Ping!
Gee, announce a policy that if you don't pay there will be no immediate consequences, coupled with an unfounded belief that "Obama gonna pay my mortgage" ... what could possibly go wrong???
Here's how it works. You borrow the money for the house (and you may not even be asked for full documentation..how 'bout that?). The bank figures out the full monthly payment, let's say $1500 per month. But, you won't have to pay the full monthly amount if you choose not to. You can pay only $500 if you wish. The bank will then take the $1000 you're short and attach it back to the principle amount. So you make a minimum payment (just like a credit card) and your balance keeps increasing. So far so good. Except for that clause about "negative amortization." When the principle grows to a set amount, normally between 110%-125% of the original amount, the mortgage will "recast" (a bankers term) to a higher monthly payment that could be as much as 65% above the full monthly payment. Such a deal!
These “pay option” adjustable-rate mortgages gave borrowers a choice of payments each month. They also carried a feature that came as a nasty surprise to some borrowers, called "negative amortization." If the homeowner opted to pay less than the full monthly amount, the difference was tacked onto the principal. When the loan automatically “recasted” in five or 10 years, the owner would be locked into a new, much higher, set monthly payment.
I don't get it, what is the problem?
Outside of our system crashing totally, I won't lose my home.
Perhaps I just don't see the light....
Snippet from today’s Daily Reckoning:
“Last night following the Ravens/Steelers game (ouch! What a game!), 60 Minutes covered what they called, ‘The Second Mortgage Disaster on the Horizon’.
“That’s right. Looks like the mainstream media is finally picking up on something we’ve been covering in these pages for over a year now: Alt-A and option ARMs.
“For those who are new to the game, Alt-A and option ARMs are two other types of exotic mortgages that have been lurking in the background, while the rest of the country worries about subprime alone.
“Although these loans were made to people with higher quality credit, these types of loans, specifically the option ARMs, still lured borrowers in with ‘low teaser rates.’ The problem with these rates, however, is right in the description…they are just a ‘teaser’. Eventually, they reset. And a mortgage that was $800, can shoot up to $1,500…and many homeowners are ill-equipped to deal with this. In fact, one out of every ten homeowners in the United States right now is behind in their mortgage payment.
“Back in September of 2007, Strategic Short Report’s Dan Amoss warned, ‘The housing market will remain sluggish far longer than most expect. $800 billion of ARM resets can only add to the supply of distressed sellers in 2008. This will further depress an already sluggish housing market that’s having enough trouble working through a huge supply overhang.’
“And we are nowhere near the end of the pain that will (and is) being felt from the rate resets and subsequent defaults. Whitney Tilson, the fund manager that 60 Minutes interviewed for this story gave viewers this uplifting tidbit:
“’We had the greatest asset bubble in history and now that bubble is bursting. The single biggest piece of the bubble is the U.S. mortgage market and we’re probably about halfway through the unwinding and bursting of the bubble…It may seem like all the carnage out there, we must be almost finished. But there’s still a lot of pain to come in terms of write-downs and losses that have yet to be recognized.’”
The people who don’t pay are going to be offered deals - great rates - bonus months without having to pay - I’m surprised anyone is paying.
This makes me wonder what happens to those of us in conventional mortgages who have never missed a payment. Are we going to be flushed down the glory hole along with the bad loans? My mortgage holder is Citi.
>Fitch warned in its note Monday that it expects that it will downgrade many senior bonds to below investment grade — just in time for fourth quarter earnings.<
What level is below investment grade? Wall paper?
That ain’t the half of it. 2004 was a big year for 5 year ARMs and they adjust in 2009. Yes, some people already got out of them and yes lower rates will help others lock in on a 30. But some folks who have fallen on hard times won’t be able to afford refinancing. So unless the mortgage lenders can afford to modify the terms, look for another wave of defaults in the summer. This is going to get very interesting.