle their monthly payments of $1,587, at 4.62 percent, as long as they both work, Casey said. The mortgage already has reset from its original rate of 3.62 percent. They're braced for it to reset again in February. She had always planned to refinance.

"My original plan was to have built enough equity and sell my house," Casey said. "But now, losing my job, my husband getting hurt, our credit shot, we're not even in a position to sell the house and get a new loan. We'd be at the worst rate possible."

She's a medical clinic supervisor. He's a carpenter. Between them, they expect to make $70,000 to $80,000 a year. They don't have much in savings, Casey said.

"We're probably like a majority of people at our level of income," Casey said. "You live almost paycheck to paycheck. You barely put money into a 401(k). Your health insurance, your fuel, your taxes, keep going up -- and then throw in a [higher] interest rate on top."

Keeping up

Even defaults on equity lines and second mortgages of less than $25,000 or $30,000 are leading to foreclosures, according to the growing number of Minnesota legal notices published each week.

In Minneapolis, Paul Weingarden noticed the first waves last fall.

"My file count's way up, and I don't anticipate it going down anytime soon," said Weingarden, a lawyer. "A lot of these loans are adjustable-rate mortgages. Some are subprime mortgages, balloon mortgages, nothing-down mortgages. People are trying to buy more house than they can afford. And if there's any uptick in rates, they run into problems.

"Nobody ever thinks that things will go bad. Nobody thinks property values will go down," he said. "And everybody presumes their income is going to keep going up, and they'll be able to handle anything that happens. That's not always true."

Interest rates, while still low by historical measures, are inching up. From a low of about 5 percent for a 30-year, fixed-rate mortgage in the middle of 2003, they now are a little over 6.5 percent. They're expected to end the year just below 7 percent, according to mortgage giant Fannie Mae.

As interest rates rise, "I would expect it to get worse in terms of the default rate," said Ralph Moore, a St. Paul attorney who represents lenders after consumers default on equity lines. "It will be harder for people who are already a bit squeezed to keep up."

Teri and Bill Van Beckum dread June 19, when their Forest Lake home is scheduled for a sheriff's mortgage sale.

In 2004, the couple took out a subprime, interest-only loan at 8.5 percent interest. They planned to wrap in their auto loan, yet still have smaller monthly payments so they could put their son through college.

Money had been tight since Bill Van Beckum was laid off from his $72,500-a-year computer-technology job in 2002. He took a job with a food company for $11.20 an hour.

But they figured Teri's annual earnings of $41,000 from her adoption agency job would cover the new payments. They were $2,000 -- all tax-deductible interest.

A month after refinancing, they learned Teri had a brain tumor. She survived more than 30 hours of surgery over two days, and seven months in the hospital, but she remains paralyzed on her left side.

The Van Beckums' $242,000 mortgage slightly exceeded the value of their 10-year-old split-level. Once trouble hit, they had no equity to use for refinancing, a position that a growing number of home-buyers are in, experts say.

No easy solutions

Critics say lenders' relaxed standards for loan applicants made the problem worse. No industry officials contacted would comment on whether underwriters will become stricter.

But Sharga, of RealtyTrac, had this to say: "They realize they made some bad loans, so now they're starting to tighten up their underwriting standards."

That could compound the problem, Sharga said. Now somebody who shouldn't have had a loan, who is going into default, is not going to be able to qualify for the next loan.

"If you have an adjustable-rate mortgage, are you sitting on a ticking time bomb?" Sharga asked. "If you have one, take a quick look at that contract to see what happens when it resets. Or better yet, go refinance now."

Tough times are ahead, particularly in the U.S. where we now have (thanks to the Bush administration) draconian bankruptcy laws. Many people are going to be in serious financial trouble.

Edited by Yankee

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