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 ...
Good man Joe. Well done.
Thanks for that education. I did not know much about this subject and while reading thought that millions were going to lose there homes. Dang MSM got me again. lol. You would think I would learn that the spin never stops with them. Your very right 200 dollars a month (on a 150,000 dollar house) will not make these folks destitute.
Sorry, no sympathy here for anybody who took out an ARM or any other fancy trick mortgage in a market where standard mortgages with historically low fixed rates are available. I simply cannot understand why anybody who wants a mortgage would not take advantage of fixed rates in the 5% to 7% range. It's ludicrous.
Rim Shot !
I have had much success with 5/1 mortgages. Like you, I knew that I would be moving within 5 years. However, financing these past couple of years at a one year ARM is not wise.
And there was a lot of legitimate doom and gloom. I remember having a VA mortgage with a fixed rate of 14-15%. I also remember the skyrocketing prime rate which in Florida shut down the construction jobs and caused people to go from riches to repossession in one short week. Very scary times.
Carolyn
I'd also point out that home values have in fact gone up since 2004, so the lack of equity argument is nonsense. Lastly, the idea that mortgage companies have been loaning money to any slacked jawed yokel willing to be suckered into an unaffordable house is absurd.
The doom and gloom folks hate facts - but thanks for presenting them anyhow. :)
They no longer qualify for a new loan (ARM or fixed rate) because they need to borrow more than the house is now worth. To make it worse, banks are tightening their lending standards (no more risky 90-100% loans) to defend their bottom line.
Homeowners can't sell because they would owe more than they get from the sale.
These people (in the millions unfortunately) are trapped.
Their banks are also trapped because those with option ARMs can legally suspend their monthly payment ('negative amortization'). The bank must keep paying the loan it took out, however so its revenues and stock value decline.
This experiment is ending badly and IMHO will result in a federal bailout as in the late 80s S&L crisis.
BUMP
In Summer of '03 I refinanced to a 15-year at 4.5%...
IMHO I believe the people who are hoping for a crash don't understand or have faith in the people who bought their homes. Secondly, IMHO, their are a lot of non moving hindsight 20/20 types/ couch potatoes, that critisize without knowledge because they missed the boat.
Unemployment is down and gas prices are falling into the winter.... does that make you angry? Are do you believe that people buying cheaper gas is a horrible thing as well?
IMHO
There. Fixed it.
By all means. Transfer the risk, the moral hazard, and the consequences for stupid saps falling for loan shark lending, to innocent taxpayers.
Since I have a 6.25% mortgage and don't plan on going anywhere, I'm kind of hoping for a return to those good old wild and wooly double digit inflation days. Make my salary wildly out of proportion to my mortgage payment... puhleeeze!
No, that's true. We refinanced down to about 5.3% two years ago, 15-year fixed. Of course, one's credit scores affect the mortgage terms offered.
That's pretty good. My wife and I bought our first house last July, and we're on a 30-year fixed mortgage at 4.70%.
We like getting calls from mortgage solicitors offering to help us "refinance & lower our payments!"
We politely tell them our current rates, and they usually reply with an, "Oh. We can't beat that."...Click.
My story is the same as yours...sold the house almost two years ago just at the top of the market. The people who bought our house only put 5% down! I couldn't believe it. Since then the house has definitely gone down in value, that much I'm sure of. We took our profit, bought a new home free and clear. It's great not to have a mortgage!
UMMMMmmmmm, free money. Not.
It is about opportunities, not faith.
Millions have fallen prey to easy money.
Their bones will be picked clean in the coming adjustment.
BUMP
These idiots not only applied for an arm loan, the went with a negative amortization loan where they have the option to made the payment based on the "2.2%" interest rate. The actual rate is higher. The difference in the 2 payments is added to the principal balance. Maybe if he read the fine print on the 3000 disclosures the federal gvt makes banks/brokers to send out before the loan is closed, he would have realized what he was getting into. Anyone foolish enough to belive they are getting a 2% interest rate on a mortgage, deserves what they get.
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