The damage caused by option payment adjustable rate mortgages with negative amortization is painful. The bad news is the pain is likely to continue for several years. The bulk of these loans were made in high-cost areas when prices were on a steady climb up -- remember the real estate market in '03, 04, '05? Lenders didn't stop making those loans until 2007. Many of them have already gone bad, taking with them banks like IndyMac, Wachovia, and BankUnited, not to mention hundreds of thousands of borrowers who lost their homes.
I recall my experience when I purchased my home in 2004. I went searching for a 30 year fixed rate mortgage. I wanted to "shop" for the best interest rate. At that time, the way to do that was to plug my information into one of the various websites and the lenders would contact you. I got a deluge of phone calls from brokers wanting to sell me an interest-only loan. I recall being told about the "advantages" of choosing a monthly payment and the "flexibility" it offered. I don't remember anyone pushing the product describing the dangers of negative amortization.
Now websites, like Zillow, BankRate, and RealtyTrac offer instant mortgage quotes that you can follow up with the best offers. Lenders have tightened credit standards and no longer offer no down payment option payment adjustable rate loans. But there's bound to be a next time. Let's hope if that happens, people will remember what turned these once-touted loans toxic.
Comments
in regards to this article, did anyone else see the incredible 62 page (don't worry, a lot of it is easy-to-understand graphs and charts) from T2 hedge fund partners?? explains why more pain to come...just google t2 partners if you want to see it...i also linked to it today from my site housingbubblenews dot com
I think "stability" is a better description for what people are looking for in the housing market. Prices are still falling.
The option mortgages are also known as "pick-a-payment" mortgages. They aren't the only ones that will be haunting the US for the next couple of years though (AT LEAST)...it is also the Alt-A mortgages. I am SURE you have seen the ARM mortgage reset housing chart by Credit Suisse...if not, you MUST! It is concrete proof that we are far from removed from the housing crisis...btw, there will be NO fast housing recovery either.
here is the chart...
http://www.housingbubblenews.com/housing-chart-graphs/housing-charts.php
The option mortgages are also known as "pick-a-payment" mortgages. They aren't the only ones that will be haunting the US for the next couple of years though (AT LEAST)...it is also the Alt-A mortgages. I am SURE you have seen the ARM mortgage reset housing chart by Credit Suisse...if not, you MUST! It is concrete proof that we are far from removed from the housing crisis...btw, there will be NO fast housing recovery either.
here is the chart...
http://www.housingbubblenews.com/housing-chart-graphs/housing-charts.php
Thirty floggings to me for getting principal wrong.
Although this does beg the broader issue of the whole concept of principal (not, repeat not, principle) reduction. With so much focus on the monthly payment, fewer people were paying down principal. Used to be that the wealth creation from homeownership came from a combination of buying down the loan and some price appreciation.
Nice Post Stephanie!
You are right. The "hangover" effect of these toxic, products will remain for 2 or 3 more years. Also unfortunately, the short sales and foreclosure sales continue to force prices downwards, thus making the possibily to sale these homes a virtual impossibilty because homeowners are "upside down" on their mortgage.
Isn't there anybody at Nightly Business Report who knows the difference between
principle
and
principal?
You don't reduce principle when you make a loan reduction.
I am disappointed with you that this got past your editors. What is happening to the English language?
Keith Zimmerman
It's not just toxic mortgages that are causing people heartburn. Purchasers who did everything right in 2003, 2004, 2005--- put 10-20% down and secured 30-year fixed rate mortgages---are in trouble because they too are probably upside down. Consider the person 10 years from retirement who bought a $600,000 home and put $120,000 down thinking that real estate was safer than the stock market. They'd have a nice place to live and when it came time to retire, that $120,000, with appreciation and ten years worth of principal payments, might be worth $250,000. That house is probably worth $360,000 right now and they'll be really lucky if it's worth $500,000 in 2013. So if they sell in 2013 they'll not get $250,000---they won't even get their $120,000 back. All they'll get is their principal payment. Their retirement plans are shot.
That's why I have a hard time buying into these sub-prime and toxic mortgage bailout programs. We're going to help these people who did all the wrong things (we say they didn't know better or we say they were duped) but for those who did all the right things we just say "too bad."