Some of the crappiest mortgages ever made were issued in 2006, and right now those 5-year introductory teaser periods are expiring. That’s leading to a 300% increase in monthly payments for already strapped borrowers, and it’s what’s driving the first increase in delinquent mortgages since 2009, a banking expert tells Credit.com.
By 2006 and 2007, lenders had run out of most eligible borrowers and started chucking their lending standards out the window. Loans were being made to people who were already spending more than 40% of their income on the debt they already had. No matter, the loans could be bundled, securitized, blessed by lazy ratings agencies, and sold off to pension plans and international investors. A swath of the loans being made at the time had introductory teaser periods where the borrower didn’t have to pay towards the principal and interest could be allowed to rack up. The intro period was often about five years.
Well it’s been about five years and now the chickens have come home to roost. The monthly payments are shooting up 300% and we’re seeing the delinquencies. The defaults will come down the road, and then the foreclosures. The damper on home prices could last until 2015, says Credit.com.
“The good news is we’re getting all this behind us,” Dr. Joseph R. Mason, a banking professor at Louisiana State University and a senior fellow at The Wharton School told Credit.com. “But it takes time.”