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Here is quite an amazing article, on the cover of BusinessWeek
Its a bit lengthy but for those of you in high appreciation parts of the country the past few years (and even for those in not so hot areas) it is amazing to see the lengths people have been going to get into homes... and scary to see how it all turns out next few years
I have to say it’s hard to feel sorry for someone who had a fixed rate at 5.25% and they refinanced for an ARM. What a DA! If you don’t read what you sign then too bad if things don’t turn out well.
As they said it’s a relatively low amount of loans that are effected and based on the people that they interviewed they are all over the US.
I would be more concerned if I owned a home where a high percentage of my neighbors had those loans.
I have to say it’s hard to feel sorry for someone who had a fixed rate at 5.25% and they refinanced for an ARM. What a DA! If you don’t read what you sign then too bad if things don’t turn out well.
As they said it’s a relatively low amount of loans that are effected and based on the people that they interviewed they are all over the US.
I would be more concerned if I owned a home where a high percentage of my neighbors had those loans.
It is not a low # - up from "nil" in 2003 to over 1 in every 10 loans in the US this year??
1.3 million homeowners took out these loans in 2004 and 2005?
This basically correlates with the fact that housing values are not in line with incomes in much of the country. Even in West Virginia where there was no housing boom people are unable to afford the home prices that are going up (or their incomes are shrinking) hence even in West Virginia 51% of new loans are of this very risky variety.
"But the best available estimates show that option ARMs have soared in popularity. They accounted for as little as 0.5% of all mortgages written in 2003, but that shot up to at least 12.3% through the first five months of this year, according to FirstAmerican LoanPerformance, an industry tracker"
" And while they made up at least 40% of mortgages in Salinas, Calif., and 26% in Naples, Fla., they're not just found in overheated coastal markets: Through Mar. 31 of this year, at least 51% of mortgages in West Virginia and 26% in Wyoming were option ARMs."
"Stock and bond analysts estimate that as many as 1.3 million borrowers took out as much as $389 billion in option ARMs in 2004 and 2005. And it's not letting up. Despite the housing slump, option ARMs totaling $77.2 billion were written in the second quarter of this year, according to investment bank Keefe, Bruyette & Woods Inc."
You either have to be a subscriber, or this story has expired.
What was the gist of it?
It is a brand new story.
I am not sure you need to be a subscriber - I am at the public library and just cut and paste this url into the computer here in the computer lab and it works.
Anyhow the gist is there is a mortage I had not even heard of, its the next exotic thing after interest only loans... I guess not enough people could buy homes with interest only loans (and prop up the bubble!) so they had to go to something called "option adjustable rate mortgage" and they have shot up in popularity and now make up about 12% of new loans nationwide as of last quarter (again I had never even heard of them until this story)
Mortgage brokers are egged on to sell them because they get a higher commission than other loans, banks are cool with them because they have the house as collateral but people are not reading the fine print and many of these jump literally in 1 year from the entry level low APR to 7%+ (if you pay the minimum) And if you pay only the minimum not only do you not pay any principal (as an interest only loan) but ADDITIONAL principal is actually tacked ONTO your total loan amount each month (so you get farther and farther behind on the principal) ... so they say already 20% of people in these loans taken out in 2004 and 2005 are upside down. And of course there are huge ($15K cited in this story) fees to get out of these loans and go back to a convential. Quite a racket. I just was surprised it was so widespread.
From the story:
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.
Amazing. I know so many people who are over-financed. A couple of them have ARMs. At least one is facing losing the home becuase the LTV is upside down and can't be refinanced. One is trying to do a short sell in a dead market.
I have always stuck with 1.5 times gross income = mortgage. I sold last year and paid cash for a house. I hope to never have a mortgage again.
...This basically correlates with the fact that housing values are not in line with incomes in much of the country. Even in WV, where there was no housing boom, people are unable to afford the home prices that are going up (or their incomes are shrinking) hence even in WV 51% of new loans are of this very risky variety....
The link to the story worked for me, thanks. The reader comments at the end of that story are also worth reading
We could see this President (Bush 43) saddled with a financial crisis similar or worse than the S&L scandal during the administration of his father (Bush 41). As a nation we keep having these ridiculous situations, where some people walk away with tons of money and the rest of us end up holding the bag, as we did in the Federal bailout of the S&L industry in Bush-41.
Where are the regulators that are our watchdogs, charged with preventing destructive practices or dangers to the banking system?
Its the banks fault for cheating people with ARM morgages. Now they are stuck forclosing thousands of houses and will take a loss reselling those. The people who took the ARM morgage lose all equity and payments. Its a lose-lose
It's the home owner's fault. They willingly entered into a mortgage. If they didn't understand the ramifications of interest rate changes, then they should not have signed the contract.
Quote:
Originally Posted by Need_affordable_home
Its the banks fault for cheating people with ARM morgages. Now they are stuck forclosing thousands of houses and will take a loss reselling those. The people who took the ARM morgage lose all equity and payments. Its a lose-lose
Its the banks fault for cheating people with ARM morgages. Now they are stuck forclosing thousands of houses and will take a loss reselling those. The people who took the ARM morgage lose all equity and payments. Its a lose-lose
The banks dont lose much - they make a lot of income in the short run and even if house forecloses they have a 'real asset'
The big losers are individuals. While I do agree people are responsible for themselves (as some posters have said), in a country where 40% of people could not name the Vice President, and there is not even a basic finance course taught in high school (i.e. balance a checkbook, what is a 401k?) I am not surprised at this and while I am not a huge fan of regulation, many times we need to be saved from ourselves. The "great masses" out there generally fall for whatver a salesman will tell them, (in this case salesman being mortgage broker) I mean what rationale person would give up a 30 year 5.25% loan for a 1 year 1.5% that jumps to 7%+ AND tacks on principal each month you pay the minimum required? Not many. But again you are relying on people to do the homework, and most people are just financially illiterate (if not most, than MANY). Same crisis is happening as we move away from pensions to 401ks. These same people who can't read a mortage document now have to make decisions about their future 35 years out? A popular trusim is people spend more time researching their future purchase of a refridgerator than their 401k choices.
Anyhow, point being - banks will make out ok - they retain an asset. yes people are crazy to be buying homes they cannot afford, but the 'industry' is not blameless either and there needs to be something SIMPLE that is a de facto standard across the entire industry, much like you get on the back of credit card offers.
Here is what you pay in year 1 and your APR that year:
Here is what you pay in year 2 and your APR that year:
all the way thruogh year 30
That is a simple solution but one that won't go into effect because its too simple and too fair and leaves out all these loopholes and 'fine print' that reduce chances for big gains for corporate america. America, run by the corporations for the corporations...
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