Posted on 06/10/2005 10:25:42 PM PDT by ex-Texan
WASHINGTON, June 10 (Reuters) - Federal Reserve Chairman Alan Greenspan this week added to a chorus of worry about the growth of home loans seen as far riskier than the 30-year mortgage that has been U.S. housing's bedrock for decades.
Those alternatives, called "exotic" by the Fed chief on Thursday, have played a big role in sustaining the four-year housing boom by making homes more affordable, which in turn stoked demand and drove prices higher and higher.
But these hundreds of alternative mortgage products have also injected more risk into the market -- both for lenders and borrowers, according to regulators and some analysts.
Of most concern are loans that require little downpayment and delay big principal payments, leaving homeowners highly leveraged for longer just as rates appear poised to rise.
"The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other relatively exotic forms of adjustable-rate mortgages are developments of particular concern," Greenspan told Congress.
He's not alone.
Banking regulators have been raising red flags over the past weeks, warning the lenders they supervise that competition to win borrowers must not compromise lending standards.
Donald Powell, chairman of the Federal Deposit Insurance Corp., which supervises banks and insures deposits, this week said more than 30 percent of all home loans in 2004 were "nontraditional," or anything other than a 30-year, fixed-rate fully amortizing mortgage.
"There are some signs in certain markets that banks have been aggressive and liberal in their underwriting," he said.
Fed Governor Susan Bies on Tuesday said the United States has developed "an aggressive lending culture" on home mortgages that is veering toward unsound practices in some communities.
JAWBONING THE MARKET
Some economists and analysts said Greenspan is trying to talk the market down just in case the housing sector boom turns out to be more bubble than localized "froth."
"I think there is a certain amount of frustration that the Fed's got," said Carl Steidtmann, chief economist of Deloitte Research. "They keep pushing up interest rates and mortgage rates keep going down."
But not everyone is as worried as regulators appear to be.
Adjustable-rate mortgages, and even interest-only mortgages, are the right product for certain borrowers, according to analysts and economists.
"I don't want to throw cold water on it and say, 'Oh this is a terrible product,'" said Frank Nothaft, chief economist at mortgage finance company Freddie Mac (FRE.N: Quote, Profile, Research) . "For some people it is perfectly the right product."
Greenspan's goal, Nothaft said, is to remind consumers that prices are not likely to keep climbing at rates topping 10 percent, as they have in recent years.
And as the FDIC's Powell said, homeowners do not want to get "upside-down" and owe more on the loan after five years than they did when they first took it out.
"It's to remind consumers that bad things can happen to good people," Nothaft said.
With low interest rates driving home prices ever upward, home buyers are being pressured to spend more every day. In some markets, they may leap to purchase homes beyond their ability to afford. They are encouraged to do so by mortgage brokers and lenders. Lenders are being pressured to make such loans. Why? Because the U.S. housing boom means the home may be worth more next year and the next. As long as home prices keep going up.
Some simple things to review: In a $ 100,000 mortgage at 6% interest the buyer will make a payment of $ 600 per month. Only about $ 95 paid against principal. At 4.8%, the total payment is reduced to $ 518.49 a month but only about $ 75 is paid against principal. (The 30 year mortgage at 4.8% is really an annual quoted rate of .391% for 360 months).
What does this means to you? When paying off your mortgage, the amount of your mortgage payments depends on the frequency of your payments. So, if you are able to make biweekly payments instead of monthly, not only do you shorten the length of your mortgage period, but you also, in the long run, reduce the amount of interest you have to pay. Understanding the Structure of mortgage payments.
An alternative strategy is to pay an additional $ 100 each month against principal. Thus reducing your loan balance quicker than the bank anticipated. By following this strategy, you may easily pay off your 30 year loan in only 20 years. Or even quicker.
But who is buying homes for only $ 100,000 today? Most people are buying far more home than they can afford, in other words, paying $ 200,000 for a home that would have been on the market for half that sum only five years ago. Which really means that many people are tying themselves into a form of voluntary "debt slavery."
That means we'll have a continued housing boom for at least 5 more years.
Greenspan was screaming about "irrational exuberance" in the stock market in 1995-6, and we had a market going straight up until 2000, before he finally was able to kill it, with his unrelenting interest rate increases, fighting a nonexistent inflation.
I guess he will continue to raise interest rates, even if he has to raise them to 10%, until he crashes the housing market too.
Sorry. My Bad ! My error: "annual quoted rate" should have been "monthly quoted rate."
Can you say upside down loans... I knew you could.
Watch for tens of thousands of them to surface in a region near you.
This housing boom is gonna bust pretty soon. It will get very ugly.
Makes me glad me and my wife got our home paid for.
more than 30 percent of all home loans in 2004 were "nontraditional," or anything other than a 30-year, fixed-rate fully amortizing mortgage.Yea, some people I know are going for 15 yr loans to pay them off sooner...
There is nothing right about the United States to Reuters since that fascist Bush seized power. So let them try and talk the housing market down it hasn't worked with the Economy as a whole so try this. So predictable.
Organized criminal activity in the mortgage industry.
They use exotic loan schemes to lure home owners into loans that are designed so they cannot be paid off! Most are refinance schemes that sound too good to be true. Or what about a loan refinanced by a banks that have taken over by the mob? It happens every day!
First, the victim learns that the address he must send his payments to has changed. He is notified 60 days after he had sent his payments to the wrong adress. Then, he learns that he is 60 days behind in his mortgage. Next he learns that he owes two months payments, plus penalties, plus additonal costs, plus interest payments! In most states, he will then be only 30 days away from foreclosure.
How many people can raise two months payments owed to the take-over bank, Bank # 2 (especially when Bank # 1 has deposited both payment checks already and has processed his payment into a dead account) plus these additional default penalties? Not very many . . .
In the meantime, the victim's credit has been ruined. No fault of the victim, but he is shown on credit reporting agencies as a deadbeat. Er, uh, where is he going to go for new financing then? He is sh*t out of luck!
I could go on and on about these nasty foreclosure schemes. They are rampant in Portland, Or. and everywhere else on the left coast. The FBI will not even open a file on them. These schemes fly under the radar. The Mafia banks involved in them buy and sell mortgages in bulk on Wall Street.
Too BIG for the White House to take on. 'Nuff said here.
You think the housing bubble is a media conspiracy?
It is worse than you can imagine.
Those schemes are a function of increasing prices. Once home values start to fall, you'll be seeing different scams. Banks and lenders will be begging people not to walk away from their homes.
The owner challenges the collection in court, presents the facts and the mob can't collect.
At least in CA the judges look for this kind of crap.
Most state have similar file closure procedures. In this state, you cannot get a case removed to the trial docket by filing a separate case against the Mafia controlled bank.
There is no way in hell. The victim is sh*t out of luck.
The foreclosure will take place regardless of the obvious fraud involved. In the meantime, the victim has no way legally to raise money to pay for legal fees to fight the mob bank. The victim is sh*t out of luck again.
The Oregon State Bar is corrupt. The entire court system is corrupt. Everybody is sh*t out of luck.
I'm surprised some groups haven't been suing the pants off of Oregon over this.
The whole state is utterly vile. The City of Portland has decided to elect itself as a "Sacrifice Zone". Just let it be. I say, "Let it be, let it be, let it be."
George W. Bush, the FBI, and the Justice Department are thinking as I do now. "What happens, just happens." Time to move on. Oregon will soon vanish into the sunset for all I care now.
But I'm just a geezer living in the Peoples' Home Grown Hell of Portland.
America has shifted to a highly mobile society, fewer people living near urban job centers plan on staying at one job or even one home for more than ten years.
They keep talking about the "housing bubble" here in FL. I'm sure that is accurate in some cases, but I live in a fairly busy suburban central FL area, and you can still pick up a 3 bedroom for $140,000. So what if 3 years ago it went for $70 grand?
It's still way below what it costs in other areas. I think we are just playing catch up here. I don't see it busting in this area.
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