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The Hangover
What the Hickses endured was an accelerated version of the common subprime scenario. A higher interest rate and monthly payment made their new house unaffordable. They tried to sell it for the amount they’d borrowed, but the housing bubble had burst. They couldn’t attract any buyers. Before long, they were several thousand dollars in debt. Foreclosure came swiftly. By April, they’d been forced to vacate their home, declare bankruptcy, move into a small apartment and rethink their plans to start a family.The couple’s new challenge: to rebuild their credit history, not an easy task considering the harsh new penalties for bankruptcy. To make matters worse, the stress brought on by their real estate fiasco made Stephanie so physically ill, she had to stop working. The young couple’s dream of owning a home now seems out of reach. “It’s terrible language, but we got screwed,” says Stephanie. “We trusted a lot of people who really took our trust for granted.”
While the Hickses’ case may not be typical in its details, it does share key elements with those of other homeowners now suffering the consequences of the credit crisis: The couple probably took on more than they could handle, should have recognized the risks more clearly, and hardly got the best advice about what they could afford. They were typical in another way. As real estate prices continued to rise, the Hickses, like millions of other would-be homeowners, figured they should buy before it was too late and they were priced out of the market.
Between 2001 and 2006, home prices rose by more than 55 percent nationwide. Fueling this staggering boom, we now know, were lenders and brokers who said yes to just about any borrower. The usual obstacles to getting a loan—a bad credit history, lack of a down payment, insufficient income, even the absence of a pay stub to verify income—often did not stand in the way. Mortgages were plentiful and cheap, and came with adjustable terms that were once considered exotic: an initially affordable low interest rate that shot up after two years, for instance. Plenty of risk takers also got caught in the bubble, trying to exploit the situation by buying a home and then flipping it at a higher price.
Now comes the hangover. And it can be brutal.
“People were encouraged to buy houses they couldn’t afford, or to wrap all their debts into a mortgage, or to take equity out of their house and use it for vacation or even a big-screen TV,” says David Rose, director of research and technology at the National Training and Information Center in Chicago, which helps organize community housing groups. “They didn’t realize that if they default on the mortgage, they could lose the house.”
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