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There's always a consequence, regardless of the politicians' attempts to inveigle and distract.
2 replies
There's always a consequence, regardless of the politicians' attempts to inveigle and distract.
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Nothing to worry about, Helicopter Ben and Turbo Tax Timmy can just throw more money at the problem. When in debt make more debt.
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@laserjobs: doubtful. they haven't thrown any money in the direction of struggling homeowners up to this point, what makes you think they'll start now?
unless you mean a second helping at the trough for bankers. in that case, yeah, i'm sure that will be their answer.
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@mac-phisto: Who said anything about helping homeowners? No, the homeowners are evil greedy stupid people who signed contracts that they didn't understand and therefore don't deserve help.
No, we must save the poor, poor financial companies like GM and Bear Stearns who were forced by those evil, evil homeowners into signing contracts with ridiculous clauses like \"if the homeowner doesn't pay, the bank gets the house\" as if the bank would really want a house. No, we must make sure that our tax money goes straight to those who need it most, those poor banks who thought they could take liars at their word and were taken advantage of.
But they get the house too. It's in the contract, after all.
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My brother has one of these option-ARMs in AZ, ready to explode in about 3 months. He has been trying to get it refinanced through the lender, but they don't return his phone calls, faxes and mail. The comps in his neighborhood are currently less than half what he paid for his place, so I can see why the bank might not be interested. It probably means that his house will be another of the many empty, abandoned and/or foreclosed houses in his neighborhood.
@ChuckECheese: Why did he get such a loan? I just can't understand why someone would make such a shortsighted bet (or maybe that's how it looks with my 20-20 hindsight).
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@teh: It's the opportunity to buy a house you normally shouldn't/wouldn't be able to afford for payments well within your range. I'm not sure if everyone that signed up for these realized how short term the smaller payments would be, but if the terms weren't fully presented to or understood by an unsavvy consumer really itching to buy, I can see why they'd take the bait. I think a lot of people also just thought they'd be able to get some equity in the house and refinance or sell for profit before the terms changed.
Interest only loans are almost just as stupid. Your payments won't adjust, but good luck selling in a down market.
@teh: I'm guessing, but based on conversations, he thought he'd be able to refinance, and/or flip the house. Also, at the time he got the mortgage, he and his gf were making bank at their jobs. After 9 mos of unemployment, she now has a job paying 1/5 what she was making before, and bro's sales commissions have evaporated. I wouldn't have made such a bet even during the boom. Ah, well.
@ChuckECheese:
Of course if they had the more traditional 30 yr mtg or a fully Amortizing loan and she lost her job and his commissions evaporated would they still have the house currently? Maybe the neg-am loan just delayed the inevitable?
@FDCPAGuy: That's a good question you ask. The answer is \"probably, yes.\" But they can't make the larger payments indefinitely. So it does seem inevitable. I don't know how or why they ended up with this mortgage type. It may be the only mortgage he was offered when he applied.
@ChuckECheese:
Well I can tell you why he was offered that mortgage. 1) They paid higher commissions to the broker/loan officer 2) They usually attached prepayment penalties and made even more 3) It was an easy selling tactic - 'here take this $200,000 mortgage and you can pay $500 a month'.
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@FDCPAGuy: Yeah, but if everyone that got sub-prime arms, etc, we might not have imploded in the first place or as bad.
I just can't imagine why anyone would get any adjustable rate loan when interest rates where near historic lows.
...and some think housing is ready to rebound. LOL!!!
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@nnj:
It won't until the labor market is healthy again, AND housing is near its inflation-adjusted long-term average (something like 150k for the nationwide median). So, another 10 to 20 percent drop assuming unemployment (bullshit measure or not) is back down by then.
The only basis I have for saying this is that it has happened again and again.
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So does this means more cheap houses and lower mortgage rates for those of us who stayed out of the bubble-blowing market over the last few years?
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@Xerloq wants to...: I think it just means more months of empty houses and condos going unsold, because banks keep waiting for the golden buyer to walk through the door with pristine credit who will pay them the 2007 market value of the property.
There are plenty of us who have good jobs, decent but not great credit, and have been trying to take advantage of the market to finally buy a house. Nobody is creating mortgages unless you have AAA platinum rated credit. And I'm not seeing the fire sale on property that we should be seeing, even in areas with 20%+ empty homes and 50% plus empty condos (we had a big building boom during the good years, and now that all the luxury condos have been finished, all the people who had put deposits down in 2007 are saying \"no, thanks!\").
The banks would rather just go back to Uncle Sam for another bailout, or let property sit vacant, rather than sell the property for what it is actually worth in the current market.
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@Xerloq wants to...: It probably means more quarters of mortgage holders trying to ignore the problem so they don't have to recognize the diminished value of the \"assets\" on their books.
@GearheadGeek: The media keeps promising me waves of foreclosures, but there's still air in the bubble in the city I want to move to. Very irritating.
First of all, a 10-15% increase in the principal should not cause a 5x or 10x increase in the payment. Perhaps the introductory rate is expiring at the same time? Second, I've always heard these loans referred to as negative amortization loans. I'd heard the Option ARM thing but thought it was something different. Apparently not.
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First of all, a 10-15% increase in the principal should not cause a 5x or 10x increase in the payment. Perhaps the introductory rate is expiring at the same time?
Exactly. So the new payment is based on a real interest of 6.5% (for example) instead of the 1.5% ARM teaser rate they had before. And the payment is also recalculated based on the now inflated principle due at the same time.
Second, I've always heard these loans referred to as negative amortization loans. I'd heard the Option ARM thing but thought it was something different.
That's my understanding as well, but I believe many (perhaps all?) Option ARMs are Neg-Am
@dilbert69:
neg am = pick a pay = option arm
What happens is these things were always a variable rate and once they hit 115% to 110% of the original loan balance they recast. The new payment is Principal and Interest on the fully indexed rate (which was a monthly adjustable in most cases).
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@dilbert69: They are both - an Option ARM has a negative amortizing \"feature.\" When I worked on the legal side of the industry, I had a financial expert explain to me the benefits of these loans - they can be of benefit to the wealthy or very high-earning, who have fluctuating income.
Usually you get four options to pay - one is the same as if the loan was a 30 year, fixed at the current adjustable rate, one a 15 year, one pays just the interest, and one pays less than the interest. As the expert said \"it was a great loan product for real estate agents.\" If you make good commissions one month, you make the 30 year payment, if very good commissions, pay the 15 year. If you have low commissions, take the heat off for a few months and pay the less-than-interest payment. The problem with these loans is that no one, at least on the regular consumer level, pays more than the less-than-interest payment.
@dilbert69: ARM loans are a type of NegAm loan, but NegAm is not limited to only interest rate increases.
@dilbert69: They are also referred to as \"Pick A Payment\" loans and marketed with the lowest payment, not the real payment. The reason for the jump is once they grow to the max, they force the payment up to cover what it would be in a traditional fixed rate loan.
It just goes to show how traditional financial companies don't give a rats ass about the people that keep them in business.
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Were these legal in NC? If so, I might be able to jump on some cheap houses in a couple of years.
Yeah, Mr. Bernanke, recession's over. Oh yeah, and it's still a recession not a depression. Right, you're the expert.
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@TechnoDestructo: Unless Bernanke said that the economy was technically recovering, although in a real sense, we still have far to go. Which he did.
You might want to switch the cable TV station that you rely on for your news if it glossed over these commonly-known facts.
Or keep silent when people wearing long pants discuss such grown-up things, to avoid personal embarrassment.
@Trai_Dep:
And people wonder why politicians talk in absolutes and worst-case scenarios.
Just goes to show that if you can't say anything in absolutes, don't say it to Fox.
Hindsight being what it is, it's a safe bet that many of these people with option-ARM's were looking to cash in after a couple of years - before the mortgages reset. You know, sell for a nice $100k bet since we all know the value of houses only goes up. Whoops!
@Buckus: around where my mom lives, these were really popular b/c people essentially rented their $750k homes with the option-arm & simply sold it within 5 years to avoid the reset.
there's really no good reason to take an option-arm that i can think of. maybe if you were expecting your salary to increase greatly within the 5 years, but that doesn't seem like a very responsible way to borrow huge sums of money.
This has already been priced in. The graph in reference has been around for years, and banks are way ahead of this issue in terms of loan-loss reserves. This will be dealt with in a similar manner to the credit card default crisis from earlier this year, which rose and fell without much incident. The next wave isn't residential real estate, it's commercial real estate, and that's going to take down literally hundreds of local banks.
Anyone that took an Option-ARM loan deserves to loose their house. They are the people that have brought all of this on us. And yes, I know it's still the banks fault too.
Oh, and for the record? I chose option A. People still tell me that I'm an idiot for renting and not buying a home using one of those ridiculous loan packages.
Fortunately, unlike the average american, I posess critical thinking skills.
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@RvLeshrac: Wow, so having critical thinking skills makes you a pretentious asshole?
And, to be fair, what precisely do any of your examples have to do with financial common sense?
Pretend you're the average American - you know, the one that doesn't believe in evolution and can't even name the state capitols. Say you want a home, and go to a realtor, who sets up a meeting with a financial advisor at the bank. This is the spiel you get from them (combined, as a space-saver):
\"We can give you a million dollar home for $250,000 and only charge you $300 a month for your mortgage payments. But only today, and only if you sign up for an ARM. If you sign up for a traditional mortgage, you'll have to pay $1500/mo for the same house.\"
Now, these are two people you trust. One of them is supposedly an expert in finance, and the other is supposedly an expert in real estate. You don't have the extra income to pay for a personal financial advisor. What do you do? Do you:
a) Continue to rent a home/apartment, despite everyone around you telling you what an idiot you are for renting and how owning a home is very affordable.
b) Jump on what looks like an incredible opportunity to buy a very nice home that, according to everyone, is going to continue to increase in value for years to come.
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When mortgage rates rise real estate values will have to plunge again. People will walk away from their mortgages even if they can afford to pay their fixed-rates
The whole system needs to be overhauled. When the times are good, these people and the banks that lend them money make out like bandits, and when times are bad, the whole economy tanks and we all suffer.
I'm tired of being responsible, not spending more than I can afford, and not jumping on the \"get rich quick\" schemes that melt down. Isn't this supposed to be a free market? If it's not, then let us know so we can all embrace socialism.
@tailstoo: It's really a brilliant system that the peculiar brand of American \"capitalism\" has developed. All of the upside profit is privatized, but all of the downside risk is socialized.
I keep in touch with a high school friend who now works on Wall Street, and he just bought his second Maserati (he keeps it at the house in Connecticut). Of course he gets to reap the rewards of short-term profits, while the very decisions he's making have huge long-term liabilities he will not have to pay for. I suppose we're all stupid for not taking the same job.
@tailstoo:
The most troubling thing about the financial crisis is our collective retreat into extremist, oversimplified arguments. Economic systems and goverments don't just oscillate wildly between poles, and neither should citizens.
Negative Amortization Adjustable Rate Mortgages are extremely complicated. Here's a moderately detailed description.
Apparently Option ARMs are even more complicated than that. Frankly, I think Neg-Am loans should be illegal. They already are in several States
Why so negative, Meg?
You see, banks are simply allowing some borrowers to increase the tax write-offs they get from their interest deduction!
Glass half-full!
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We had a 1-year option-ARM on our home about 5 and a half years ago that we used as a bridge loan while we were selling our previous home and buying our new one. We ended up only having it for about a month and I was happy to pay it off.
Still, not all ARMS are bad news. Our standard 5-1 ARM just rest last month and the interest rate actually went *down* -- from 5% to 4.25%.
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Haven't we been getting warnings about this for the last year, and now it's finally happening?
When I was looking to buy about 2 years ago, I saw commercials for $500K mortgages at $400 a month. I thought it was strange because I can afford $400 a month, but I know I can't afford a $500K house. When I looked at it, not even the allure of buying a $500K house could make me sign up for such a loan, and I'm not usually a rational person with such things.
Part of the reason the payments go up so much, is that you weren't paying the real payment anyway. You may have been paying 50% of the actual payment, now you need to pay 200% of the actual payment, so it ends up being 4 to 5 times what you were paying, not what you should have been paying. (figures completely made up)
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Why are these even legal? Seriously.
I know some responsibility goes to a homeowner for signing up, but why would we allow a bank to do this?
So we get to add this on to the current ongoing wave of people losing their homes because they have no income? Sweet-ass.
As a former lender (who refused to sell Option Arm Loans) I can tell you that these are VERY complicated and there is hardly ever a situation where it would be beneficial to the borrower to have an Option Arm...unless buying a house you can't really afford is considered a benefit.
These loans payed out HUGE commissions to Loan Officers and Brokers. So they pushed them on a lot of people especially in rapidly increasing markets like CA and AZ.
They were also so complicated that even the few honest people selling them often did not really know how they worked. They were unable to explain the loan mechanics to their clients- even if they wanted to- and the rarely wanted to.
To make it worse: since the minimum payment (bellow the interest only payment and therefor Negative Amortizing) did not change they often sold these loans as \"Fixed Rate.\" In reality, only the payment was fixed and even that was only fixed for a period of time.
Oh, and for a little extra pain- the almost all have \"hard\" prepayment penalties. Which meant you were going to pay up to 6 months interest if you refinanced the loan or sold your home and closed the loan within a certain amount of time (from 6 months to 3 years).
In short- probably the worst loan idea ever.
@ChuckECheese: Well, each transaction has an inherit amount of risk. He understood the risk and is now going to feel the short-side of that transaction. Ah, well is right. He's certainly no victim.
I think the thing I learned from this financial mess is to ALWAYS take out a fixed-rate loan. No other type is acceptable.
If you owe more than your house is worth...folks...please...just walk away...
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I handle employment and wage verifications where I work. Over the last few months, I've seen several mortgage applications from employees who make $13-$14 an hour. Because of my position, I know a bit about their personal situations other than wages, and I just don't understand how these companies would even consider loaning these kids $200,000 (which is the average cost of a house in our area). The 8k tax credit is part of the bait, I'm sure, to convince these kids that they can afford the \"American Dream\".
It makes me ill.
I bought a house in 1989, for 5,000 down (75,000 mortgage) at 10.5 % interest. And back then, no bank wanted to give me a loan. I had to beg for a mortgage!
Having lived through that, I know that the market fluctuates. These people who are taking out loans that are too good to be true need a wake up call. If you SIGN YOUR NAME for something, read all the fine print.
Doesn't anyone know what a signature means anymore?
The reality of Option ARMs is bad enough that there is no need to inflate the amount of their payment at reset. It is not 5 x 10 times the current payment. Realistically is will be between 44% and 52% more then the current payment assuming interest rates between 5% and 6%.
I ran a quick analysis of an Option ARM minimum payment at the usual 1.25% \"introductory rate\". The introductory rate usually remains in place until the loan reaches 110% of it's original amount. Here is how it lays out;
Original loan amount:
$100K @ 1.25% interest $333.25/mo
30 year amortization
Paying only the minimum required payment, the loan will negatively amortize (add principal to it's balance) and hit it's \"reset\" amount @ 40 months in at $110K or 110% of the original loan. The borrower now has to start making principal and interest payments on the $110K amortized over the remaining 320 months.
This amount is $623.01 at 5% and $689.83 at 6%.
If the homeowner is able to refinance into a 30 year fixed mortgage their payment will go to $590.50 at 5% and $659.51 at 6%.
Herein lies the insidious problem with an Option ARM, the mortgage balance has increased and the value of the home has gone down, meaning the homeowner is either underwater or very close to it.
Most homeowners will be unsuccessfulin refinancing their home at 95% of it's present value with a 44% jump in their monthly payment.
I hope this makes sense.
I am the COO of a company that has developed a private, non-taxpayer funded solution to the mortgage default crisis and that can definitely help a homeowner faced with a resetting Option ARM remain in their home.
If you would like more information on our company please check our web site at [www.reidex.com] for a better explanation.
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That is the Carlsbad power plant in the background of that picture. Yay Carlsbad!
@dbasch: I live in Carlsbad as well! Yay Carlsbad!
@dbasch:
I like the San Onofre ones a little better.
Yes, because they're shaped like breasts.