Housing Horrors: How an Adjustable Rate Mortgage Can Burn You

[NVMojo]

yep, the secret it out and the MSM finally has a clue.

Sept. 5, 2006 — The housing boom of recent years prompted many Americans to invest in their first homes and embrace the American dream.

Many who used adjustable rate loans to finance those homes like North Carolina homeowner Sharon Wright Jackson have had a rude awakening as their mortgage rates have risen.

When Jackson bought her first home in 2004, it was a dream come true.

"I was jubilant. It was one of the best times of my life — second to giving birth to my children," Jackson said.

Today, however, that dream has turned into a nightmare for the widowed mother of two.

more...

http://www.abcnews.go.com/GMA/MellodyHobson/story?id=2395084

[truthisfreedom]

1. people gotta do a little math when they sign contracts...

another reason we should focus on math and sciences in school. a little less faith, a little more reason.

[UpInArms]

8. OMG! further into that article:

After doing considerable homework on the housing market, Jackson went with an adjustable rate loan to buy the house.

It seemed to be the perfect financing option.

"You don't have to put anything down," Jackson said. "You'll get money back at closing. You can refinance and pull money out in a couple of years and still keep the rate that you want."

:wtf:

Somehow these folks seem rather misguided or just plain stupid. Who in the world would believe that buying a house is like winning the lottery - no money down - take money out - any rate you want :crazy:

[physioex]

12. Right....

Take out an ARM you can have your cake and eat it too....

[sendero]

15. She's not a homebuyer...

... she's a speculator. She ASSUMED and COUNTED ON the price of her house rising fast enough to allow her to refinance out of the blatant mistake she made.

That's really just too bad. She rolled the dice and it came up snake eyes. Thanks to the actions of herself and those like her, people who played by real rules are going to get hurt in the downturn.

I don't have an ounce, not one smidgen of sympathy for her.

[warrens]

34. Her thinking probably never went that far

I went through the process, and I was far from naive, but dealing with lawyers and agents who do this everyday...you are at a severe disadvantage. I knew enough to get a fixed mortgage, but beyond that I was helpless.

[sendero]

40. There's no way to know..

... but the syndrome is everywhere in America and it is very corrosive. The "buy now pay later" plan has exploded to gigantic proportions. She cited the "getting money back at closing" - well, where did she think that money was coming from?

No, in America, everyone is more worried about looking prosperous than they are about being so. Of course, the regulatory agencies the quasi-governmental agencies that loosened mortgage requirements to the point of absurdity are equally to blame, as are the mortgage companies who will help sucker a borrower into a loan that they know full well is not only ill-advised, it's an almost-certain disaster.

There is plenty of blame to go around but the consumer is the one who pulls the trigger and who bears the final responsibility. As I said, I have no sympathy at all for this person, and the millions just like her who have now fucked up the housing market for everyone for years, maybe longer.

[Tiberius]

54. I don't understand - fucked up the housing market?

These people didn't fuck up the housing market any more than speculators fucked up the stock market during the internet boom.

Those of us who are smart (I am currently renting) will be able to get some great deals when these folks crash and burn.

[sendero]

57. Fucked up the housing market..

.... for those who bought a house to live in, financed it appropriately, bought a house they could afford - and now need to sell because they have been relocated or whatever. They're fucked, and it's totally the fault of the speculators and their enablers.

[closeupready]

64. Can't you also blame sellers for selling at inflated prices?

I mean, I don't see how you can blame only buyers.

[sendero]

65. Now...

.. you're just getting silly :) Sellers don't set prices, buyers do.

[raccoon]

51. And some agents mislead people. To put it charitably. nt

[Alameda]

47. real estate speculation

I must say the whole thing about buying "homes" based in perceived increase in investment value is annoying to me too. Nobody seems to actually look to buy and invest in having a home = community, place for extended family....and all. You know a base to build on?

[sendero]

48. That's exactly what it is..

.. "speculation". People rolling the dice and hoping to make a profit. It doesn't matter whether it's tulip bulbs, common stocks or housing - it always ends badly.

[slackmaster]

55. Not necessarily misguided or stupid, just uneducated

Schools do a piss-poor job of teaching the basics of home financing.

California public schools were about the best in the country when I graduated from high school, and I didn't receive one iota of instruction in personal finanace. My mom tried to teach me but she was so far over my head I couldn't understand her. Luckily when I bought my first house I was married to a woman who had been through the process a couple of times. I could easily have been burned otherwise.

[nosillies]

17. Good point -- why aren't we teaching more financial stuff in school?

We can start with how credit works, different types of investments, etc. I worked in a school system where those in vocational/career tracks got some of this education, but those on the standard college prep track did not. I would have loved to learn more beyond basic economics.

Look, I've had two ARMs. I am by no means stupid. My husband had job contracts that all but guaranteed we would move within 18 months to two years. "Stupid" would have been taking a fixed rate loan at a higher interest rate in those cases. We're on a fixed rate now, because we might be in this home longer and we speculated that rates would rise dramatically. And we knew that we'd never take an interest-only option loan. (I think many people are confused and think that ARM = interest only.)

But the bottom line is, we've made good decisions only because we did lots of research and studying and asking questions of our parents (who are all wise investors). We also had honest mortgage brokers, and we've stuck with that company for all our mortgages. We had no clue, otherwise. We never learned about this in school. While I have little sympathy for those who have access to the facts and still make stupid decisions, I also think that our schools should make room for education on this topic.

Maybe when national standardized tests contain sections on economics and finance, then somebody will actually care about this as a subject matter!

[bleedingheart]

22. How about parents and family teaching this at home?

I went to a high school that offered a class in how to manage a budget and write checks..etc it was to insure that kids who would enter the workforce right away understood what they needed to do.

I didn't take the class because I passed the test they gave us to determine whether or not we needed it.

The person who taught me how to manage money was my widowed mother, she is a financial genius and very fiscally conservative....

NOW...my siblings grew up in the same household but they thought she was nuts and to some degree have had financial problems because they didn't think they had to follow the rules....people take away from situations what they choose to take away.

[physioex]

24. Good point.....

Imagine we had kids coming out of high school entering the real world and not knowing the basics of managing their finances. I say that is a recipe for disaster.....

[dsc]

46. I teach this in my advanced functions and modeling class

I don't do adjustable vs fixed but I do go over credit cards and fees and all of that. We also look at payments given different interest rates.

[Julius Civitatus]

27. Because otherwise the credit card and loan industry would lose $$$

I think it's obvious that the credit card and loan industry get away with all these unethical practices because the public is not properly educated in financial matters.

The more ignorant people out there, the more money they make.

What's shameful is how our public officials have failed to protect the public once again, allowing corporate predators to offer abusive loans under the guise of easy financing option.

[nosillies]

35. The cc and loan industry would be sponsoring the textbooks

Watch out for the spin! :D

[RUMMYisFROSTED]

2. Taking an ARM when interest rates are(were) at, or below, 6%...

...is the heighth of stupidity.

And victimizing someone for a few points is criminal.

[SmokingJacket]

3. Well, you'd have to be delusional not to see that coming.

Before getting an adjustable rate, don't you ask, "What happens if the rates go up? What'll I have to pay then?"

I feel terrible for these people who are going to be losing their houses. Why didn't they know this could happen? Are loan officers fooling them, or what??

[Taoschick]

7. They knew it could happen

They were just betting it wouldn't.

[gratuitous]

Certainly they're being fooled, sometimes willingly so

Let's face it, you're in the market to buy a house, probably your first. You've gone through the credit checks, the employment verifications, the this and the that. You've looked through maybe 100 pages of listings, toured or driven by a dozen homes. You're at the cusp of making the decision, ready to sign papers, and hold everything! It seems the realtor selling you the house may have overpromised just a weensy bit when he said that financing would be no problem. The person writing the loan seems to have a different opinion of the amount of income that would qualify you for the loan amount you need.

You're so close to home ownership you can taste it. But here's this brick wall stopping you. There's a teeny chink in the wall, though. Have you considered an adjustable rate mortgage? You'll actually have to put less down, and your monthly payments will be a smidgen higher, but the mortgage company will write a 100% mortgage! And in the next couple of years, you just refinance (home prices are increasing, which is why you're in the market to buy now, isn't it?) and get a fixed rate mortgage based on the increased value of the property! Win-win. And you move in at the end of the month.

You've already given notice at your rental, and your landlord is calling every day or so to see if you'll move out a little earlier. He wants to paint the interior and shampoo the carpet, and he's got another renter all lined up for $50 more a month than what you're paying. Come on, be a sport. Can't you stay with a friend for a week until your new house closes?

Lots of pressures coming from a lot of different angles. Not surprising that in a decision this big under these circumstances a lot of people make mistakes. Major, life-changing mistakes. But good news: Congress passed a bunch of new, more punitive bankruptcy laws, so none of your creditors will get stiffed as you go under financially.

[raccoon]

52. Good post. Very informative. nt

[slackmaster]

56. Not delusional, naive.

:argh:

[The_Casual_Observer]

4. People willing to sign up to those bogus contracts are what caused

the bubble. The prices kept rising as people "found" more money to pay them.

[Julius Civitatus]

28. But also the unfair lending practices of the industry

It takes two to tango.

The bubble hasn't been just caused by people willing to sign these loans, but also by the industry's UNETHICAL LENDING PRACTICES. Years ago, these practices would have been considered usury, or a con game.

Unfortunately our elected representatives, which were supposed to protect us from these types of predatory lending practices, have completely failed us. This is the problem of lobbying and pumping so much money into politics. The people in charge of protecting our interested have worked for the last two decades on protecting the interests of their donors and lobbyists. Many congressmen are OWNED by the credit card and banking industry, signing into law any abusive new way to screw the customer that they could invent.

Last year's outrageous credit card and bankruptcy regulation is a good example of this.

[Generic Brad]

5. This economic disaster is only just beginning

I suspect a lot of people nationwide are going to be losing their homes over the next few years.

[Bobbieo]

6. E-mail mortgage spammers and telemarketeers

are in high gear these days. We bought our house in 1980, I refinanced several years ago from 11% to 6.4% and that is where I am staying until the house is paid off in 09.

[Wcross]

9. I don't think she understood what she was getting into.

QUOTE-"After doing considerable homework on the housing market, Jackson went with an adjustable rate loan to buy the house.

It seemed to be the perfect financing option.

"You don't have to put anything down," Jackson said. "You'll get money back at closing. You can refinance and pull money out in a couple of years and still keep the rate that you want."

Does it sound like she knew what she was getting into?

[maseman]

10. I see both sides

Look, there are a number of not so bright people out there who make really dumb decisions. If there were not how the hell would all of those midnight - 5AM infomercials ever make money? (I made $72,000 last month with a telephone and a computer.)

But for every not so bright individual is a master deceiver and snake oil seller working for the Dewey Cheatem and Howe Mortgage Company. Those assholes need to be jailed.

Very sad situation but come on folks. Do a little investigating before buying a house.

[Wcross]

23. I do feel sorry for her.

She is obviously quoting what the Real estate agent and the mortgage company told her. I don't know how we can go about protecting gullible and naive people from sharks like that.

[shrike]

62. Well, we can go after the sharks

as much as possible.

We seem to be a society of predator and prey these days, and almost anyone is vulnerable in some ways. Not all of us are -- or can be -- knowledgeable in everything.

While you can't idiot-proof the world, there are standards, and laws, that should enforced. I read a story about payday lenders the other days; some of those outfits charge 300 percent interest. While you may argue that those who patronize them are fools, I don't know how any society can allow those kind of usury rates.

[Julius Civitatus]

29. The loan and credit card lobby gets away with anything

I think you are right. It's a mix of both uneducated customers and highly deceptive lending practices in vogue in the USA for two decades now.

Many of these practices are truly predatory and should not be allowed, but unfortunately this is an industry that owns a good portion of congress, so expect the usury and con refinancing schemes to continue.

[cliss]

11. Answer = no.

I wonder what that "considerable homework" on the housing market was? Running around to 50 open houses each weekend and wondering how much she could afford? Surely it wasn't the mortgage tables.....

Sorry to be so cold-blooded, but the housing market is the same as anything where you part with your money: "CAVEAT EMPTOR".

[bleedingheart]

21. bingo!

you have to read and if you don't understand what you are reading, you need to ask some questions....

[LostinVA]

30. No, it doesn't...

[Snivi Yllom]

33. No, it does not sound like she spent more than 5 minutes thinking about it

And she is now paying for her own carelessness.

[slackmaster]

59. She didn't even know what questions to ask

Lack of education and natural gullibility.

[sendero]

45. There is an old saying out there..

.. "you can't cheat an honest person". People who fall for these schemes think, or wish to think, that they are getting something for nothing.

[raccoon]

53. I think that "old saying" belongs in the circular file.

""you can't cheat an honest person".

Sometimes it's EASIER to cheat an honest person. Sometimes an honest person thinks because s/he is honest and has integrity, it doesn't occur to them that another person would be dishonest and underhanded. Yes, that's naive. And yes, it happens.

[Tesha]

63. You're missing the point of the saying.

The reason "You can't cheat an honest man" is that
the honest person *KNOWS* that you can't get something
for nothing, so if they are being fed a line that,
for example, they can take a mortgage on their house
and somehow get free money from that deal, they *KNOW*
it just can't be so.

(And Rolexes don't cost $59.99, even on street corners
in bad neighborhoods.)

Tesha

[w4rma]

13. The recent bankruptcy bill (GOP/DLC-LIEberman included) was passed with

this future (now present) in mind.

[PurityOfEssence]

14. Why is this surprising?

You take out a loan when interest rates are effectively as low as they can possibly ever get, yet somehow it's shocking that rates rise. There's nowhere else they can go, and in a boom-and-bust cycle of capitalism, fluctuation is guaranteed.

Sheesh.

[mikeytherat]

16. I take out a loan when the Prime Rate hovers around 1%,

and I think that interest rates for consumer loans will DECREASE? I mean, obviously the Prime Rate will drop to 0%, since banks are famous for lending each other money for free.

Do I have that right?

Sheesh indeed!

mikey_the_rat

[Massachusetts]

18. "in a boom-and-bust cycle of capitalism, fluctuation is guaranteed"

Correct you are, thats one play in the Rule book of Capitalism. We are neither a Socialist society nor a "fully" Democratic society (mutt version of Democracy). The point being is that we still have to take personal responsibility for the financial and political actions we take, and face the consequences, good or bad.

"Capitalism is the legitimate racket of the ruling class”
- Al Capone

[meganmonkey]

19. Good thing we got a 30-year fixed

although we had a hard time getting that - and I wonder how many other people have this problem...

On the day of our closing, our mortgage paperwork came with a 5-year ARM!!! EXCUSE ME?!?!?! That is NOT the same paperwork we saw last week! WTF!

Worst part, the elderly woman we were buying the home from was leaving town the next day, and the mortgage co said it would take a week to redo the paperwork - so in the interest of not screwing everyone involved we signed the damn paperwork. But we got them to re-mortgage it 2 weeks later for no extra fees or costs since they fucked up. We were lucky to have gotten the mortgage through a company with a family connection so we knew we'd be alright.

But it makes me wonder how many people have NO idea what is really on their mortgage, it was like a 30-year fixed was an alien concept...I wonder how many people get screwed by this kind of shit and don't find out until their payment goes up all of a sudden?

[PeaceProgProsp]

26. I wonder how much of an accident that was.

I would never sign a contract that wasn't what I expected unless I had in writing (even hand-writing) a second agreement with the lender's agent to draft a new contract and COMPLETELY indemnify me of all costs within two week.

[meganmonkey]

38. I wonder about that too...

I bet they slip changes like that into stuff all the time, and at closing people aren't going to look that closely at what they are signing, assuming it is what it should be.

Apparently the broker's reaction was that no one gets 30-year-fixed anymore so he figured it was a mistake :wtf:
But as I said, there was a family connection (on mistermonkey's side) - and we had assurance that it would be remedied at no cost to us (by the relative) before we signed. Honestly, I don't know who had to eat the costs - the broker or the family member or what. I don't really care, someone else screwed up and that's their problem. I personally wouldn't have chosen the company we worked with (or even working with a family member at all) if it had only been up to me, but that's how things go...

[jdog]

61. Every closing I've ever had

I request the documents be delivered the day before closing so I can review them closely and answer any questions before sitting at the table. I don't think most people know you can do this. To me, it just makes sense to give yourself enough time to read all the fine print without anyone breathing down your neck, and you are entitled to that time. In really complicated deals, many people run it by a lawyer (not something I've ever done).

I think part of the problem with this whole thing is that the people controlling the markets WANT us to remain as uneducated and naive as possible - until it's time to pay the piper. We have to ignore that influence and be pro-active in our own lives!

[FedUpWithIt All]

39. This is one of the reasons i left my loan officer job...

whether by error or deliberate action (I did not stay long enough to find out), rates and terms sometimes changed, just before paperwork was signed.

This combined with the relatively common practice of shopping for more attractive appraisal numbers was not something i felt i could be part of.

[bleedingheart]

20. Here is a bit of advice, "If it seems too good to be true...it is"

also...if you can't afford or don't have the money for a 30 year fixed mortgage, then you can't afford a home in the market you are in or you need to save up more or earn more.

I remember looking for a home years ago, we didn't have enough money for the larger 4 bedroom homes that we liked. The mortgages were too high and the downpayments were out of our reach and we accepted it and looked at homes within our means while saving up more money.

We went with an FHA loan on a smaller 3 bedroom home and that is the home I am in today. We got a fixed 30 year mortgage that we later turned into a fixed 15 year when interest rates went down.

[PeaceProgProsp]

25. This "news" story is basically an advertisement to buy another

mortgage product.

Notice how it's written: you've paid a lot in fees and interest, and the only way to solve your problem is to pay another fee and to pay more interest.

And isn't it interesting how ABC web advertising technology pops up an ad for a mortgage product next to the story?

[praeclarus]

31. wow! i want to get me some of that...

I guess I didn't do "considerable homework" because
I had no idea this type of dealio was available:

"You don't have to put anything down," Jackson said. "You'll
get money back at closing. You can refinance and pull money
out in a couple of years and still keep the rate that you want."

How about that eh? Somebody will give you a house. And they
will give you money. And later they will give you still more
money. And you don't have to put any down!!

[Snivi Yllom]

32. Ms. Jackson, you are an idiot

"You don't have to put anything down," Jackson said. "You'll get money back at closing. You can refinance and pull money out in a couple of years and still keep the rate that you want."

She put nothing down. How can people be so ignorant? Buying a house is not like buying a sweater or a TV. It's a major financial commitment and you, the buyer, need to do your own homework.

[OrangeCountyDemocrat]

36. Great Blog Site For Housing

www.thehousingbubble.com

Lots of excellent insight and comments there from different regions around the country.

[physioex]

41. Does not work.....Please Fix....EOM

[NVMojo]

49. here's the correct link for the famous Housing Bubble Blog

http://thehousingbubbleblog.com/

[FedUpWithIt All]

37. I was a loan officer in training for a few mos...

I eventually quit because i could not do to people the things i saw being done.

One of the things i learned about ARM programs and would tell any potential client...

ARMs can actually be positive things. The idea is to get the lowest interest rate possible and use the low rate to build equity like mad. A homeowner does not have to make a minimum payment. In fact an honest loan officer will tell a client that this will lead to negative amortization at the end of the lower rate period. If they were to make a higher payment, such as a 30 yr fixed payment amount, more of the payment would go toward the principle because of the lower rate the ARM provides.

At the end of the lower rate period, a client can refinance for a better fixed rate due to the increased equity they have built in their home.

I would only recommend ARMs for families that were planning to move in a short period of time or those that planned to make a higher than required payment.

The problem is that the world is filled with too many people willing to sell their fellow man down the river. They want the sale so the sell the low rate programs unethically.

[physioex]

42. Makes Sense.....

So the ARM isn't "evil", it is for a select few who know what they are doing. But the majority would be better of with a fixed 30 or 15 year rate......

[mtnester]

44. We are on an ARM, but we do not owe all that much on our property

put a considerable amount down, and were well aware of whether we could afford an increase if our rates went up.

We pay attention, and refinance if we think things are going to get out of hand. Our monthly payment just went up, but we were expecting it, and we would have to go another two years at this monthly rate in order to break even as to where we would have been with a conventional 30 year fixed.

Our ARM has annual caps and LIFETIME caps as well.

Just have to do your homework and keep on top of it. We plan on selling our way to big house next spring, and even with the increase, we are still ahead with the ARM.

It is a matter of watching where the hell you are going once you take a path down a road, and knowing where that road will take you.

[Lorien]

43. I have an ARM that has actually paid off

it was 8.5% when I signed for it more than 10 years ago, and since then it's dropped to as low as 4.25%. It's at about 7% now. I put a large down payment on my home and now have over $300,000 in equity. Originally I had planned to keep it less than five years, but it looks like I'll end up being here for three times that long. I'll only be unhappy with the situation once it gets above that original 8.5%.

[ckramer]

50. American dream? "you've got to sleep to believe that"

Click here for a laugh:

http://vids.myspace.com/index.cfm?fuseaction=vids.individual&videoid=935607276

[AngryAmish]

58. A worse housing horror is when they only move the headstones

[slackmaster]

60. I hate it when they do that

;-)