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Nightmare Mortgages
Old 09-01-2006, 05:13 PM   #1
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Nightmare Mortgages

Good article from Businessweek on option ARMs:

Nightmare Mortgages

It even includes an early retirement story:

Jon and Meghan Bachman of Portland, Ore., consider them wealth-building tools. "We want to own a bunch of houses," says Meghan. "We're hoping for early retirement."

So far they have stayed out of the fire. The couple, who are in their 30s, bought their first home, a 100-year-old farm house in Portland, Ore., in October, 2005, with a no-money-down loan for $200,000 from GreenPoint Mortgage, a unit of NorthFork Bancorporation Inc. By May, the value of the house had soared to $275,000. Rather than sit tight as their grandparents might have, the Bachmans, with an annual household income of $70,000, took out a home equity loan to put a $30,000 downpayment on an investment property in an up-and-coming neighborhood nearby. They pay a minimum of just $825 on their new $191,000 mortgage, and rent the house out for $100 more than that. Sooner or later, the payment will rise. Then they'll have to raise the rent to stay in the black. If the still-strong Portland housing market tanks, they could find themselves in deep trouble.


And it looks like California could be in for some interesting times:

[img width=750 height=483]http://images.businessweek.com/gen/map_of_misery.jpg[/img]
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Re: Nightmare Mortgages
Old 09-02-2006, 09:07 PM   #2
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Re: Nightmare Mortgages

4.4% in Texas?* Who are these people?
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Re: Nightmare Mortgages
Old 09-06-2006, 08:54 AM   #3
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Re: Nightmare Mortgages

An article in the San Antonio paper today talks about the sharp rise in county home foreclosures…849 last month. Bottom line: Even though ther RE markethere is strong and home prices continue to improve, the use of ‘creative’ mortgages is beginning to take its toll.

People who buy a home with no down payment and who roll closing costs into their mortgage loan seem especially vulnerable to foreclosure.

These "upside-down" loans — so named because the loan amount is higher than the home value at the outset — make up only about 1 percent of all mortgage loans in San Antonio, according to LoanPerformance, a mortgage research firm. But in the first half of 2006, they made up 16 percent of the Bexar County foreclosure market, according to the Addison-based Foreclosure Listing Service, Inc.


If this is happening where the real estate market is healthy, what the heck is happening where the bubble is deflating? Ouch.


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Re: Nightmare Mortgages
Old 09-06-2006, 09:27 AM   #4
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Re: Nightmare Mortgages


The housing boom is going to bring down California which already has a state budget disaster because of the Enron criminals and Proposition 13 "the people's initiative to limit property taxation," which sounded like a good thing at the time. But without Proposition 13 I doubt we'd have this huge bubble in California. The high property taxes on million dollar shacks would have certainly given buyers pause.
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Re: Nightmare Mortgages
Old 09-06-2006, 01:58 PM   #5
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Re: Nightmare Mortgages

Wow, glad we sold when we did and now live in a little cheap apartment.
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Re: Nightmare Mortgages
Old 09-09-2006, 10:48 AM   #6
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Re: Nightmare Mortgages

I just finished this article. What's really SHOCKING, is how many people refinanced their already low fixed-rate mortgages to these crazy option-ARM things. Obviously so they could significantly lower their monthly payment. But it's so sad because they apparently could already afford their house and the payment, but then they put themselves into the tragic position of not being able to afford their house payment later.

It's not just new home buyers!!!

Audrey
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Re: Nightmare Mortgages
Old 09-09-2006, 11:05 AM   #7
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Re: Nightmare Mortgages

Quote:
Originally Posted by audreyh1
I just finished this article.* What's really SHOCKING, is how many people refinanced their already low fixed-rate mortgages to these crazy option-ARM things.* Obviously so they could significantly lower their monthly payment.* But it's so sad because they apparently could already afford their house and the payment, but then they put themselves into the tragic position of not being able to afford their house payment later.

It's not just new home buyers!!!

Audrey
They were being "smart." I remember financial commentators talking about the "unbelieveable" low interest rates available. Everyone "knew" that the days of high interest rates were over.

All of us that had paid off our mortgage or stuck with our old fixed rate mortgage were dinosaurs from a by-gone age.
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Re: Nightmare Mortgages
Old 09-09-2006, 11:30 PM   #8
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Re: Nightmare Mortgages

I recently sold my home in Memphis and moved to San Diego (where comparable housing is three-five times higher depending on many variables).* I shocked realtors by expressing no interest in option ARM's and am immensely pleased that I chose to rent a house that had been on the market for a year -- yes, at twice my housepayment on a McMansion in Memphis.* In two or three years, I'll take my cash (now resting in CDs) and buy something cheap in Texas or other less-exciting but more retireable jurisdiction.

I feel truly sorry for the folks who got suckered into this type of loan.
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Re: Nightmare Mortgages
Old 09-10-2006, 12:17 AM   #9
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Re: Nightmare Mortgages

With so many loans already underwater, who's going to be left holding the bag when the owners send back they keys? I don't see how banks can walk away from this without feeling some pain.
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Re: Nightmare Mortgages
Old 09-10-2006, 12:21 AM   #10
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Re: Nightmare Mortgages

Quote:
Originally Posted by dmpi
With so many loans already underwater, who's going to be left holding the bag when the owners send back they keys? I don't see how banks can walk away from this without feeling some pain.
That's where the taxpayers come in. Remember the S&L debacle?
The US taxpayer is always the sucker of last resort.
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Re: Nightmare Mortgages
Old 09-10-2006, 05:35 AM   #11
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Re: Nightmare Mortgages

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Originally Posted by alphabet soup
That's where the taxpayers come in. Remember the S&L debacle?
The US taxpayer is always the sucker of last resort.
Things have actually changed quite a bit since then. There are still a lot of FDIC insured institutions holding loan paper but the great bulk of them are owned by individual investors. Many of the ARM, wrap, whatever type loans are private placements. During the S&L fiasco, S&Ls were required by law to make home loans.

The other key point is that the problem loans are in a much smaller geographic area. Yes, it's still a lot of loans but the S&L mess was nationwide.

Another disincentive to "mail in the keys." is that the "forgiven" mortgage amout of a repo/forclosure is now treated as income and the final indignity is getting a 1099 from the mortgage company. That raises the pain.

I agree it could get ugly but it will have to get a lot worse. With what I'm seeing the FED may be reducing rates pretty soon to prevent what we're now talking about.


Quote:
Originally Posted by playaman
II shocked realtors by expressing no interest in option ARM's and am immensely pleased that I chose to rent a house that had been on the market for a year -- yes, at twice my housepayment on a McMansion in Memphis.
Realtors make no money if you don't buy. You saw that without the option ARM or another "sophisticated" loan product you couldn't afford to buy anything. Therefore, resisting these loans meant another lost sale.

BTW -- What is your total annual cost of renting versus buying. I've seen articles saying you can rent for 60% or less than the cost of buying in some of the "hot" California market area. I'd like some real, current data.
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Re: Nightmare Mortgages
Old 09-10-2006, 05:56 AM   #12
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Re: Nightmare Mortgages

To the point above, in one of my 401k's the only bond fund is a mortgage bond fund ... which has a dismal annual return record anyway. Those funds could get interesting in the next year or two.
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Re: Nightmare Mortgages
Old 09-10-2006, 06:39 AM   #13
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Re: Nightmare Mortgages

Quote:
Originally Posted by Charles
To the point above, in one of my 401k's the only bond fund is a mortgage bond fund ... which has a dismal annual return record anyway.* Those funds could get interesting in the next year or two.
Your fund is probably a GNMA fund which is not specifically guaranteed by the US government but it's owned by an agency that is supposedly going to be backed if needed. The GNMA funds hold the "best" mortgages so their should be a much lower default rate.
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Re: Nightmare Mortgages
Old 09-10-2006, 10:38 AM   #14
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Re: Nightmare Mortgages

Quote:
Originally Posted by Oldbabe
But without Proposition 13 I doubt we'd have this huge bubble in California. The high property taxes on million dollar shacks would have certainly given buyers pause.
I thought Prop 13 was supposed to keep taxes lower for the current homeowner, but the taxes were increased (in some cases, greatly) when the porperty was sold.
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Re: Nightmare Mortgages
Old 09-10-2006, 11:31 AM   #15
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Re: Nightmare Mortgages

Opened the paper and found a mortgage company my last buyer used (Diamond) was closed by the state (MA) for fraudulent lending practices. Apparently they fudged the lendee's income to float the loan past the secondary market. This can't be good for Freddie and Fannie.

... and history repeats (think '90-'92 Commonwealth Mortgage and others)... will we ever learn?
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Re: Nightmare Mortgages
Old 09-10-2006, 12:12 PM   #16
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Re: Nightmare Mortgages

Quote:
Originally Posted by Charles
To the point above, in one of my 401k's the only bond fund is a mortgage bond fund ... which has a dismal annual return record anyway.* Those funds could get interesting in the next year or two.
As 2B said, I would not even include this on my list of worries. The fund more than likely holdes AAA and AA rated mortgage bonds. Only way they will see defaults is a direct meteor strike.
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Re: Nightmare Mortgages
Old 09-10-2006, 02:19 PM   #17
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Re: Nightmare Mortgages

Quote:
Originally Posted by FIRE'd@51
I thought Prop 13 was supposed to keep taxes lower for the current homeowner, but the taxes were increased (in some cases, greatly) when the porperty was sold.
Yes, this is true. Thank you for correcting my error!
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Re: Nightmare Mortgages
Old 09-10-2006, 03:10 PM   #18
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Re: Nightmare Mortgages

Quote:
Originally Posted by FIRE'd@51
I thought Prop 13 was supposed to keep taxes lower for the current homeowner, but the taxes were increased (in some cases, greatly) when the porperty was sold.
Isn't there a way around that by selling (or transferring) to a relative?
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