The fallout from Metro Detroit Sub-prime mortgages

On the internet yesterday they said 48% of all subprime mortgages where either in foreclosure or at least one month late on their payments.  I just don’t understand how Wall Street, and the banks did not understand the potential problems with these loans.  There are guys with masters and doctorate degrees that work for these banks and wall street.  They have high priced economists working for them.  The banks and Wall Street have so many people making over 6 figures that it would stun you on how much some of them make.

Yet collectively nobody in this country or around the world in the banking industry realized how toxic these loans were.  Here are some interesting facts.

  • Proportion of sub prime mortgages made from 2004 to 2006 that come with “exploding” adjustable interest rates: 89-93%
  • Proportion approved without fully documented income: 43-50%
  • 1 in 5 subprime loans from 2005 and 2006 will end in a lost home
  • Proportion with no escrow for taxes and insurance: 75%
  • Percentage increase of interest rate on an “exploding” ARM resetting to 12% from 7%:70%
  • Typical increase in monthly payment (3rd yr): 30% to 50%
  • over 50% of all loansmade to African-Americans and over 40% to Latinos were subprime compared to only 19% of white borrowers
  • Number of sub prime mortgages set for an interest-rate reset in 2007 and 2008: 1.8 million
  • Valued at: $1.4 trillion loans outstanding
  • 70% of subprime have prepay penalties; only 2% in prime

The problem is that these Metro Detroit subprime mortgages will affect us all.

American families not facing foreclosure will see the value of their homes decline by an estimated $265 billion.  Every neighborhood in Michigan has lost from 25 – 60% of the homes value back in 2004 -2005.
A city can lose up to nearly $20,000 a year in lost property taxes and other costs for every property abandoned by foreclosure.  I honestly don’t know how some cities will survive with the loss of revenue.   Many Detroit homes that once sold for $70,000 – $90,000 are now selling for an average of $10,000.  The City of Detroit can’t survive with the loss of revenue of that magnitude.

The years ahead will be interesting for many cities.  Unfortunately the only thing that can stem this tide is an influx of new home buyers.  That means either we have to have a large immigrant population buying homes and our kids grow up and need homes.  That is what the housing market will depend on.

Russ Ravary YourLivingston, Wayne, and Oakland County Realtor

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