TEXT OF COMMENTARY
SCOTT JAGOW: Last year, more than a million families lost their homes to foreclosure. That's still a small percentage of homeowners, but it's a 42 percent increase over the year before. Not insignificant. A lot of these people got sub-prime loans. So they didn't very good credit to start with and they're probably poor. Commentator Robert Reich worries about what's to come.
ROBERT REICH: A few years ago, banks were awash in money, eager to give mortgages to almost anybody who applied. And investors were all too happy to get high yields from mortgage-backed securities.
Which meant an explosion of sub-prime lending along with all sorts of gimmicks making it easy to meet the payments: adjustable-rate mortgages, interest-only loans, no down payments, often financing 100 percent of the value of the home.
Well, it's time to pay the piper and the piper's raising rates and calling in the loans.
Last year's increase in foreclosures may be just the beginning. Now that the economy is perking up, adjustable rates are increasing. The Mortgage Bankers Association estimates that in 2007, more than $500 billion worth of mortgages will be adjusted upward.
That's no problem if a family can refinance by getting, say, a 30-year fixed-rate mortgage that's cheaper than where the adjustable-rate ends up. But even that 30-year fixed rate is still more than where the adjustable rate was just a few years ago.
Some families won't be able to afford the additional payments.
And here's the kicker: Even if they could just barely afford them, they won't qualify for refinancing.
That's because, now that the housing bubble has burst, the value of their home is less than what it was a few years ago. They'd be trying to get a loan for more than their house is worth. And these days, mortgage lenders are refusing to do that kind of refinancing.
Which means more foreclosures. According to a report issued last month by the Center for Responsible Lending, 1-in-5 sub-prime loans made in past two years will end in foreclosure. That's about 2.2 million borrowers who are likely to lose their homes.
Who knows where it will end? Only one thing is clear. Mortgage lenders and investors will come out okay. At worst, they'll have properties they can resell.
But meanwhile, millions of families who thought they had found the American dream are ending up in a nightmare.
JAGOW: Former Labor Secretary Robert Reich now teaches public policy at the University of California-Berkley.