Pardon my ignorance, but what is a balloon? What is a "higher-payment point"?
Are you saying that banks in SoCal were making home mortgages with non-constant monthly payments, i.e. monthly mortgage payments that increased over time?
Yikes. Not where you'd want to be in a tight market [as the homeowner/mortgage payer], if, say, you unexpectedly lost your job...
" Yikes. Not where you'd want to be in a tight market [as the homeowner/mortgage payer], if, say, you unexpectedly lost your job... "
Ignorance??
Looks to me like you're got a pretty good grasp of the situation... ;~)
(And, yes -- remember all those tv ads a few years ago for big mortgages with 'affordable' payments? Low-payment-now with increased-payments-over-time is exactly what they were selling...)
Pretty much.
Negative-amortization loans. The payment doesn't even cover the interest at first, but increases for 5 years, then BAM you start paying principal and the payment doubles.
These loans have existed for years but only in specialty markets. The idea was that the borrower could still afford a traditional payment but wanted a temporary respite to invest the money elsewhere or something. But when Joe Six-Pack was using these loans as the ONLY WAY they could afford the house, it's a problem.
Well, that's the whole con game being discussed here - people have been getting mortgages with artificially low monthly payments in the first 2-5 years, that "reset" to a higher repayment rate later. It's a way for mortgage companies to keep getting an ever-dwindling supply of new buyers into ever more expensive homes. The idea is that these buyers would refinance later, before the reset or ballon payment was due, or that they would sell the house with a nice equity gain before that time ever came. The other implicit assumption by the lender (almost never borne out in reality) is that the buyer's income would magically go up enough to cover the doubled monthly payments.
It looks like a good gamble if you believe house prices will keep inflating 20% a year, forever, or if you fall for the realtor/lender scare tactics such as: "This could be your last chance to own!!!"
For example...a $90k balloon loan for thirty years at 10% would have a monthly payment of @ $750 whereas the same loan for 15 years might have a monthly payment of @ $1,200. The buyer takes the thirty year to get the lower payment but must pay-off all the loan in payment number 181. That outstanding amount would be @ $78k.
The buyer is gambling that he will be able to refinance the $78k at a lower rate. If he can't he is screwed.
It's not necessarily banks, but those loans have been the main driver of prices here over the last three years. Option ARMs, negative amortization, 100 percent financing, no doc loans.