Nightmare Mortgages

[spinbaby]

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.

(snip)

The option ARM is "like the neutron bomb," says George McCarthy, a housing economist at New York's Ford Foundation. "It's going to kill all the people but leave the houses standing."

http://news.yahoo.com/s/bw/20060901/bs_bw/b4000001

[warrens]

1. Standing, but empty

The next few years are going to be a great renters' market.

[TechBear_Seattle]

15. Not in many areas, sadly

In Seattle, apartments are vanishing at an increasing rate. Apartment owners are kicking out the tenants and refurbinshing the units as condominiums, which are then being sold for about $450 to $600 A SQUARE FOOT. You heard me. It is not unusual for a one bedroom, one bath 650 sq. foot condo to sell for around $325,000. And they are being snapped up as fast as they come on the market, because they are much cheaper than the cost of a single family home.

[Rabrrrrrr]

2. Why anyone would get an ARM on anything they won't pay back

in less than a year is beyond me.

Fucking greedy-ass morons, reaching for more than they can afford. Well, stupidos, the chickens are comin' home to roost. HA!

[Bluebear]

3. Not all 'Fucking greedy-ass morons', rabrrrrrrrrrr

I know a lady who was talked into one of these, she truly, truly did not know any better. And now she is in for some hard times.

[Rabrrrrrr]

6. Okey dokey, then, I'll take off the "fucking greedy ass".

[Bluebear]

8. LOL fair enough. But she did get taken in. "Cut your mortgage in HALF!!"

And I would say, "Uh, does this make any kind of sense to you?" But she thought she had discovered some great "bargain".

[rfranklin]

5. You are very angry at these folks who want to own a home....

Maybe we should outlaw predatory lending instead?

[Rabrrrrrr]

11. No, I'm angry (though "laughing" is the better word) at the idiots who

over-extended themselves to buy more house than they could afford in order to impress their friends or live their dreams too much early in life.

And yes, the banks are partly at fault for handing out loans willy nilly when interest rates were so low, giving loans to people who clearly weren't earning enough to afford the loan.

But ultimately the banks are not at fault - the people who took the loans, who accepted the terms, without ever truly considering their own financial status; they're the ones who should accept 99% of the blame.

And in case you, or someone else, wants to argue "well, these people aren't bankers! They don't know how mortgages and stuff work!" I say, "Then they should have fucking read up on it and done their own due diligence".

[Montauk6]

7. I don't either, Rabrrrrrr. When it comes to the interest rate,

as broke as I am, PLEASE don't un-fix it!

[BOSSHOG]

9. There may be a little of instant gratification involved

Especially as a carrot to young buyers. The first year sounds great so sign me up NOW. "Look at the great interest rate we can get honey."

IF YOU ARE GONNA BUY A HOUSE MAY I SUGGEST A FIXED MORTGAGE INTEREST RATE. I'm an old fart and I'd love to see you be able to enjoy your home.

[Bluebear]

10. Agreed. ARM's do have their place...

...for instance if you know in fact you are moving in another three years... but with Bush's economic performance for the working man, it's a very scary place to be in.

[Missy Vixen]

13. You know, I was going to walk away from this. I just can't.

>reaching for more than they can afford<

Really?
I have to wonder to myself where you live. The area we live in now has a median home price of $375,000. Those who rent are unable to get ahead due to being unable to write off their investment. When we bought our first home, it was a hand up. We bought with an ARM eleven years ago and refinanced to a fixed rate as soon as possible. Maybe it wasn't the smartest move according to you, but it worked for us.

It would be great if everyone had perfect credit, could buy with a fixed rate, etcetera, but sometimes it doesn't happen that way. For every scorned McMansion owner the denizens of this website love to dump on, there's some single mom that found a condo the size of a postage stamp, but it's hers, and she just bought something that will help her with additional tax writeoffs.

Julie

[Gormy Cuss]

32. Julie, you probably did not have an option ARM.

Older ARMS tended to have very clear and simple terms. Your rate would be adjustable at X interval and the interest rate could rise no more than X %, for example. With these ARMS there was a certain level of predictability in the payment requirements and potential cost.

Option ARMS are called that because the consumer is given a number of options for payment each month. Here's an example:
1. Make monthly payments as if the loan will amortized in 30 years.

2. Make payments as if the loan will be paid off in 15 years

3. Make interest-only payments

4. Make payments based on a below-market interest rate with the unpaid interest rolled back into the mortgage debt.

The last is how people can get in big trouble because it represents a negative amortization on the note. Number # 3 is treading water because no principal is paid. Note that the homeowner can choose any of the above each month. If your income stream is lumpy, it's a good product because you can choose the negative amortization option when the cash flow is low.

If on the other hand all that you can afford is option 3 or 4, you are in deep trouble when the rate is adjusted upward. Some option mortgages adjust MONTHLY, so it's difficult to project how much money you will need to set aside for the mortgage. Unless your property is appreciating rapidly you may not be able to refi because of the debt to income ratio.

[TornadoTN]

24. I see your point, but I do disagree to some extent

I'm a young businessman mid-20's (well, 27, time is catching up with me), and when my wife and I decided to purchase our home two years ago, we looked at all of our options and weighed the risks and decided to go with an ARM for the first two years. After that, we had the guarantee that the rate couldn't exceed 8.5%, which was still a significant risk. However, we refinanced at the end of the ARM and locked it in a fixed mortgage for around 5.1 or 5.2% . The beauty of what we did was that we bought a modest home, well within our means, and ended up saving a significant amount of those two years and we didn't have to pay closing costs either time. It gave us a nice nest egg to use in our savings and other financial interests. I looked at it like playing the stock market - get as much information as you can, formulate a plan, and get ready for a wild ride. Luckily it worked out for us.

But I do realize that some people don't realize what they are getting into or they quite simply jump into the housing market and buy a home that they simply can not afford when it comes time to pay the outrageous rates that come due when the ARM outlives its usefulness. One of the things that I learned when I refinanced was that a majority of people that take ARM's are in bad credit situations and simply cannot get a fixed rate mortage at an anywhere near decent rate. When they try to get out of their ARM, they find out that they can't get a decent fixed rate at below what their ARM is valued or they don't even qualify for another loan. Then they are faced with either sticking it out or losing their home - which sadly enough ends up happening anyway.

[MissB]

39. Buyer beware and all that.

My mom is not quite elderly - she's in her mid-60s. She hasn't owned a home for years, and is looking at buying a home right now. The broker she has been working with wanted to get her into an ARM at a 2% rate. She thought it sounded splendid. She's not terribly good at the whole financial thing.

We've talked her out of it, and one of my siblings is taking a second mortgage to pay for the house and having her "rent" it back from them. She simply couldn't qualify for a traditional mortgage, but no mortgage broker would tell her that. They'd couch it in terms that she wanted to hear.

[Warpy]

4. Yeppers, and you can tell when those rates have just gone up

every year. The foreclosure signs start to pop up like mushrooms.

I feel very sorry for people who got suckered. I don't feel quite as sorry for the ones who refinanced to pay off credit cards charged to the max with toys and trips. I don't feel a bit sorry for people who went for the ARMs so they could trade up to McMansions.

But a lot of people did get suckered by that "Cut your mortgage in half!" crap. There's plenty of sympathy for them.

A lot of neighborhoods are going to turn into rental housing, and blight is going to start again. Some housing, like the 2 bedroom, 6 playroom McMansions, will simply become unusable except as retail or office space, things already oversupplied in most areas.

It's going to be a rough ride for a lot of folks, and an unpleasant one for those of us who planned ahead.

[OrangeCountyDemocrat]

12. Great Website To Track The Crash

www.thehousingbubbleblog.com

[tjwash]

14. Those fucking ARMs are predatory as all hell.

They should have outlawed them years ago.

[bleedingheart]

16. This is Proof that People DO NOT READ and DO NOT UNDERSTAND MATH

and I am not talking about Algebra...I am talking basic math skills.

I am really sorry but when everyone got caught up in the "big home hoopla"...I too was a bit curious and a bit jealous...so Mr. B and me decided to look into some of the options and they were all pretty freaking ridiculous.

Now I can create a list of all my expenses and their associated costs and figure out what I have left to pay for a mortgage. I can also determine whether or not I can adjust my life to a diferent mortgage payment. I also read contracts and ask questions about what I am signing.... Apparently I must be gifted because a lot of folks out there can't do this stuff.

I also think a few people need a reminder in the old adage...

"If it seems too good to be true...It is".

[melissinha]

17. Unfortunately don't get Amortization schedules

Because being Adjustable means there are many different combinations of Amortization schedules...

[bleedingheart]

20. to be honest, adjustable rate mortgages are not for the majority of people

and they are especially not for people who can't seem to understand the ramifications of those types of loans.

When you sign a contract for a home or a car, it is assumed you know what you are signing for and you know what you are doing and there is no excuse you can give a bank that is going to make them feel bad.

The mere fact ARMs are hard to really keep track of...is a sign that it was/is a bad idea.

[melissinha]

29. Bingo!

The mere fact ARMs are hard to really keep track of...is a sign that it was/is a bad idea.

Only liberals who rely upon facts and evidence would come to that conclusion... well put! :yourock:

[sui generis]

18. I hate to take the contrarian side on this but

If you enter into a complicated deal, such as real estate purchase, you need to understand the risks.

Even credit card companies when raising their rates on you, must inform you and you can decline the rate hike provided you close your account with them.

If all someone can pay on an option ARM is the interest payment or a partial then they should not have made that purchase choice. There are ARM instruments that have caps, and in no case should anyone ever have taken a loan based on some absurd property appreciation / turn & burn stunt. There will always be predators, including major mortgage companies willing to part stupid people and their money, and stupid people willing to let them.

It is up to us to take care of ourselves and read and understand the fine print. This really is one where the homeowner has every possible scrap of information at their disposal before committing and many did it on real estate market speculation and now we're supposed to feel sorry for them.
_____________________

Having said that, the real down side is that you have overvalued properties that have to go into foreclosure or REO for re-sale at higher new mortgage rates for less than the guarantee on the loss. A lot of those properties were no money down, or zero equity or interest only (some variation). Remember that's what happened with the real estate the RTC held in receivership for the S&L's in the late 80's to a great extent.

We won't bail out homeowners, but the sin on the horizon here is that we will probably stop at nothing to bail out Bank of America or Chase Bank when they start whining about their devalued assets; the national publicly traded builders like DR Horton sitting on new starts who are paying full improvement and property taxes with no buyer in sight and nobody willing to pay enough rent to cover the builder's loss.

Yeah, it's gonna get real ugly for sure, except trickle down solutions don't work when the situation is hemorrhaging in every major economic organ.

[bleedingheart]

23. ah...but reading...doesn't it just take longer when you do that..

isn't it better to just "take someone's word for it"...and crack open the bubbly and celebrate?

:sarcasm:

;-)

[Rabrrrrrr]

34. Yep, just take their word for it, then go crying to the government

when you get screwed over and can't make your payments and you can go boo hoo about how nothing was "spelled out clearly" and "I was told this..." and "I was told that..." and "we need regulation" and "I wanna sue!" and blah blah blah :nopity:

"I refuse to do any due diligence because **it's my right** to have everything taken care of me, and **not my responsibility** to actually learn or read or anything about what I'm doing."

[bleedingheart]

40. it puts me in mind of the folks who cry to the government when

grandma spends their "inheritance" on publisher clearinghouse crap or perhaps...nigerian banking scams...

Those folks have special hearings so that they can cry about how grandma and grandpa were too old and too feeble to resist the temptation....and that there should be laws to protect them.

Meanwhile...I never hear someone say..."perhaps if I had been visiting grandma and granddad and perhaps helping them this might not have happened"....but nope...only visit once a year for thanksgiving ...and perhaps for christmas...and then go bitching that the house is full of books they bought thinking they would win the sweepstakes and the 300 cats they live with....and the cats pissed all over the books...so they ain't worth anything now....wa wa wa

[Rabrrrrrr]

43. Ah, yes - the good ol' "The government is supposed to by nanny" bullshit.

Coupla assholes use their toasters or blow dryers in the bathtub, and now they gotta have warnings on them.

Some shitbag gets hurt on his bike cuz he was fucking around in traffic and wasn't wearing a helmet, and says "Oh, if the government had FORCED me to wear a helmet, I would have had one on, but the government didn't force me, and so the government is at fault!!!" and now every kid on a bicycle has to wear a helmet, have knee and elbow pads, a shirt and pants on, an obnoxious day-glo orange flag, a bell, a light, a license, a lock, and i wouldn't be surprised if the handlebars are now required to dispense antibiotic soap.


Or some dipshit's kids play text-message with a pervert and go meet up and get in trouble, and the dipshit goes screaming to the government to censor and "manage" better the Internet so that our children can't be preyed upon and put on "limits" and "security devices" and blah blah fucking blah blah wa wa wa wa wa wa.... because they couldn't be bothered to supervise their children. Same with the fuckwits that want the government to ensure that the TV is safe to watch while the fuckwits go out to dinner or otherwise ignore their kids and leave to be babysat by the TV.

[melissinha]

19. Even worse are the no interest mortgages

I wouldn't touch that with a ten foot pole..... you never actually pay it down.. no principal...

LUckily though with these ARMS they don't last for the entire term because the ARM goes fixed from within 3-5 years (depends on type fo ARM), but a person should know that they can weather the higher interest rate and look at the rate ceiling mentioned in the mortgage and make sure they can handle that.

When I get one, its gonna be fixed, period. I will then pay additional principal on top of that to accelerate the mortgage.

[bleedingheart]

21. Those are interest only mortgages...

where you pay just interest and no principal for a specified period of time....

Once again, these are short time loans meant for executives who do not stay in a place long or for people who are going to turn around and move in a small period of time. I know a fellow who took such a loan because his fiance and he were selling their other homes. Once the other two homes were sold he re-financed his interest only loan into a fixed rate mortgage.

[melissinha]

27. I am familiar with them worked in mortgage industry

Its so predatory, I could never see why regular people got ARMs.... though I was always given the schpeel about anticipating wage increase as a reason for getting an ARM. Its still too risky IMHO.

I think even for senior citizens who don't intend living out a term, I think interest-only is purely predatory.

[thereismore]

30. You are assuming you have the money to pay extra principal. Good

for you.

[Lex]

31. I'm lost.

How would there be "extra principal" involved?

You borrow $250,000 and you pay the interest only for X amount of years.

There would only be more principal to pay back if more principal was borrowed, right?

[Rabrrrrrr]

37. If you can't afford to pay principal, you have no right to have a loan.

Or, more economically speaking, if you can't afford to pay principal, you can't afford to have a loan, and you're whacked if you get one.

Unless you're a smart businessman who is playing the game and getting an interest-only loan for a short period of time until you fall into a bundle of cash, or are going to move very soon, or what have you.

[bleedingheart]

38. this isn't about paying extra principal

this is about paying principal at all.

People who take 0% principal type loans are taking a risk. The risk is that their home is going to gain so much value as to offset the fact that they will pay more in interest over the life of the loan...unless of course they refinance with a fixed rate.

[Lex]

22. A few years ago I refinanced

my 7.75% fixed rate 30 year to a 5.25% fixed rate 15 year. *whew*

Love watching that payment drop my balance each month.


Seemed like everyone was snapping up ARMs at the time, which isn't terrible if you don't expect to stay in that house for more than 3 years (before it starts adjusting).

[bleedingheart]

25. we took our 8.25% fixed rate for 30 years to a 5% fixed for 15..

when the bank asked if we wanted to take out more money...we said. no.

[Lex]

26. Yeah, we borrowed only enough to refinance

and I think our payment, including escrows, was about the same even though we had just knocked 15 years off the term and saved all that money in interest.

[Gregorian]

28. GREENSPAN WAS RECOMMENDING ARMS!

This was only two years ago at most!

We all stood stunned as this bozo Greenspan spewed what we all knew to be financial suicide.

I mean, any idiot could tell you that interest rates had nowhere to go but up.

Buyers didn't know. That's all one can say.








My first house was on an ARM. But rates were falling. And it was only after I sold the house that I even knew how dangerous an ARM was.

[bridgit]

33. that's right, many others stood before a loan officer with a stunned...

look on their face when told they could not qualify for a conventional...that's when these loan sharks reach in the drawer and pull out the ARM, seems like a good deal...but it is essentially a ruse, lenders care less, cause they'll see you on the backside if need be; all of the lender's money is secured in one form or another as there is a ancillary market in foreclosure as well

[Gregorian]

41. It's funny that they always have a line...

"We're not in the business of foreclosing." I've heard it so many times.

I'm thinking about funding mortgages when rates go up. The thought crossed my mind that foreclosing could happen. It's a mixed bag. One has to cover their loaned money. But I wouldn't ever want to see someone unhappy at my profit. I'd probably be the only person in the history of mankind to collect my loan, and then pay the property owner back for their rightful share.

Anyways, money is such a sick subject. I'm just glad to be on the other side of that fence. I was poor without any hope for so long. Now I'm well off without any hope. Haha. (:

[ecstatic]

45. That's right! I forgot about that! Bushco scum smh nt

[donco6]

35. Why anyone would have one is beyond me.

I guess I'm just not a gambler. I don't mind carrying the debt, but never with an ARM!

[Sammy Pepys]

36. We just bought....

...and demanded up front that we wouldn't consider anything other than a 30 year fixed. No one tried to sell us on an ARM anyway, though....

[judaspriestess]

42. It's clearly stipulated in writing that these loans are

only for a short time and WILL have to be refinanced. Also people have to put 5-10% down in order to get this type of loan. People also have 4 options to choose from on the payment. the super low, interest only, a regular payment and one other.

I find it hard to believe people are going to lose their investment of 5-10% but it will not surprise me. One family member gets sick and poof there goes everything in these times.

[ecstatic]

44. I don't get it either-- are these surprised borrowers the same ones who

voted for Bush?

I bought in 2004 and yes, the ARMS were extremely tempting but even then it was obvious how quickly the economy was changing and it was also clear that the record low interest rates were not going to be around for long.

I'm angry as hell because my grandmother, who was able to get a fixed rate of 5.2%, was tricked into refinancing into an ARM and now her mortgage payments have skyrocketed.