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Nightmare Mortgages
Business Week ^ | September 11, 2006 | Unknown

Posted on 08/31/2006 5:26:52 PM PDT by Mini-14

They promise the American Dream: A home of your own -- with ultra-low rates and payments anyone can afford. Now, the trap has sprung

For cash-strapped homeowners, it was a pitch they couldn't refuse: Refinance your mortgage at a bargain rate and cut your payments in half. New home buyers, stretching to afford something in a super-heated market, didn't even need to produce documentation, much less a downpayment.

Those who took the bait are in for a nasty surprise. While many Americans have started to worry about falling home prices, borrowers who jumped into so-called option ARM loans have another, more urgent problem: payments that are about to skyrocket. The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created.

...

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.

...

The option ARM is "like the neutron bomb," says George McCarthy, a housing economist at New York's Ford Foundation. "It's going to kill all the people but leave the houses standing."

(Excerpt) Read more at businessweek.com ...


TOPICS: Business/Economy
KEYWORDS: arm; estate; home; housing; mortgage; optionarm; real
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To: Jaysun

"I've found this scenario to be wildly overblown and the dooms day predictions to be without merit"

Not true in So. Calif., not only are prices going down but people with ARMs on average homes are getting hit with increases of $450-500/ month in their payments. They can't sell because current market is $50k+ below their mortgages and forclosures are increasing.


101 posted on 08/31/2006 7:37:24 PM PDT by dalereed
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To: dalereed

Southern California does not a national trend make.


102 posted on 08/31/2006 7:38:02 PM PDT by Phantom Lord (Fall on to your knees for the Phantom Lord)
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To: dalereed

Further, with the "massive decline" in real estate sales the media has touted for July, North Carolina saw a 7% increase.


103 posted on 08/31/2006 7:38:36 PM PDT by Phantom Lord (Fall on to your knees for the Phantom Lord)
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To: verum ago

And what's that?


104 posted on 08/31/2006 7:40:18 PM PDT by RockinRight (She rocks my world, and I rock her world.)
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To: Phantom Lord

While you might be opposed to it, a three-year PPP could have easily yielded three points. Try that on a couple of $600,000 deals in one month.


105 posted on 08/31/2006 7:44:01 PM PDT by Doc-Joe
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To: RockinRight

Good points, I suppose. I'm not that deep into the plastic for it to work for me, and the annual mortgage interest is too low to be a viable deduction (nearly paid off).


106 posted on 08/31/2006 7:44:56 PM PDT by Smokin' Joe (How often God must weep at humans' folly.)
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To: Smokin' Joe

Well, that's the way to do it. But, sometimes, people do the best they can with what they have, and if you do it right you can set yourself on a much better financial course.


107 posted on 08/31/2006 7:45:49 PM PDT by RockinRight (She rocks my world, and I rock her world.)
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To: verum ago

If you plan on keeping your house, or your property value isn't growing at an extraordinary rate, good idea. For those in areas where the property values were skyrocketing, and they were planning on flipping, it made sense.


108 posted on 08/31/2006 7:46:42 PM PDT by Doc-Joe
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To: Phantom Lord

"Southern California does not a national trend make."

No but hen 12%+ of the nations economy goes on it's head you are going to feel it.



109 posted on 08/31/2006 7:46:49 PM PDT by dalereed
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To: Gay State Conservative

Call me older fashioned. We're 3 years into a 15 year fixed. And we were about 40+% down on the refinance.


110 posted on 08/31/2006 7:49:25 PM PDT by FreedomPoster (Guns themselves are fairly robust; their chief enemies are rust and politicians) (NRA)
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To: FreedomPoster
Call me older fashioned. We're 3 years into a 15 year fixed. And we were about 40+% down on the refinance.

That's the way my Dad did it when we were kids.He had the family homestead (located in an upper middle class suburb of Boston) within 8 years of having bought it while supporting 4 kids and our stay at home Mom.

He was most assuredly a child of the Depression.

111 posted on 08/31/2006 7:55:43 PM PDT by Gay State Conservative ("An empty limousine pulled up and Hillary Clinton got out")
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To: Mini-14

tabloid garbage in business week. What is next, Nicole Richie starving herself and how that is bad for the economy?

This is garbage. If Business Week is reporting tabloid news you should invest or do the exact opposite.


112 posted on 08/31/2006 7:58:21 PM PDT by Porterville (Hispanic Republican American Bush Supporter)
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To: Phantom Lord

A little more: With the max PPP, IndyMac usually had the best yield spread. Still, check the daily rates - you might do better with WaMu or Countrywide.


113 posted on 08/31/2006 8:01:10 PM PDT by Doc-Joe
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To: Phantom Lord
A couple of years ago you should have been able to get low to mid 5's.

Really? Why don't you just link me up to prove what you say...I think you don't know sh**

114 posted on 08/31/2006 8:09:10 PM PDT by demsux
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To: demsux

He's totally correct-IF-your credit was good, it was in 2003 or 2004, and you had under 80% loan-to-value with verifiable income.


115 posted on 08/31/2006 8:20:06 PM PDT by RockinRight (She rocks my world, and I rock her world.)
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To: RockinRight
It did not start that way, but thankfully, card rates were pretty low when I needed to use them, I locked in a fixed rate mortgage at 9.1 when that was a really good rate, then got the rate adjusted downward to 7.25 (the lender offered) when I was considering refi. It turned out that paying the standard payment would have cost more to payout refinancing than staying at 9.1 until the existing lender offered the rate change.

A mere 20-50 dollars in extra principal can take a lot off the back end of the mortgage as well, and thankfully, that is something I have done from day one.

If I had it to do over, though, I would have looked far harder at the 15 year fixed rate than I did. Instead, I went with the 30 yr with no penalty for early payout, and expect it will have taken 22 years when done (if all goes well).

The other factor is that I bought about two years after a local housing bubble burst, at one third the former selling price of the house.

Frankly, to have done it right, I could have bought a block of 4 townhouses for less than my primary residence, and had I done that instead, would have doubled my initial investment and paid for my house.

Live and learn.

No matter where you start pick a goal and have a plan (and a plan B) and you will get there.

116 posted on 08/31/2006 8:21:59 PM PDT by Smokin' Joe (How often God must weep at humans' folly.)
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To: Hazcat

ARMs allow people to purchase when they don't have a leg to stand on.


117 posted on 08/31/2006 8:36:59 PM PDT by Justa (Politically Correct is morally wrong.)
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To: RockinRight
However, I can spend hours telling you about Mr. Idiot-Who-Knows-More-Than-a-Loan-Officer-With-Years-Of-Experience with a 513 credit score (that's a VERY bad credit score) who INSISTS he can get a 6.125% fixed rate loan "at the bank" but for some reason, he's talking to me...

Oh man, that's like the guy we had that we were trying to refinance out of forclosure who couldn't go TWO WEEKS without opening a new credit card. Every time he got one of those "move your credit card balance for 0% apr" he'd do it. Every. Time.

Had to give up on him unfortunately.
118 posted on 08/31/2006 9:27:17 PM PDT by Shion (Jaded Southern Californian)
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To: GeorgefromGeorgia

I agree. My in-laws learned the ARM lesson years ago when they lost their house.


119 posted on 08/31/2006 9:28:55 PM PDT by submarinerswife
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To: RockinRight
100% LTV on 3 million?

Wow...


I know, isn't that just criminal?

The owner had defaulted within the first year, suprise suprise...
120 posted on 08/31/2006 9:29:10 PM PDT by Shion (Jaded Southern Californian)
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