Bad Economic News

03 Dec, 2008 by Melissa Clouthier

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This economic news more than just about anything else bothers me:

The ADP Small Business Report has shown that:

Small businesses cutting employees mean that big businesses don’t need what small businesses are producing. I suspect these numbers will get worse at the start of the new year. Obama or no, the economy is going to continue to contract. If people have money, they’re not going to spend it. In fact, some of the business movement this year (travel, for example) happened because the trips were already planned. Next year will probably be worse. Time will tell.

Then, I can be overly pessimistic about this sort of thing. But maybe I’m not too pessimistic. Maxed Out Mama says and this is tangential but related because small businesses losing jobs at precisely the time when people need the money to save their homes:

I apologize in advance; here’s where I lose my temper and the cussing starts. The borrower’s mortgage payment more than doubled over the first few years of this transaction. Even if the borrower make it through the fourth year, the borrower is still almost always going to lose the home unless the borrower’s income increases pretty hugely, or unless the borrower had saved a 7% downpayment. But very few of such borrowers would take such a mortgage; these things were marketed to those who really didn’t have the money to buy.

If borrower’s income remains the same or increases moderately, borrower will lose the home. If the home appreciates only moderately, the borrower will lose the home.

So there are two conditions, and only two conditions, in which such a loan will not result in the borrower usually losing the home – the home must appreciate far beyond the historical norm, AND the borrower must have a major increase in income to pay the actual amortized cost of the refinanced mortgage.

At an APR of 6.5%, the amortizing mortgage payment would be about $1,820 on a 30 year. You have to have significant equity to get that rate, and a decent credit score. Thus, to escape this loan the borrower is going to have to pay substantially more plus have good credit, plus be able to pay about 1K more monthly.

I don’t think this will be over anytime soon. 2009 is going to stink, I think.

Cross-posted at MelissaClouthier.com