An article in the New York Times titled Blame the Borrowers? has a few scary numbers embedded in it.  This paragraph knocked my socks off:

Figures from the Federal Reserve Board show that the share of subprime
mortgages in default is more than 14 percent. And researchers at the
Center for Responsible Lending say that 64 percent of foreclosures
filed during the 12 months ended June 30 involved subprime loans. A
September report from Banc of America Securities said that 93 percent
of completed foreclosures this year involved adjustable-rate loans that
were made in 2006, pooled and sold to investors.

Interesting item to note from that article is the study of the assumption that subprime borrowers are predisposed to default.  They compared the default rate of borrowers in the NeighborWorks America program, "a nonprofit organization created in 1978 by
Congress to deliver financial aid and training to troubled urban
communities" with those of the overall mortgage business and found the following (quoting directly from the article):

• "As of June 30, the most recent figures available, 3.34 percent of
  NeighborWorks’ borrowers were at least 30 days’ delinquent on their
  loans, only slightly higher than the 2.63 percent delinquency rate on
  prime loans recorded in that period by the Mortgage Bankers Association."
• "Compared with subprime loans over all, the NeighborWorks loans really
  outperform. Its 3.34 percent delinquency rate is well below the 14.54
  percent on subprime loans nationwide."
• "The NeighborWorks loans that went into foreclosure during the second
  quarter of 2007 totaled 0.56 percent, while subprime loan foreclosures
  came in at 2.45 percent during that period. The foreclosure rate for
  NeighborWorks loans was a little over double the 0.25 percent rate for
  prime loans in the period."

The number that shook me the most is that 64% of foreclosures included
subprime loans.  That means that 36% didn’t, and since subprimes are a
minority of the market the fact that such a large chunk of foreclosures
come from supposedly prime borrowers is even scarier to me than the 64%
who are subprime.  According to this March 1, 2007 article in Fortune
subprime mortgages made up 13.5% of the mortgages originated in the US
in 2006 (that’s up from 2.6% in 2000).  The article also states that the
subprime market was $600 billion in 2006, out of an overall $3 trillion
mortgage market.  It doesn’t take a rocket scientist to figure out that
even if the prime market sees a default rate that "only" rises to say 5%, then you’re talking a really big number.  And considering what’s happening to US banks already, that really big number is truly threatening.

How threatening these mortgage defaults are is still being worked out. To the left is another set of scary numbers from Fortune’s special report on the meltdown in the financial sector (click on it to enlarge).  This ain’t looking good.

According to the Mortgage Bankers Association over 50% of mortgage applications last week were for refinancing.   Hopefully this means that lots of the ARM holders, particularly in the prime market, are locking in fixed rates and thus stemming an even greater tide of defaults next year.  But who knows how many people will be unable to secure fixed rate financing and thus face escalating mortgages next year?  Again, even if it’s a relatively small percentage it could turn into a huge number of dollars. 

You ask me the reason the ARMs, especially the sub-prime ARMs are so much trouble is the same reason that high interest credit cards absolutely slaughter most people.  No one sets out to be a bad debtor, but most people have no concept of how hard it is to pay down debt that lays on even 10% each year, much less 20%.  The author of the Times article rightly points out that a big part of NeighborWorks’ program is their 130 loan counselors providing extensive mortgate education to their borrowers.  I don’t think the banks spent much, if any time educating their borrowers since it would have diverted them from churning out even more loans and earning the requisite fees.  Now it’s time for all involved to pay the piper.

But what do I know?  I’m just an English major who has trouble balancing a checkbook.  A big part of my fear is that lots of the "experts" predicted this wouldn’t be a big deal and now they’re all sitting around looking at each other and saying "Who knew?" while the people they called Chicken Littles are sitting around saying "I told you so."  I don’t have a lot of confidence that the people guarding the financial hen house aren’t a bunch of wolves looking for the next meal and average folks like you and me aren’t the hens.  Cluck, cluck. 

Hat tip to Ed Cone for pointing to the Times article and the Fortune special report referenced above.