My Sub Prime Doomsday Scenario

As an investor and Hard Money Lender I am VERY concerned about what is going in the Sub prime market. The following is my Doomsday Scenario that will come to pass unless lenders pull their collective heads out of their collective…… or the FED starts to ease interest rates or both. 

You have someone who bought a house on a 90%+ LTV 2/27 ARM or some other ARM product. The first adjustment period has arrived and the payment has become very painful. In 6 months it may adjust upwards again. You have a homeowner struggling to pay his mortgage but falls behind. The lender starts to put the “hammer to him”. (No partial payments, Late fees, etc.) The homeowner struggles to stay afloat but his already so-so credit begins to get worse with the late payments. 6 months later the ARM adjusts again and it is too much. The borrower ties to refi but with his bad credit and very little equity he has trouble finding a lender. The homeowner tries to sell but with the amount of inventory on the market and current interest rates he cannot get enough for the house to cover Realtor fees, closing costs and payoff with late fees etc. The Lender, like an idiot, forecloses on another “salvageable” borrower and adds yet another “zero equity” property to our growing inventory. Now what? Well this problem gets worse and worse as each lender repeats this process. The Lenders are cutting their own throats and the homeowners, the economy and us Investors are paying the price. 

“Fine” you say…. “Get into rentals.” Not a bad idea but with all of that inventory on the market rental rates will be experiencing downward pressure too. If the FED doesn’t lower rates and Lenders don’t begin to see the wisdom in trying to help their borrowers stay in their homes by “restating” the loans to a fixed rate that the borrower can handle, we are looking at a flood of Zero Equity foreclosures. 

Just my $0.02. 

Rob