Sweet Mortgage Deals Turning Sour

The Press Democrat (Santa Rosa/ Sonoma) ^ | 9/23/2006 | Michael Coit

[Dems_R_Losers]

Exactly. Plus, lenders will come up with ways to help people out who get really stuck. It's in their interest to do so. It's absurd to think that the mortgage industry is just going to call thousands of these loans at once, or even to enforce prepayment penalties when the alternative is having the homeowner walk away and throw the keys at them.

Lenders know most of these loans will be refinanced. They just can't say so in public.

[operation clinton cleanup]

When you are renting and cannot afford a hefty increase in the monthly cost of the rent, when you walk away from the deal, you don't lose a down payment totalling 20% of the price of the house.

Exactly.

[Flying Circus]

Otherwise known as the "Bigger Fool" theory. Strangely while people around here recognize there is a correction going on- with multiple "open house" signs on every corner it is kinda hard to deny something is going on- they still don't think it will be a big correction and will recover within a year. People here are still convinced that RE is the best investment going. Of course these are also the same people who lament the hundreds of thousands of dollars of personal worth they saw evaporate in the dot-com bust.

[GSlob]

"this editorial ... takes the position (like many naysaying posters) that option ARMs are useful tools."
Well, for those who know what they are doing, option ARMs [and everything else, as long as they know what they are doing] are, or could be, useful tools. The problem is not with option ARMs per se, but with those who took them on crossed fingers and a prayer:
"she said. “This is all just cross our fingers and hope it works.”"

[Polybius]

So... If you have a $300,000 loan And that represents 40% of the property value in an area that's seeing huge ups in the market would it not make sense to get a 10 year interest only loan because your payment is fully tax deductible (as opposed to renting) and in 10 years (at 3% inflation) your loan principal is 1/3 less than it was when you started. Why exactly is this a bad thing?

Because "trees don't grow to the sky" and these house prices are now getting to the point where buyers can barely afford the monthly payment during the "interest-only" grave period. So, your choice is either to refinance at a fixed term you can't afford or cough up the remaining principal in cash or lose your down payment.

Even if you have the cash in the bank, the "interest only" loans hurt you because you had to bid against burger flippers at McDonald's who could afford (temporarily) to borrow $500,000 with the interest-only loan gimmicks. That easy money has the effect of inflating the true market value of the house

If you have purchased a property at a non-inflated price and can pay the pricipal off in cash whenever you want, then interst-only loans are just a cash flow management tool.

[flyingtabby]

Real estate doesn't ALWAYS go up. And right now, in some parts of the country, it's going down a bit, having been over-inflated! In any event, many of these mortgages are ONLY ok when they are given to qualified buyers - not people who are attempting to buy beyond their means. The mortgage industry, and for that matter, banks, need to clean up their acts. There is WAY too much loose, easy credit around. Personal debt/income ratios are nothing short of ridiculous, and coupled with the negative savings rate we currently have, I am surprised foreclosures aren't considerably higher.

[flyingtabby]

BINGO!!!!!!! GREAT FINANCIAL MOVE!!!!!!!! Everyone else should be so savvy!

[quienyo]

The question then is, did the outrageous price of a house drive the move to interest only loans and other "creative" financing, or did interest only loans lead to the outrageous price for a a house?

Are rental rates as out of whack as home prices, or is that a possible route for those who so choose?

[Petronski]

...that option ARMs are useful tools.

You're just jealous because you're such a useless tool.

[Flying Circus]

Rental rate are high here... however the financing expenses and property taxes still make buying between 1.5 and 2x more expensive per month that renting even when allowing for tax deductions. A houses that would sell for $600-750K can be rented for $1600-1900/month.

The housing market is overrun with speculators here. The only way you can justify the large difference between rents and property values is speculating that the market continues the recent years' trajectory of double digit increases something that is not sustainable in a rational market. In this boom it is notable that rents have remained flat while RE is skyrocketed.

[GodGunsGuts]

I'll ask you the same question. What do the banks do with the extra money when the loan resets, Toddsterpatriot?

[Toddsterpatriot]

What do the banks do with the extra money when the loan resets, Toddsterpatriot?

The banks have higher earnings, more money available for new loans, more money available for salaries and dividends.

The higher payments mean less money for those consumers to spend, but the money does not disappear. The new owners of the money will also benefit the economy.

[GodGunsGuts]

So if the loans never reset, the banks would have the same amount of money as before?

[ninonitti]

This is Hugh!!!!! I'm stuned!!!!!!

[Toddsterpatriot]

Huh? If the banks get more money, they'll have more money. Is it really that difficult for you to understand?

[wireman]

So it's Bush's fault they financed a house they couldn't afford?

Absolutely!!! EVERYTHING is Bush's fault!!!

[wireman]

You're just jealous because you're such a useless tool.

Ouch!

[GodGunsGuts]

So banks are fee to reset rates at whatever rates they please?

[Toddsterpatriot]

So banks are fee to reset rates at whatever rates they please?

Yes, absolutely. If you have a 6% fixed rate mortgage, the bank can hike your rate to 9%. LOL!

Go back and read the original post I responded to and maybe you will understand my point.

[dfwgator]

Well < DING DONG > it's the Piper at the door, and it's time to pay the man.

Of course, the taxpayers probably are going to end up being the ones footing the bill.