Interest-only real estate loans potential traps

[question everything]

The Daily Breeze

Thursday, June 09, 2005

Interest-only real estate loans potential traps

Some market watchers fear California may become a crucible for a meltdown because of the popular tool.
By Michael Liedtke
The Associated Press

Daily Breeze

(snip)

Built on the assumption that home prices will keep rising, interest-only mortgages represent a gamble that many home owners accustomed to conventional fixed-rate loans would never take.

(snip)

But the financial firepower of interest-only mortgages is affecting all home owners. They are further elevating already lofty housing prices, a trend that's raising fears of a crash that could plunge the economy into a recession.


(snip)

With some of the nation's highest home prices, California has become ground zero for interest-only mortgages. Many home buyers also have been relying on interest-only mortgages in hotter markets in Florida, Nevada and Arizona, according to the market research firm.


(snip)

A sharp downturn in housing prices could turn interest-only mortgages into financial albatrosses, saddling many borrowers with homes worth less than what they owe. Also risky are the adjustable rates included with many interest-only mortgages. If the prime lending rate keeps rising, these homeowners' monthly payments could soar even as home values plummet.

A double whammy like that would increase the chances of borrowers falling behind on their payments or, in the most extreme cases, just walking away from their homes, raising the specter of the massive foreclosures that contributed to the taxpayer-backed bailout of the savings-and-loan industry during the late 1980s.

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Find this article at:
http://www.dailybreeze.com/business/articles/1610951.html

[wallwriter]

1. Isn't this kind of obvious?

[acmavm]

2. One would think.

.

[liberal N proud]

3. Well DUH!

:think:

[kevinmc]

4. I live in California.......

and I just saw a story on this last week. It said 61% of the loans are interest only in this state. Now, I don't know if they meant new loans or all loans. But it did show what would happen if rates go up and it wasn't good. There will be a lot of homes taken back by banks and prices will fall. Most of these people have little if any equity in their homes.

[orwell]

5. New Loans...

but its even worse, there are new mortgage products that don't even cover the interest. You are, in effect, taking out a small equity line of credit every month. The hope is that the home price rises faster than the money you are taking out of it monthly.

Can you say bubble?

[reprobate]

6. Final proof that Americans are economic imbeciles.

They wouldn't walk into a casino and lay down a bet like that. Or would they?

[hatrack]

7. I would suggest that popularity of televised poker . . .

and the continuing metastasis of Las Vegas are only two versions of the same answer to your rhetorical question.

[Tracer]

8. And there will be more people doing this!

"Real Estate Flippers" now have their own television show.

I happened to catch a few minutes of the new Discovery Channel show "Property Ladder" ...... which is nothing more than yuppies grabbing a piece of property, doing some slapdash reno and flipping the property a month later.