Nightmare Mortgages

[NVMojo]

It's now in vogue to talk about the housing bubble bursting ...

SEPTEMBER 11, 2006

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RELATED ITEMS
Cover Image: How Toxic Is Your Mortgage?

Graphic: Dubious Options

Graphic: Home Disadvantage

Worst Practices

Graphic: A Loosening Of Standards?

Phantom Profits

Graphic: The ARMs Race

Online Extra: Residential Options ARMs Lending Table

Online Extra: Slide Show: Home Disadvantage

Online Extra: Map of Misery
Online Extra: Spreadsheet on Foreclosures

Business Week COVER STORY
September 11, 2006

Nightmare Mortgages

They promise the American Dream: A home of your own -- with ultra-low rates and payments anyone can afford. Now, the trap has sprung


For cash-strapped homeowners, it was a pitch they couldn't refuse: Refinance your mortgage at a bargain rate and cut your payments in half. New home buyers, stretching to afford something in a super-heated market, didn't even need to produce documentation, much less a downpayment.

Those who took the bait are in for a nasty surprise. While many Americans have started to worry about falling home prices, borrowers who jumped into so-called option ARM loans have another, more urgent problem: payments that are about to skyrocket.

The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created. With its temptingly low minimum payments, the option ARM brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted, especially in the hottest markets. Suddenly, almost anyone could afford a home -- or so they thought. The option ARM's low payments are only temporary. And the less a borrower chooses to pay now, the more is tacked onto the balance.

The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules -- often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can't count on rising equity to bail them out. What's more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.

more...

http://www.businessweek.com/magazine/content/06_37/b4000001.htm

[The_Casual_Observer]

1. How small a violin can I play for these mortgage holders?

Sure the lenders were predatory, but nobody was putting a gun to the buyer's head to buy these overpriced houses.

[heliarc]

6. No gun

But Oversized houses make up the bulk of development nowadays from what I can see while driving on the highway. Lots of REALLY big houses going up.

Plus where do you get off blaming mortgage holders for fees that probably weren't properly explained to them (or documented) before they entered into the deal?

The False advertising in this business is criminal. And the false advertising should be illegal. Fees should be regulated, and I place the blame squarely on the smart people who did the duping and the smart people who neglected to do the regulating (our Legislators). You might be smart enought to tell the difference, between loans, but that doesn't mean most people should be expected to do the same. This amounts to bloodsucking fraud, and consumers deserve support and a common voice with sympathetic people who share their struggle to earn affordable housing.

[Maine-ah]

13. not just that

but it's an ARM! Of course the friggin' rate is going to go up.

[Singular73]

2. They assumed the risk.

They take the hit.

Though some Mortgage Brokers are scum...lots of people don't know what they are getting themselves into.

Look, if your ARM's fixed period is coming to an end, chances are you made some decent money on your house by now, and that you should be able to refinance quite easily, with the added equity.

The BIG problem some people have, is that they've been using their equity like an ATM....

[sandnsea]

3. 25 year old kids

who didn't know any better and were just trying to do the economically responsible thing that they've been taught their whole lives, buy instead of rent.

Some days this board just festers with compassion.

[murielm99]

7. You're right.

I was 25 and my husband was a couple years older when we bought our first house. We got some advice from family, but I don't think we really knew much about what we were doing. We just paid everything until it was nearly paid for, then we moved up. There was nothing complicated.

That house cost $12,500.00. The same house now appraises for $183,000.00.

I wonder if my kids will be able to buy homes. They have student loans. I kind of doubt that they will be able to afford to own a home. It is a shame.

[Maine-ah]

14. I bought my first (still in it) home

at 27. There's a lot of research you need to do for a mortgage. There's all sorts of info, and most people do the research. Going with an ARM is not the smartest plan, and I knew that at 25. It took us a couple years of research, and house hunting to find what would fit our wallet best. (30 year fixed and then refi when rates go down, which is what we did).

You have to admit that some of this is personal responsibility. Yeah, I know shit happens, christ, I'm pregnant with no health insurance, and I'm going to struggle to make my house payment very shortly here, but when you take out an ARM, and keep your fingers crossed that 1. your rate doesn't go up or 2. nothing catastrophic happens you're just asking for trouble.

Yeah, I feel bad for people, but hell, what about personal responsibility?

on edit:

at 25, you're an adult, not a kid. That is part of the problem with some of the generations coming up. They have been told their whole lives "your just a kid" and they have had everything handed to them. They don't know personal responsibility, they don't know hard work.

[bleedingheart]

16. there are plenty of 50 year olds doing the same thing

two foreclosures down the street from me were people in their 40's and 50's...

[TomInTib]

4. Fools

Fucking fools...

Geniuses...

who were either unable to read are who were just too damned blind to see.

I am just blown away by this idiot segment of our Society.

What were they thinking?

[heliarc]

8. Too bad.

I just had a conversation with a dem who justified why she didn't eat squid or octopus by saying that it was more intelligent than other animals... That's not very bright IMHO, but thankfully I'm not a cannibal... nor do I discriminate on the basis of intelligence or street smarts.

This sort of outright fraud SHOULD BE ILLEGAL. Exorbitant fees should be regulated. That is the most democratic egalitarian way to solve problems like this. Not hoisting the blame up over the heads of poor people whose educational system has been starved and then dropping it on their shoulders.

Absurd to blame a populace that is growing less and less empowered due to this hijacked government that everyone has always said was by and for the people. I blame our representatives more than these poor people. Legislation to regulate this sort of thing and protect the consumer is WAY behind schedule thanks to Repugs (and Dems for that matter) and their big Banking friends/lobbyists.

What everyone on this thread is saying is like blaming the people who had skyrocketing energy prices in California for what Enron and Schwarzenegger was doing to the market.

[shrike]

15. Thank you

Do we really want to live in a society where everyone is either a predator or prey?

You could even take it a step further and say that if you leave your house unlocked (or, have a REALLY scatterbrained day and leave the door open) you deserve to be robbed. After all, you didn't take the necessary precautions. . .

I agree that personal responsibility is necessary, but do we want to live in the kind of society where so-called payday lenders charge 300 percent interest (no joke) and get away with it?

Maybe we should stop going after the flim-flam men (or women), then. After all, if people are stupid enough to fall for that stuff . . .

[Wiley50]

17. Excuse me. Payday loan interest is 1048% APR

I know. I have one now. On$603 a month SSI disability it's the only credit I can get.
I'm into them for $300 and pay back $330 every month
and then have to borrow it again.
Don't know how I'll ever get out
from under the principal

[shrike]

18. That much, eh?

All I know about payday loans is the legal actions against them that I've read about.

A few lawyers have taken them on. The figures I saw quoted mentioned 300-500 percent interest. The rate you quoted just proved my point. Is this the kind of society we want to live in?

My sympathies, btw.

[Name removed]

10. Deleted message

Message removed by moderator. Click here to review the message board rules.

[skids]

5. I'll be the first to say these buyers were stupid BUT

Blame, and risk, is really on both sides of the street. The lenders assume the risk that the value of the loan will not be retrieved, and it could happen that some of them now find themselves in hot water along with the mortgage holders, because they bought into the very lie they were spreading. If these predatory lending companies come crying to the government for assistance as they lose money on bad loans, screwem. Same goes for credit card companies.

It's a shame most of the consequences for these risky lending practices, which were a business folly, will mostly fall on the patsy buyers due to the new bankruptcy laws. Businesses that make bad business decisions should not be able to bail themselves out through either government handouts or preemptively via bought-and-payed-for lobbyist-induced legislation.

[heliarc]

9. Thank you for this

I'm a little disturbed by how little sympathy there is for the mortgage holders here in this thread. I'm sure many of them got sold the shaft, and I bet the fees were never adequately explained to them in many cases. I think there's a lot of fraud in the mortgage business too besides there being risk, and too many here responded with a demonstrated discrimination for people of less than average intelligence. People are people, and I hate to be a bleeding heart here, but the bulbs that burn less brightly should have all the protection that this government can muster. Frankly, I see a business that has progressed far beyond the willingness of our legislators to regulate it. That is a shame on our legislators, NOT uneducated people trying to live their lives.

[michaelwb]

20. Agreed and more thanks

Funny, I remember the days when Democrats stood with the working person, not side by side with Republicans and predatory financiers in blaming the victim.

Shameful and disgusting...

[praeclarus]

11. the lenders...

Have a read of the link in the original post. It's
kind of long and gets detailed at points but gives
a good idea of who is assuming the risk on these
loans.

Also interesing how the banks are accounting for
these loans, although it is in accordance with
GAAP it is kind of questionable. Reminds me
of mark to market used by Enron sort of.

[skids]

12. Thanks...

...for encouraging the click-through. Though I have to say, since given the real CPI is much higher than offcial figures and anything making under 8% annual yield can be argued to be declining in value at this point, I don't think the owners of this debt are going to come out as unscathed as they think they are, despite all their leveraging. True they will own huge amounts of the housing stock, but at what price?

[smb]

19. A Fool And His Money....

Burger, a solid earner with clean credit, has bought and sold several houses in the past. In February he got a flyer from a broker advertising an interest rate of 2.2%. It was an unbeatable opportunity, he thought. If he refinanced the mortgage on his $500,000 home into an option ARM, he could save $14,000 in interest payments over three years. Burger quickly pulled the trigger, switching out of his 5.1% fixed-rate loan.

Yes, it sucks to be him right now, but when you do damn fool things like that, what else can you expect? Only an idiot would expect an ARM to go anywhere but up, given that interest rates lately are the lowest they've been in decades.