Ah, So THIS is Why The Housing Market Is Crashing & Foreclosures are Up!

[The Cleaner]

I think I know exactly why foreclosures are increasing.

The other day, I saw a commercial on TV. It was for Quicken Loans, and they said you can get a $1000 mortgage for $499/month. I thought, what is that and how does that work? Such a low payment is tempting! So I call a rep to inquire, and boy was I surprised.

When asking about that specific mortgage loan, he told me it was a great program and would probably cut my costs in half in comparison to a fixed rate loan. Then I asked him if it was an adjustable rate mortgage (ARM) and he said yes. I asked him, "Isn't that a bit risky with all the foreclosures and everything?" He downplayed it and said, "you know, the news doesn't report that very accurately, they're alarmist about it. Your rate doesn't go skyrocketing up; it's incremental. It's really not as bad as they say, and ours is a great program."

Oh yeah? Then I read this over the weekend:

But there's a gamble involved, and ARM buyers can get burned as a result. With an ARM, your payments are lower for the first three or four years, and will stay low -- provided interest rates in general don't skyrocket. If they do, the lender typically will adjust your ARM rate upward by a maximum of 2 percentage points a year, and a max of 6 percent over the entire loan period.

An ARM that starts out at, say, 5.75 percent can increase to 7.75 percent in the second year, to 9.75 percent in the third year, and to 11.75 percent in the fourth year. Over that period your monthly payment would shoot up from $581 to $1,000.

http://tms.ecol.net/realestate/arm_v_fr.htm

And this:

Beware of Negative Amortization
Amortization takes place when payments are large enough to pay the interest due plus a portion of the principal.

Negative amortization occurs when payments do not cover the cost of interest. The unpaid amount is added back to the loan, where it generates even more interest debt. If this continues you could make many payments, but still owe more than you did at the beginning of the loan.

Negative amortization generally occurs when a loan has a payment cap that keeps monthly payments from covering the cost of interest.

http://homebuying.about.com/cs/mortgagearticles/a/mortgages_arm.htm

In researching ARMS, I found a vast complexity in terms of ARM types, what funds they are tied to, types of caps, amortization, and so forth. It is truly dizzying to the first-time homebuyer. The language is so confusing most homebuyers likely say, "ah what the heck, that's up to our broker to understand." But to their peril!

I never fully understood how people were getting into $500K-$1 Million homes which were just average family dwellings in typical neighborhoods. But now I have an idea. But my goodness, that's a hell of a lot of people sitting on a very, very risky investment! And these damn dishonest brokers are STILL pushing these risky loans without fully informing people of the risks! It's totally irresponsible.

Despite some financial institutions tightening their belts a bit, as you can see, this obfuscation still goes on. I think they should create regulations to FULLY inform each home buyer of ALL potential risks.

[Atman]

1. We used to have an ARM, and it always worked in our favor

They probably don't right them that way anymore, just for that reason! LOL! But our first mortgage was a 3-year adjustable. IOW, it was only reviews every three years. It could not rise or fall more than 2% per adjustment. It fell at least the full 2% with each adjustment period. And it had a cap that it could never rise more than 5% over the initial rate. As I said, we worked out well with ours, but it was twenty years ago. I feel badly for the people caught in this cycle, but crikees...anyone who has to rely so heavily on accounting gimmicks to get a loan probably shouldn't be getting the loan in the first place.

.

[The Cleaner]

7. So you think the fault lies with the homeowner?

Maybe a small part is the homeowner's fault. But from my experience, lenders are too eager to continue pumping out these risky loans w/out proper disclosure of risk. That's the problem I have with it.

As home prices skyrocketed, more companies had to offer "creative financing" to make it more affordable. But the result is far greater risk. I admit it is so tempting - and maybe it is partly the fault of homeowners for jumping the gun, not researching what an ARM is all about, and simply trusting the broker.

You got in on a good deal before all this creative financing nonsense.

One more point - I believe, correct me if I'm wrong, that ARMS provide a far greater profit margin for these companies. So no wonder they push them.

[Atman]

14. No, I didn't mean to imply that.

Heck, we got our ARM with only 5% down. When you're buying a home, it is such a major, major decision emotionally, and sometimes rational thinking goes out the window. This is what the lenders prayed upon, unfortunately. So, I'm not saying it is the homeowner's "fault," I suppose, any more than it is a car owner's "fault" for buying a car that gets crappy reviews, but they purchase anyway because they love the way it looks and they found someone to finance it. It's a combination. But basically, anyone should step back and take a breath for a moment if it turns out that all sorts of schemes and gimmicks are required to get you into a loan. That's pretty much always a warning sign that something isn't right, be it your ability to re-pay, or the lender being sleazy.

.

[The Cleaner]

20. I agree. And yes, it IS emotion-based it seems...

All this "you can get into a home today! It's exciting! The American Dream!" kind of talk really does serve to focus on the emotion side rather than the rational side. Yes - I guess the mortgage brokers really do know how to game the system and manipulate people into buying these homes based on an emotional, rather than prudent, decision.

[Double T]

2. Mortgages a criminal would be proud of............

ARMs are a disaster waiting to happen, from less than honorable lenders.

[The Cleaner]

8. Yeah - and my experience was with Quicken Loans -

supposedly an honest, trustworthy broker who brags about having a number of major corporate accounts!

:shrug:

[melm00se]

11. unless of course

Interest rates drop, then they are boon to the consumer

[The Cleaner]

12. If you bought a home in say, 1989 when rates were much higher,

yes, it would be a boon to you. The question is one of timing and prediction. Sure ARMs are great when the rates are at 16% and steadily falling. Now they're at what, 6% or so.

By the same logic ARMs would be a very poor choice when rates begin to rise. And that may happen very soon. So far they've kept the rates low, but for how long? that is the question.

Also when rates rise, bye bye using a home as an ATM refi machine.

[melm00se]

16. a big part of this

is that we are (and have been) sending people out into the world with absolutely no understanding of finances. So much so that many people can't even balance their own checkbooks (or know why that is even important).

I personally think that regardless of your educational track or goal, you shouldn't leave high school without a basic understanding of things like:

budgeting
credit (what it is, how it works and why paying back on time is important)
taxes
insurance
investing (long term and short term)
and the like...

[Raven]

3. One additional nasty aspect of this

is that some real estate brokers are working hand in glove with these lenders to bring buyers in. The re broker knows that the folks can't really afford the house but goes ahead anyway and pockets the re commission.

[Gormy Cuss]

18. That unholy marriage should be the first target of regulation.

RE people can always walk away once the sale is complete, yet some (not many, not all) will go to great lengths to convince people that they really can "afford" the house or condo.

[whistle]

4. ARMs and sub-prime loans are like casino gambling, the house always wins

....and it is not the borrowers house, it is ALWAYS the lender because interest rates are controlled by the Federal Reserve board which is made up of the major private banking corporation executives. It is the function of deliberate and deceptive lending practices better known as predatory capitalism and is going on all over the world.

<snip>
Predatory Capitalism
When Corporations Go Unregulated
PredatoryCapitalism.net
A Service Of LoveAllPeople.org
Rev. Bill McGinnis, Director
Unregulated profit-seeking corporations cannot be trusted to protect the Public, because their main objective is to make profits, not to be a do-gooder for the Public. Whenever profit-making conflicts with the Public interest, profit-making wins!
This is not a radical idea, but an obvious fact, if you think about it. Profit-seeking corporations exist to make a profit, and the more profit, the better. Anything which increases profits is good for them; and anything which decreases profits is bad. So they try to do whatever is necessary to make profits. This is the essence of Laissez-faire Capitalism: that profit-seeking corporations should be left alone to do whatever they choose to do in order to make profits.


Employees get paid to help the company make a profit, not to be a do-gooder for the general Public. Just suppose a local manager decided to give away $1,000,000 of the company's money to build a playground for the neighborhood children. "The kids need the playground!," he says. Unless this playgound were part of some co-ordinated Public Relations effort, intended ultimately to produce greater profit, the employee would probably be fired, and replaced by someone with a better profit-making attitude.

Suppose an auto manufacturer had some kind of a safety problem, perhaps gas tanks that sometimes exploded on impact. And suppose it would cost a hundred million dollars to fix the problem, but it would only cost ten million to let the problem continue, and pay off the victims who sued and won. What do you suppose the company would do? It would let the problem continue, of course! Deny that a problem exists, claim it was the user's fault, and pay off damages only when forced to do so. These kinds of decisions happen all the time. Why do you suppose the corporations are so eager to get "Tort Reform?" To limit their payoffs for damages, of course! So their profits aren't hurt so much! "To hell with the Public," they think. "They should be more careful!"

And if the Management of a profit-seeking corporation ever did choose the Public interest over a higher profit (unless it were forced to do so by some kind of government regulation), then that corporation would be violating its financial duty to its stockholders. And the stockholders would be entitled to replace the do-gooder Management with a profit-oriented Management.
<snip>

... An unregulated corporation is like a loose elephant in your neighborhood. Who can stop it from trampling over whatever it chooses?

1. NOT PAY TAXES -In order to maximize profits, they always seek to avoid or minimize their taxes.

2. ELIMINATE COMPETION -In order to maximize profits, they always seek to eliminate or control their competition.

3. CUT WAGES AND SALARIES - In order to maximize profits, they always seek to reduce their labor costs.

4. DISREGARD THE ENVIRONMENT - In order to maximize profits, they always seek to avoid all environmental restraints.

5. SELL DANGEROUS, HARMFUL PRODUCTS - In order to maximize profits, they are tempted to sell dangerous or harmful products. <more>

http://www.loveallpeople.org/predatorycapitalism.html

<snip>
Taming Global Capitalism Anew
by JOSEPH E. STIGLITZ, THEA LEE, WILL HUTTON, JAMES K. GALBRAITH, JEFF FAUX, JOEL ROGERS, MARCELLUS ANDREWS & JANE D'ARISTA




One of the greatest achievements of the twentieth century was a social contract that provided far more economic security and prosperity for working Americans than had existed in any previous period. But successive waves of changes in the world economy, together with the ascendancy of a strain of economic philosophy that puts the freedom of capital above the interests of society, have placed enormous strain on the postwar social contracts of all Western countries, resulting in stagnating wages, greater insecurity and levels of income and wealth inequality not seen since the early 1900s. And even more far-reaching challenges arising from the current pattern of globalization, with its emphasis on the outsourcing of service as well as manufacturing jobs, may lie ahead.

Developing a strategy for taming global capitalism anew therefore constitutes the overriding challenge of our time. For that reason, we have invited some of the leading progressive thinkers in this country and a longtime observer of the American economy to offer their ideas on how the United States, as the major capitalist country and the major player in globalization, could reshape both capitalism and globalization in ways that build a new social contract serving the needs of working people everywhere.
--The Editors


A Progressive Response to Globalization

JOSEPH E. STIGLITZ

Globalization is often viewed as posing a major threat to "capitalism with a human face." Trade liberalization puts downward pressure on unskilled wages (and increasingly even skilled wages), increasing inequality in more developed countries. Countries trying to compete are repeatedly told to increase labor-market flexibility, code words for lowering the minimum wage and weakening worker protections. Competition for business puts pressure to reduce taxes on corporate income and on capital more generally, decreasing funds available for supporting basic investments in people and the safety net. And international agreements, such as Chapter 11 of NAFTA and the intellectual property provisions of the Uruguay Round of trade talks, have been used to short-circuit national democratic processes.

Yet Sweden and the other Scandinavian countries have shown that there is an alternative way to cope with globalization. These countries are highly integrated into the global economy; but they are highly successful economies that still provide strong social protections and make high levels of investments in people. They have been successful in part because of these policies, not in spite of them. Full employment and strong safety nets enable individuals to undertake more risk (with the commensurate high rewards) without unduly worrying about the downside of failure. These countries have not abandoned the welfare state but have fine-tuned it to meet globalization's new demands. We should do the same.
<more>

http://www.thenation.com/docprint.mhtml?i=20060417&s=forum

[OmmmSweetOmmm]

5. I would like to know the percent of foreclosures that are due to the war. Reservists and Guard

members who had to leave their employment, with families, mortgages and car payments that they can't afford to pay for?

[Autumn Colors]

6. I'm in the process of buying a house right now

because my husband and I are divorcing. It's all amicable, so I have no need to rush into something so risky.

I've been reading everything I can get my hands on about these subprime lenders failing and foreclosures about to skyrocket.

We had our previous mortgage through a local bank. Never was assigned, we were always on time.

Of course, now I'm applying based on my own (self-employed) income and credit record. Our banker is great and I had a long talk with him about the above trend and he said he was really relieved that their bank didn't dabble in that kind of risky lending at all.

I'm taking my time and following the advice of our banker before submitting my application so that I'll meet all the qualifications for our bank to keep my mortgage and not assign it elsewhere. (The bank's webpage actually states that they do mortgages where they will promise to service your loan for the life of the mortgage.) He's given me guidelines from day one on how much I can afford and what my price cap should be for a house. I found a really great one.

We just watched friends of ours go through a foreclosure. Typical of all of these articles, they borrowed on the equity and then home values took a nosedive. They got into financial straits (the husband started businesses that failed) and couldn't refinance again because the house was worth less than they owed on the mortgage. So now they lost their home and filing for bankruptcy (and divorce).

I don't even want to imagine how many other families are going through this - due to sudden illness and no health insurance or other reasons.

So the bottom line is ... never, ever, ever go with anything but a fixed rate mortgage. If the payments are too high for you with that type of mortgage, then you need to set your sights lower or not buy until you can afford the payments.

[The Cleaner]

9. Excellent advice!

So the bottom line is ... never, ever, ever go with anything but a fixed rate mortgage. If the payments are too high for you with that type of mortgage, then you need to set your sights lower or not buy until you can afford the payments.


:)

[stirlingsliver]

10. ALWAYS Remember This:

ALWAYS remember this when trying to get ANY type of loan -- but especially a mortgage:

The person or institution trying to lend you money is out to make as much money as they can -- despite what they tell you about how they want to "help" you.

They want to make as much money as they can.

And, in most cases, if you do not ask, they will not tell.

Which means --- ASK, ASK, ASK.

If you don't understand something -- ASK -- and keep asking until you get a straight answer that you can understand.

They want to make as much money as they can.

Make them put it in writing.

And if you don't understand the writing, ASK -- and keep asking until you get an answer -- in writing -- that YOU understand.

Because they want to make as much money as they can.

[The Cleaner]

26. Do they want to make as money as they can?

:rofl:

Good advice though :)

[stirlingsliver]

33. Yes They Do.

The reason I kept repeating it is that the phrase "They want to make as much money as they can" should be repeated over and over -- like a mantra - by anyone who is talking to a bank or other lending institution about a loan or a mortgage.

Because the bank or other lending institution will keep telling you that they are really just looking out for you.

And that is bullshit.

They want to make as much money as they can -- and so they will do ANYTHING they can to screw you when loaning you money.

[Ezlivin]

13. "$1000 mortgage for $499/month" - ???????

What kind of house can you get for $1000?

Certainly you mean $100,000.

[The Cleaner]

17. no, they said "A $1000 per month mortgage will cost you

only $499/month."

*per month*

So in other words a risky ARM with a "teaser rate" to lock you in. Then one day you get a whopper of a rate increase and you can't pay it, and you're trapped in that home. That's the reason for all the foreclosures IMHO.

[EST]

15. There is also the fact that new mortgages, rather than

being held by the lending institution or its holding company, are bundled and sold as securities or shares of securities. Since the lender gets its money up front and does not suffer as much exposure, there is little incentive to do a thorough job of vetting the borrowers. To the contrary, at each stage of the process, from the hame purchase to the final sales and management of the securities, there are fees charged-even when the borrower is a lousy credit risk.

Since the money is being made, not on interest and the original processing fees, but on the packaging, repackaging, sale and resale of the resulting financial construction, the dollars are in the numbers.

Even though the final package may consist of, say, a thousand loans that all may go sour, there is more money changing hands, for more manipulators than the actual mortgages could ever generate as interest, or ever will, for that matter.

There is no need that the borrowers be well qualified, just be there in large numbers and the magic of republiclown credit goes to work, ripping money off from less well heeled hopefuls, from mortgage buyers to stock dabblers, to breathtakingly greedy manipulators.
Theft on a grand scale.

At the congressional hearing on this crooked business, the big wheels and regulators stayed true to form and on talking point, assuring credulous, gullible legislators, at least appearing to be concerned for their disgruntled supplicants, that things weren't getting as bad as it might appear or that the troubles were easing off or getting marginally better.

Those legislators, tasked with getting to the bottom of it all, were obviously primarily interested in being told the lies they wanted to hear, anxious to wash their hands of it all but still appear to be actually doing something.

According to the purveyors of this ponzi scheme, there is approximately 1.3 trillion dollars worth of paper that is somewhere in the feet-in-the-air pipeline, from late pays/no pays to foreclosure and repossession. When that amount of money, and, no doubt much, much more coming, is withdrawn form the market place, the effects on the economy will be devastating, causing the collapse of many, many enterprises and the resultant loss of jobs, with more homeless, more emphasis or multi-family rental property and a massive glut of private, deteriorating junk boxes.

Lets face it--the coming destruction of society will prove, once again, that republickers are incapable of handling any large, multi-phase operation of any sort, except, perhaps, for large ripoff mega churches. Ill informed, ideological idiots will still insist that their "conservative" heroes are the only hope for survival.
Anger and frustration abound.

[Solo_in_MD]

19. Housing sales jumped up 4% in the last report (heard it on Friday)

largest month to month increase in some time. However, it does not and could not state why

[Chimichurri]

22. "Sales of new homes unexpectedly dropped in February

to the lowest level seen in nearly seven years, while inventories of unsold homes rose to a 16-year high, suggesting that the nation's housing market was softening heading into the vital spring buying season."
http://www.marketwatch.com/news/story/us-sales-new-homes-fall/story.aspx?guid=%7BA1D8CD82%2D1EB9%2D4E46%2DBDF5%2DDB0BA246F1DE%7D

[The Cleaner]

24. It's clearly teetering...and that is exactly what bubble crashes do.

It never crashes all at once, there are drops, pickups when prices are lower, more drops, more drops, a pickup or two, then the bottom really falls out.

Happened in 1929, 2000, and will happen again, with housing this time.

[kwassa]

31. Define "bubble"

The image of a bubble bursting comes to mind, and what you just described doesn't sound anything like a bubble bursting.

It sounds more like you are trying to tailor the events occuring in real estate to your belief that it is a bubble.

Personally, I don't see the evidence of any bubble . The market has definitely cooled, depending on what market you are in, as there is some variance by geographic location. Some areas are far worse than others, others are declining slightly or increasing slightly.

I don't think the sky is falling.

[Rockholm]

36. The sky is NOT falling.

Thank you for a sensible response to this post. I was rather surprised that a whole week had gone by without a "housing bubble" thread.
Look, depending on WHERE YOU LIVE the real estate market is DIFFERENT. These national posts do not work with real estate. Even the MSM can't get real estate correct. One one hand CNN touts gloom & doom bubble crap all the time, but then has links to Money Magazine where they show various markets. Guess what, Boston (where I live) and San Francisco, 2 markets that the media loves to tout as a bust market, are "bubble proof" markets. Why? Because we have high salaries and high demand for good jobs.
I was just in Dallas and the amount of overbuilding is very similar to when I went to college in Houston in the 1980's. A down cycle is certainly headed there.
Sure, the real estate market has cooled. Sellers are adjusting to the market, therefore prices have dropped. Inventory where I am has dropped. The law of supply and demand would dictate that prices will go back up. Real estate prices always do.

[kwassa]

32. Sales of existing U.S. homes rose about 4%

same article.

"Last Friday, the National Association of Realtors reported that sales of existing U.S. homes rose about 4% to a seasonally adjusted annual rate of 6.69 million in February, the third increase in a row. Inventories of existing homes continued to climb. "

[The Cleaner]

23. Yeah, I heard that too!

In fact, I think it was yesterday, they had a "realtor" lady doing a puff piece on Today Show. She actually implied the market was booming again, prices were going up, and that if you wanted to buy at the market low, YOU MISSED THE WINDOW a few months ago!!
:puffpiece:
:rofl:

[kwassa]

34. Here is a full report on the rise

http://www.marketwatch.com/News/Story/existing-home-sales-rise-39-february/story.aspx?guid=%7B8B345C8E%2D335A%2D4977%2D8344%2D2E867AEB2750%7D

Existing-home sales rise 3.9% in February
Inventories rise 5.9%, most in nearly a year

WASHINGTON (MarketWatch) -- Boosted by warm weather earlier in the winter, sales of existing homes unexpectedly rose 3.9% in February, reaching a seasonally adjusted annual rate of 6.69 million units, the National Association of Realtors reported Friday.

The sales pace is the highest since April.

Inventories of unsold homes rose 5.9% to 3.75 million, representing a 6.7-month supply, up from 6.6 months in January. It's the largest rise in inventories since April, but since inventories are not seasonally adjusted, comparisons are difficult.

(jump)

With the February results, existing-home sales have risen three months in a row for the first time in three years. Still, sales are down 3.6% compared with a year ago, the NAR said.

(jump)

Sales rose by 14.2% in the Northeast, by 3.9% in the Midwest and by 1.6% in the South. Sales were flat in the West.

[matcom]

21. Neg Am Is NOT The Same As An ARM

:eyes:

[sandnsea]

25. People can build credit

and then transfer to a fixed. A few years ago they used these ARM's to give 100% mortgages to people who wouldn't have qualified otherwise. It's worked out well for my newly married kids. They just locked in a fixed rate this month after playing the ARM game for 3 years. Lots of relief, all the way around. I still think they're a predatory scheme though. A lot of people won't understand what they're getting into.

[The Cleaner]

27. Hard to build credit when you have to foreclose!

I understand what you are saying though. :)

[sandnsea]

28. They were very fortunate

We live in a town that California retirees will be coming to for a long time. I figured their property value would go up and they'd be able to roll their mortgage, although I still advised them not to get into it. Very risky. Anyway, as long as there are boomers retiring, I'm not worried about my kids living here. Other parts of the country, I'd have been on pins and needles.

[Odin2005]

29. Adjustable Rate Mortgages should be banned.

[Rosemary2205]

30. I don't agree

I do think the terms need to be clarified to the buyer much better AND I think the approval requirements for the loan should be based on worst case rates and not best case rates. No one should be approved that can't show an ability to make the payment based on the maximum the interest will ever be.

These loans are useful when used carefully. Someone who moves often due to job transfers, someone fixing up and older home and planning to sell it soon, private investors etc etc. The problem is these loans are being marketed to people who plan to stay in the home for a longer period of time.

Even negative amortization has it's uses when used carefully. Unfortunately the banks are not on the side of educating the consumer when using these products.

[NewJeffCT]

35. Most ARMS are locked at the original rate for a time period of several years

Typically, 5 years. The other more common types of ARMS are 3 year and 7 year. So, that means the rate will not change for at least the first 5 years (or 3 or 7 years). It will likely also have a cap of X% over the life of the loan, so a 5 year ARM at 5% will not be able to go over (say) 11%, which would be 6 percent. And, ARMS typically only adjust once per year, or every other year.

If you know you are going to be moving within that 5 year period, an ARM can be a great way to save money. That said, if the rate for an ARM is close to the rate of a fixed loan, go with the fixed loan.

We had done a refinance to a 5/1 ARM several years back that was amortized over 15 years - my wife was pregnant, and we knew we would eventually move by the time my then unborn child started school because my wife wanted to be in a town with excellent schools. We ended up paying down a lot more principal with basically the same payment because of the short amortization schedule and lower rate.