MSNBC: "Homeowners with nontraditional loans are in for a payment shock"

[Human Torch]

'Exotic' mortgages seen losing their allure
Many homeowners with nontraditional loans are in for a payment shock

By Vanessa Richardson
MSNBC contributor
Updated: 11:50 a.m. MT Aug 30, 2006

http://www.msnbc.msn.com/id/14584569/

"Joe" is a homeowner who did not want to give his full name for this story because he’s ashamed to admit that he soon won’t be able to afford his monthly mortgage payments.

In order to get the $800,000 house he bought early last year in California’s Silicon Valley, Joe got an “option ARM,” an adjustable-rate loan that lets him choose from a variety of payments every month. The smallest payment included no principal and less than 100 percent of the interest due. The unpaid interest was tacked onto the principal, creating “negative amortization.”

This let Joe trade lower payments now for higher payments later. He initially thought his salary would rise along with his home’s value — he was a marketing executive for a small software firm he was confident would be successful. But when a lost deal closed the company and “For Sale” signs popped up — and stayed up — in his neighborhood, a now-unemployed Joe is wondering how he will afford those higher payments when his rates adjust.

Joe is not an atypical homebuyer in the Bay Area or other now-bursting bubble markets across the country. Nearly half of the homebuyers and thirty percent of people refinancing mortgages in California chose interest-only loans last year, according to research firm LoanPerformance. The nationwide numbers are not so high — 32 percent for homebuyers and 20 percent for refinancings — but they do reflect the country’s increasing reliance on these so-called “exotic” mortgages.

[seriousstan]

1. He was a fool, as is anyone with anything other than a fixed rate.

If you can't afford a certain house and are willing to gamble that you will eventually make enough money to afford it, don't cry when you lose your ill-conceived bet.

[MercutioATC]

2. Agreed, in most cases...

...if you're planning on selling in a few years, a low-rate ARM might be financially advantageous.


If you're planning on staying, however, an ARM is a gamble. People sometimes lose when they gamble...as "Joe" did.

[Warpy]

4. A lot of people had to get those ARMs if they were marginal

borrowers. It was the only way to get into the market.

If they were in an appreciating market, they should have leveraged their growing equity to convert to a fixed mortgage ASAP.

It's hard to tell people who are struggling to pay a high mortgage while covering the other necessities of life to do that, though, and a lot missed the opportunity.

Good people are going to get hurt. The wrong people are going to get hurt.

Speculators will probably survive, though.

[seriousstan]

8. Then they shouldn't be "in the market". Taking these kinds of poorly

thought out risks is how they became "marginal borrowers".

Rent and save and then be realistic about your goals and abilities. While this might be a tough pill to swallow, you will not be bankrupted in the process.

[Warpy]

9. They were marginal borrowers because their WAGES SUCKED

thanks to a decade of inaction by a heartless Congress and 30 years of wage stagnation indexed to inflation presided over by both parties.

Blaming the victims is pointless and cruel.

[seriousstan]

15. And putting your head in the sand and your rose colored glasses on

is delusional and ignorant. By your own reasoning, these people had a situation in front of their eyes for over 20 years. If they are too blind to see the facts then perhaps they should have someone else handle their finances. Perhaps they could claim mental handicap and get a "provider" to handle their affairs. God only knows what other poor decisions they have or are about to make in their lives.

Yes I do blame a marketing executive for being this obtuse about his finances. That is not cruel and it has a very relevant point. One he obviously CHOSE to ignore.

You want to be compassionate, pay his mortgage for him.

[Tom Yossarian Joad]

23. Buyer beware, right?

You are right, but, put the buyer against a realtor and loan company telling him or her what a great deal it is coupled with "the American Dream" mythology and poor judgement is just around the corner.

It's an effing confidence game being played on middle class America. And the con men are paying for the Senate and Congress.

[nosillies]

24. good advice

Speaks the truth, but not too harsh:D

[Iris]

10. If someone had to have one to get in the $800,000 house market, than

boo hoo for them.

[nosillies]

12. I have no idea what his house looks like

But it some markets, $800K doesn't get you much -- maybe three bedrooms in a marginally safe area.

[Human Torch]

14. Trust me...in Silicon Valley, $800K can get you a shack.

CONDOS are going for $400, $500, even $700 if you buy one in a "money town" like Palo Alto. I have a friend who is a realtor who sold a condo in Palo Alto for $750K. When I questioned the price he said "It's a REALLY NICE condo..." When I questioned him further, he admitted that at least $300K of the price was the result of it being located in Palo Alto. NO garage. CONNECTING walls. Three quarter of a million bucks.

That's Silicon Valley. "Joe" DID NOT get a "mansion" for his $800K.

:patriot:

[TahitiNut]

16. The 1400 sq' Silicon Valley condo I bought in 1983 for $140K is $700K now.

$800K ... 1500-2000 sq ft condo, 3 bedrooms and 2.5 baths, with a 2-car garage.

In need of paint and new carpeting!

[enid602]

22. prices

Seems to me that the people who buy at the end of the boom (with 'exotic' mortgages) are not the only people to be pitied here; imagine the homeowners who fail to sell in this era of high prices. Imagine being a paper millionaire one day, only to wake up and find one's precious equity gone. They will no longer be able to post on blogs like this that they bemoan the high prices while smugly feeling that they have arrived.

[Iris]

29. still - there are times when renting is not a bad thing.

[Dorian Gray]

25. or in Manhattan a one bedroom

Two in an older building that's falling apart.

[LostinVA]

30. You can get a 30-year rate even if you have a Chapter 7

on your credit. You just have to wait two years to get an FHA.

[Kajsa]

3. This is one reason why there is a rise

in foreclosures.

Interest-only and ARM loans are nuts.
The principal is never included in the
monthly payments.

This reminds me of the "minimum due"
amounts on credit card balances. Often,
it's the amount of the interest and little else.

[nosillies]

7. As Mercutio posted, ARM loans make perfect sense for those

planning to own the house for a short while. My husband has to move for work every 18 months or so. We happen to have a fixed rate now, but we've always had ARMs before (usually 5 year). There was no point in paying a higher interest rate when we knew we'd never see the day our rate changed.

And you do pay principal on ARMs. ARMs and interest-only loans are not the same thing. I've had enough to know.

[Kajsa]

18. Thanks for straightening that out.

I was under the impression that both
only paid towards the interest.

I learned something, today.

[nosillies]

20. It's one of those things I wish I didn't know so much about

I wish we didn't have to move so often, and deal with all this home buying crap so regularly.

Regardless, I am thankful that I have a nice roof over my head in a safe neighborhood. I am blessed!

[LisaM]

5. It's sad - but since I have been priced out of the housing market

I think something HAS to happen so that I have a chance of someday being able to own a house. Though I don't think that day will ever come.

I had a conversation with a co-worker yesterday where I expressed my resentment that people pay more than they should for houses - thus driving the costs up for all of us. There were three of us there; we all work hard and none of us can afford a house.

[nosillies]

11. You are absolutely right.

But what to do? I paid more than I should for my house, not because I wanted to, but because I live in an over valued area. If I wanted a house, period, I had to pay too much.

I place much of the blame on flippers/speculators and rampant development. Builders have to quit saturating markets. I was glad to see that Toll Brothers recently had a bad quarter, but I doubt they'll ever change.

[earth mom]

13. You should fault the entire industry. Not people who want a home

just as much as you do. They have been hurt just as much by the rampant greed in the real estate industry as you have. Don't forget, they also have much more to lose than you do. :(

[OPERATIONMINDCRIME]

6. No One Else's Fault But The Borrower. The Rules Of The Game Are Well

stated and well known. If one chooses to take the risks they should not seek sympathy when those risks come to fruition. We are responsible for our actions and sometimes have to push on through hardship due to them.

[sendero]

19. The mortgage companies are beyond sleazy..

... pushing people into these loans to sell a larger house with a larger origination fee -BUT I agree with you. Nobody put a gun to these folks' heads - this is CLASSIC AMERICAN BUY NOW PAY LATER KEEP UP WITH THE JONES' BULLSHIT.

I feel a lot more sorry for the folks who played but the rules and are now going to suffer a down market because of the large numbers of foreclosures these morons will be causing.

[ThomWV]

17. I Have No Sympathy What So Ever

For anyone who speculates with their own future stupidly.

[onethatcares]

21. I agree with you Thom

and also want to add, he's gonna learn about the new bancruptcy laws very quickly.

[VolcanoJen]

26. Look at this graph... it blew my mind.

My thread from yesterday, ties in perfectly with this discussion:

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=364x2005232

I'm really only beginning to wrap my mind around this kind of looming, common financial disaster.

[nosillies]

27. Thanks for the info and link

[haydukelives]

33. I't going to be a train wreck

[LostinVA]

28. I have a 30-year fixed at 5.5%

I bought a house I could AFFORD and one only the size I NEEDED. The mortgage is hundreds of dollars less than my rent was. And, homes are NOT inexpensive where I live -- not SOCAL or NOVA $$$, but way higher than the national average.

[nosillies]

32. way to go, common sense prevails!

I fear the day when my child's old enough that we have to start worrying about schools. I hope then that what we can afford and what we need (decent schools) matches up.

[LostinVA]

34. Would I LIKE a slightly bigger house?

Yes... but I don't need one. I qualified for a much higher loan, but I would like to have some $$$ left over after I pay my bills!

[fairfaxvadem]

31. These new lending tools just shock me to no end

I was in the mtge biz for over 10 years, saw the downturn in the late 80s/early 90s, suffered through a housing crash in California, etc. It did get ugly for quite a while. Not just in California, but even here in the supposedly "recession-proof" DC area. So, I've seen it on both coasts up close and personal, including the eventual layoffs, let alone the price collapse.

But these I/O option arms are a new breed of nasty. Back in the day, only folks who had the kind of transient life and/or cash-flow used ARMS. A lot of self-employed folks used ARMS. Military here in DC would use a 3/1 or 5/1 (fixed for a short term, then flip to ARM) or one of the balloon notes.

Having seen it all, I've always felt that any fixed rate at 7% or below is damn good. And if you can't afford a home at an historically low fixed rate between 5% and 6%, where they were for a while, then you can't afford the damn house.

Oh yes, also, back in the day with ARMS, you couldn't qualify on a lot of them at the initial rate. Underwriters would run your numbers one adjustment out on a 1-year, or 2 adjustments out on a 6-month, and if your numbers didn't stay within the income/debt parameters, you didn't get the loan.

This is going to get brutal next year.