Toxic Mortgages

Thanks for sharing such a good, in depth article. Hopefully, publication of more of this type of information will prompt more homeowners and buyers to search for the real "truth in lending" before signing!

Thanks for the post Shelly. Enlightening.

After reading something like that, it is amazing to me that the CNBC talking heads are still debating whether there will be a "hard" or "soft" landing.

It's also amazing to me that anyone would sign a contract without reading and understanding it completely. I found it difficult to sympathize with the "victims" in the article.

Thanks for the post Shelly. Enlightening.

After reading something like that, it is amazing to me that the CNBC talking heads are still debating whether there will be a "hard" or "soft" landing.

It's also amazing to me that anyone would sign a contract without reading and understanding it completely. I found it difficult to sympathize with the "victims" in the article.

I am sure this happens more than one thinks.

In metro Atlanta, I am seeing more and more people in their late 20s and early 30s buying "McMansions" and driving Escalades and Hummers, when they do not have the cash in the bank to pay for these luxuries. A friend in the banking industry told me that what is happening is, these folks are taking out up to 3 mortgages to pay for $600,000+ homes and two luxury cars to put in the driveway. They flaunt themselves as rich, but in reality they are living "paycheck to paycheck" every month. The county I live in has one of the highest foreclosure rates in the country--and is fastly growing with McMansions, which are also what seems to be showing up in the foreclosure database.

In the true American tradition, now everyone that can't make their mortgage payment is a "victim"...class action lawsuit and govt bailout to follow!

I have used ARMs and option ARMs in the past to good effect. The first time my salary income was modest but I had a substantial guaranteed large bonus due within 12 months. The second time I was on assignment and knew I would only be in the house for a few years. In both cases I was out within
18-24 months and none of my plannning anticipated (or required) my house go up in value (although they did). In 2005 I moved into a home I plan on being in for 10+ years and secured a 5% 30 yr fixed and put 75% down in cash. My mortgage lender could not understand why I wanted this loan when I qual'd for much more and could not remember the last time he did a 75% LTV. I felt the froth could not last and this was prudent. Boy, did I feel foolish at cocktail parties around the 'hood for the last 18 months while all my friends were buying and flipping RE in FLA and making big profits.


All these products have legit uses, but unfortunately a spectrum that runs thru stupidity, greed, flock mentality, igonrance and outright fraud have bastardized the product. Combine slick commission based products with greedy salespeople and speculative buyers and there you have it....😱
Markets do correct, and sometimes the correction is nasty and long. My folks lived in Houston thru the boom and bust in the early 80's...very deja vu to the current market. Back then you couldn't buy a house, everything was a pocket listing, all the apts went condo, builders threw up inventory like no tomorrow, etc etc. Then in 85 the bottom fell out. Lots of BKs, repos, etc. I checked Zillow.com the other day the house my parents were in maps out like this:

1983 cost new $ 67,000
2004 resale 110,000


Thats a 21 year holding period to make a 60% "return" (and lets not talk about carrying costs, reparis, taxes, etc...). I realize beach markets and Houston are not the same, but on the other hand people will probably sell a 2nd home quicker than a primary.

I feel it's going to be a bumpy ride over the next few years but we won't wind up in a ditch. Commodities, tax lien certificates, resources plays and shorting financial firms that hold the ultimate risk on OARMs (if you can ID them) will be good investments, IMO. Not doom and gloom, just reality associated with a normal cyclic economic slowdown. Everything runs in cycles. It's never as bad as it seems and never as good as it seems, except for those on the overleveraged edges.

I see some great buying opportunities in RE and in SoWal over the next few years. The area is just too darn nice. Those with some cash and decent credit in 2007-8 will do nicely. I will be making aggressive offers to some of those neighbors now holding millions in multi-property ORMS that are adjusting and can't carry. Their turn to feel foolish at the cocktail parties.

I see some great buying opportunities in RE and in SoWal over the next few years. The area is just too darn nice. Those with some cash and decent credit in 2007-8 will do nicely. I will be making aggressive offers to some of those neighbors now holding millions in multi-property ORMS that are adjusting and can't carry. Their turn to feel foolish at the cocktail parties.

"Real" investors who know their stuff won't be buying into anything unless they see an opportunity for positive cashflow. Something has got to give for that to happen; either carrying costs (insurance + interest + HOA fees + taxes + management fees) have got to come down considerably OR prices have got to drop considerably. We've just gotten through the real estate "high season" and now entering the "slow season." There's still a lot of unwinding to do and lots of properties up for grabs with more continuing to come on the market as condos finish and more subdivisions are carved out. AND...it's just not a Florida thing--with most every metro area in most every state involved in the RE boom, with a few exceptions, it's pretty much nationwide.

Not everyone who is looking for a beach house is investing in the sense that it must produce income. In my case, not planning on renting, just want to get in at a good price point and hold long term for personal enjoyment. If it appreciates, that's icing. I would be curious to guess what pct of owners who do rent cover expenses (with 2006 ins and tax, not prior years) and how many weeks on average covers. I have heard that 10-12 weeks is about average, not counting snow bird rentals off season.

I would be curious to guess what pct of owners who do rent cover expenses (with 2006 ins and tax, not prior years) and how many weeks on average covers. I have heard that 10-12 weeks is about average, not counting snow bird rentals off season.

That's a function of how much equity they've got tied up in the property. With the big turnover of property we've had in the last couple of years, people getting in with little of their own money down, and the soaring carrying costs, I'd say there are a heck of a lot less now than there were before.

I cover my expenses on my house, I paid cash. Last year I barely broke even however. This year is much better. If this market needs real investors looking for cash flowing properties to start clicking it is around 70 percent overpriced. Properties will barely cover expenses without any mortgage in many cases and I have looked at hundreds of them on paper.

I paid cash. Last year I barely broke even however. This year is much better.

Imagine if you had to add to that a monthly nut at these prices :shock:

If you're not risk averse, you also have the option to "go commando" and self insure.

Malcolm Berko Column

Be careful: An ARM may end up costing an arm and a leg


Dear Mr. Berko: In May of 2005 we bought a condominium on St. Pete Beach, Fla., for $885,000. Five months ago my wife and I lost our jobs in the travel industry. We immediately put our condo on the market and have lowered the price twice, finally to what we paid for it, even though our unit looks out over the Gulf of Mexico. While our purchase price was $885,000 our mortgage is an $878,000 adjustable rate at 4.75 percent. Last week we got a lowball offer of $795,000, which is the only offer we've had since we listed the unit. At first we thought the offer was a joke because shortly after we bought our unit, two other condos in our building just like ours sold for $1.1 million. Then we were shocked at the possibility we might have to take an $83,000 loss.

Now we are frightened that we may have to keep the unit making mortgage and interest payments and paying maintenance taxes and insurance until the market gets stronger. That would certainly bankrupt us because we can't afford the $7,000 monthly costs. It's killing us and the possibility of taking an $83,000 loss would wipe out all our savings, our two Individual Retirement Accounts and we'd still be about $18,000 short. We've read that the experts believe housing prices will increase this year between 3 percent and 7 percent. It seems that interest rates have stopped rising. So do you think when rates begin to fall again that the condominium market will get stronger? If so how long do you think it will take?

D.S.
Delray Beach, Fla.

Dear D.S.: You folks are in big trouble and so are tens of thousands of others who bought homes with zero money down using an adjustable rate mortgage. And the banks may be in deep do-do, too, because in almost every instance the amount of those mortgages exceeds the market value of those homes. In many of those instances, they may be forced to swallow the differences.

I'm quite familiar with that section of Florida and I know that the number of resale listings has increased fourfold in the past five months. Your unit is competing against a surging glut of thousands of resales as well as a record number of unsold new units sitting empty and a soaring number of unsold "new builds" that will soon triple the already swollen unsold inventories.

Now I know my advice is going to be hard to swallow, but the crux of the matter is that you've got to consider the circumstances and take your loss and lump it.

The housing boom - no matter what the experts, real estate agents or builders tell us - is going bust. I learned years ago never ask a barber if you need a haircut or a banker if you need a certificate of deposit. And never ask a real estate agent if he thinks property prices will come down. Of course housing experts (who are these experts?) are predicting a 3 percent to 7 percent increase in property values this year. But these well-paid idiots completely ignore the fact that there wasn't a sane reason for the astronomical rise in housing costs during the past five years when Middle America's wealth imploded in the bear market.

During the past five years wages haven't moved off the dime as inflation averaged a modest 2.5 percent to 3.5 percent increase, depending on the government agency with whom you visit. But housing prices on the other hand exploded just as the tech and dot-com booms when Lucent was trading at $80, Juniper Networks was $240 and Ciena was $150.

Common-sense valuations suggest that as of January the prices of most homes and condos were 40 percent to 50 percent too high. Even if we experience a strong growth in the wage base, a surge in gross domestic product and inflation at 5 percent, I believe the average home value can fall 25 percent to 30 percent in the next three years. Last year, 45 percent of new-home buyers, like you, bought their homes without a down payment and 35 percent of all new mortgages were interest only.

Making matters even more precarious, over $3 trillion in mortgages will adjust during the next 12 months. So consider a typical $250,000 ARM with a 2 percent cap rate-hike and a current $1,100 monthly payment. The monthly payment climbs to $1,424 after the first increase and then to $1,750 after the second increase. That's $650 a month, or $7,800 a year. Then plug in soaring insurance costs and higher state taxes and the annual nut just increased by almost $10,000. I'd like to know how a middle-class family taking home $40,000 after taxes can afford an extra $10,000 and still fill up their gas tanks.

So sell that unit before the buyer rescinds his offer.

The current situation sort of reminds me of the 1980's when the RTC was formed to absorb all of the real estate loans and the institutions and banks that went bust. I am sure there will be oodles of vulture funds formed to buy up either the housing units themselves or the mortgages on them at deep deep discounts and then they will be repackaged and sold to pension funds or other financial institutions. Someone's misfortune is always someone else's gain. History always repeats itself....why don't people ever learn ????

I am sure there will be many class action lawsuits forthcoming regarding Option ARMs especially with many of the named Banks in this article.
Whenever a consumer obtains an adjustable rate mortgage of any kind, they are supposed to receive disclosures detailing the loan product and it is supposed to be signed PRIOR to funding the loan and again at funding.
However, most of these disclosures were generic and difficult to understand.
One of the named banks did not even have any disclosures for the Option arm, and if you wanted one, you pulled off a copy of the Note they would use from their web site.
I had many Banks "push" this product on me to sell my clients, and it really irks me that a Lender would allow someone who had low fixed rate mortgages in the 5% range to refinance into these Option arms especially if they have a high Loan to value. Makes me sick.

What has happened with these type of loans and their consequences, is a great advertisement for hiring a COMPETENT and LEARNED attorney. The few hundred bucks it cost to consult with an attorney BEFORE signing on the dotted line will save a whole world of hurt down the road. And I speak from experience after losing my shirt 25 years ago on a real estate deal in Arizona. I was caught up with the RTC coming after me. VERY scary situation but a valuable and costly life lesson.

Properties will barely cover expenses without any mortgage in many cases and I have looked at hundreds of them on paper.

Wow, I would have not guessed that at all. How many weeks on average is considered good?

Business Week Magazine's excellent articles on mortgages

Kudos Shel on an informative link describing the yang of leveraged mortgages.
There is a ying to these financial products..but we all know what they are, and how to use them responsibly.... at least here on this forum. I hope!!

So the million dollar question is ...."Why do people leverage themselves to the max, with just a song and a dream in their pockets?"

I do know they are not as stupid as we think. At some level one understands what one is getting into when signing on the dotted line. So why take such tremendous risk?

I really don't know..What is clear to me is we are a society of too much. Excess everything. Super size the damn thing!!
Fries, hummers, SUV, houses, our waist lines, debt ad nauseam.
Sad..very sad actually when you put it into perspective with the starving masses in Africa and Asia. Our McDonald garbage bins would be enough to feed most of Darfur. I have seen poverty with my own eyes..abject poverty. And when you juxtapose a pot bellied starving child with an overweight white American suburbanite..its amoral.

When do we, or when should we define ourselves in terms of what we NEED and only take that much..not more.
We abuse our resources only because we can..eat more because we can..build bigger because we can and own more and spend more only because we can. Even to our own detriment and ill health.
I think this is the reason why so many of us get into trouble so often, in so many avenues of our lives. Unmitigated indulgence.

Laissez les bon temps rouler!!!

A wise man once said "Buy experiences not things".and at least you'll have your memories.

I'll quit my soap box right now and I'm on it because I had an epiphany recently and I have said enough..I have more than I can spend in a lifetime and I will not pursue getting anymore.
Minimalism is my mantra.
thanks for your ears.

Good soapbox message, dsilvar.
' A wise man once said "Buy experiences not things".and at least you'll have your memories.' ..... I like that way of thinking!
.

What has happened with these type of loans and their consequences, is a great advertisement for hiring a COMPETENT and LEARNED attorney. The few hundred bucks it cost to consult with an attorney BEFORE signing on the dotted line will save a whole world of hurt down the road. And I speak from experience after losing my shirt 25 years ago on a real estate deal in Arizona. I was caught up with the RTC coming after me. VERY scary situation but a valuable and costly life lesson.

I think COMPETENT AND LEARNED being the operative word here especially with a purchase in states where title companies close the loans. (NY a lawyer is obtained on both sides) Unfortunately, having worked in the industry and "trained" attornies on how to do closings etc., I have not always found that to be the case and what they knew about mortgages left much to be desired.
I always suggested my clients interview an attorney and ask lots of questions and provided a list of scenarios that could occur and specifically seek an attorney who specializes in real estate transactions only, not their brother in laws cousin who is in court all day long.:blink:

So if the banks have to eat all that $$$, will it make it that much more difficult for "average" people to get a mortgage?:idontno:

So if the banks have to eat all that $$$, will it make it that much more difficult for "average" people to get a mortgage?:idontno:

No, that will not be the case. Subprime mortgages and your "average" person mortgage are 2 different animals. ;-)