The Fate of the Financial World Rests with the Montes

The Wall Street Journal printed an excellent article today which really gets at the heart of the entire credit-crunch sweeping the planet. It's the story of Mario and Leticia Monte who were seduced into buying a home they probably couldn't afford or shouldn't have been able to afford. In their case, they used a sub-prime 2/28 mortgage with no money down. A 2/28 keeps a low fixed-rate for the first two years and then rests for the remaining 28 years at a rate that is above an interest-rate index. The Montes are moving into their third year and expect the reset to cost them an extra $900 per month, pushing their family budget well into the red. Based on local prices their home has mostly likely lost value and they have no equity in it, preventing them from refinancing or even selling.

They have three options:

• Try to get the bank to change their terms, which they don't seem willing to do without equity in the house.
• Sell their house, which seems unlikely since prices have dropped and they won't be able to repay their mortgage.
• Give the bank the keys and walk away.
• Cut, and cut expenses, take on extra jobs, and keep the house.

The article ends with Mrs. Montes saying: "We're going to keep it. Hopefully, we won't go down and if we do, we're going to go down with a fight."

How this plays out for Mrs. Montes and the millions of others across the country will determine the future of the economy over the next couple of years.