The current foreclosure crisis has been getting quite a bit of press. While a good portion of that press time has been focused on the devastation of neighborhoods made up of lower-middle-class and low-income residents, stories about the rise of foreclosures among those of higher income brackets are becoming more common. The crash and burn of jumbo and exotic types mortgages, such as those taken on by various celebrities, has been fodderÂ for the gossip pages, with even mainstream news has been reporting these famous foreclosures. However, those arenâ€™t the only higher income bracket people losing their homes. Throughout the nation, upper-middle class people and those further up on the economic ladder are finding themselves in the surprising position of fighting to keep their homes, with an increasing number even losing their homes.
Many homeowners on the brink of foreclosure point to the variety of circumstances outside of their control as being the source of their current economic woes. These circumstances include the mortgage and lending melt-down, the credit crunch, adjustable rate mortgage increases, the housing market correction, the rapid increase in the cost of fuel, the steady rise of food prices, and numerous other associated financial stresses. Certainly it is true that a variety of factors have come together almost all at once to create what some economists have referred to as the perfect economic storm. However, those factors, real as they are, do not tell the entire story about todayâ€™s record foreclosure levels.
Foreclosure Is Not A Low Income, Bad Credit Phenomenon
On June 5, 2008, CNNMoney.com reported that â€œmore than one million homes are now in foreclosure, the highest rate ever recorded.â€ According to an Associated Press report from Newsday, for example, recently ran a story with the headline â€œForeclosures Taking Hamptons By Surprise,â€ which offered an interesting bit of insight into the difficulties affecting those in the higher income brackets. One Westhampton Beach home caught up in the foreclosure process, according to the Newsday report, has a mortgage of $1,100,000 and a market value of $572,700. Another, located in Clover Grass Court, Westhampton, has a market value of $848,000. However, the amount owed on that home isÂ $1, 270,500.
Like others throughout the nation, these residents have felt the affects of falling home prices, and have found themselves up-side downon their mortgages, owing significantly more than the home is worth on the market. In many instances, the ill effect of falling home values is compounded by the all too common practice of drawing out home equity, via loans and lines of credit, to fund consumer spending â€“ or, in simple language, a failure to live within oneâ€™s means.
News stories detailing middle and upper class decent into foreclosure and financial turmoil are becoming commonplace, with teaser copy describing the fall from middle class security to having to resort to the homelessness, and similar scenarios. A common theme throughout many of these stories, in addition to the all too familiar withdrawing of home equity via loans or lines of credit, is the trading up of houses. Typically, a first home was bought, then sold at a profit, which was put into â€“ along with a significant loan â€“ a new, more expensive property. Some repeated the process multiple times, moving into piggyback loans, alternative loans, and sub-prime loans, confident that theyâ€™d be able to afford payments because of continuously increasing home values. When the market shifted and credit tightened, those without personal savings to draw upon were unable to cope financially.
Middle-class enclaves, including suburbs, throughout the nation are feeling the record level foreclosure stress. According to an article in the Daily Gazette, an upstate NY newspaper, â€œthe spread of foreclosures into suburbia could worsen this year as homeowners with good credit fall behind on mortgage payments because of inflationary pressures, especially from gasoline and food. Many prime borrowers are also expected to default on the home equity loans they mostly used to pay off credit card debt, resulting in what industry experts are calling the â€œalt-A mortgage crisis.â€
This trend of increased middle and upper class foreclosures leaves not only homeowners in chaos, but also is leaving experts and those dealing with the aftermath potentials perplexed. â€œThereâ€™s been nothing to study. We never had a record number of foreclosures in middle-class neighborhoods. Weâ€™re in uncharted territory now,â€ said Kirsten Keefe, a staff attorney for the Empire Justice Center in Albany.
The Bottom Line of the Blame Game
Sub-prime loans are not only for the low-income and for the fiscally inexperienced. Many of the mortgages in middle and upper class neighborhoods that are going bad right now are sub-prime. However, as the foreclosure crisis moves on, itâ€™s not only bad credit loansand sub-prime mortgages that are in trouble. Even those who bought their homes with good credit histories and credit scores are beginning to stagger under the weight of their debts and get behind on mortgage payments.
Does that indicate that those pointing at current economic and housing market conditions as being the cause of the record loan defaults seen to day are right? While certainly those factors do have a role to play in the rash of higher income foreclosure rates, there is more important data that speaks a bit more truth about the matter and that data is the abysmally low rates of personal savings in the United States.
The Pew Research Center recently published the fascinating results of a study on this matter. Although â€œthree out of every four Americans say they aren’t saving enoughâ€ and many profess to be concerned about their lack of savings, â€œAmericans now save, on average, less than 1% of their incomes, and the savings rate has been in almost continuous decline for more than two decades.â€ In fact, in recent years, the rate of personal savings has dipped into the negative zone more frequently than has been seen since the Great Depression.
While savings dipped, however, consumer consumption rose ever higher. Bigger, better, more, buy today, no money down, easy termsâ€¦ A good quality color television isnâ€™t good enough, a flat screen model big enough to take up almost an entire living room wall and TVs strewn throughout the house for individual viewing pleasure is essential enough to be bought on credit. Niche brands and exclusively gourmet goods costing big bucks became the standard for many. Living large often replaced common sense practices of living within ones means and maintaining a smart level of personal savings. And, as unpopular as it may be to say it, that is why so many middle and upper class people are finding themselves unable to weather the storms of changing economic times.
All signs seem to indicate that the current foreclosure crisis and the various financial issues related to it arenâ€™t going to pass any time soon, and that those who are usually fairly secure during tumultuous economic change â€“ the middle and upper classes â€“ are going to be feeling the affects of this particular financial phase for a good long time to come. Those who come out on the other side of this period of time with their assets fairly well intact will be those who take a common sense approach to their personal finances. In fact, for those operating on a common sense, old-school, living within oneâ€™s means manner, the odds are that there will be plenty of opportunity to increase financial and property holdings, as the assets of those less financially apt and able enter the market at bargain prices.Â