Posted on 09/27/2006 4:18:39 PM PDT by ex-Texan
Gerard Herard was able to finally purchase a home in 2003 through a $225,070 mortgage from Security Atlantic Mortgage. His payments on the quaint Totowa Avenue house in Paterson were a reasonable $1,300 a month.
But Herard's payments have since increased to $2,200 a month and the mortgage has grown, not shrunk, to roughly $300,000.
Herard is not entirely sure why his situation changed so dramatically and is struggling to deal with the increase. "I'm trying to climb a steep ladder," said Herard, 53.
In recent years, lenders have lured scores of homeowners to untraditional mortgages with changing terms. Many deals allowed minimum payments at artificially low rates for the first year or two of the loan.
But the sweet deal is ending for thousands of Americans who took out interest-only and payment-option adjustable rate mortgages, or ARMs. After that initial grace period, homeowners faced serious sticker shock -- monthly payments that can double or triple because their minimum payment suddenly goes from 1 percent to 7 percent, for example.
Many borrowers took one of these complicated loans without knowing the consequences, and without socking away extra cash for the eventual increase. Some experts fear that the widespread marketing of untraditional ARMs to those who couldn't afford them will fuel foreclosures, and federal entities are calling for more oversight of the exotic products.
"I feel for these people," said Steve Hoogerhyde, a loan officer at Clifton Savings Bank in Passaic. "Now that the piper comes due, they didn't know or didn't understand what would happen. They are really stuck."
Untraditional ARMs come in two main forms. Interest-only mortgages allow owners to pay just the monthly interest on the loan for three to 10 years.
Option ARMs, a more recent fad, present serious dangers, experts say.
Every month, Option ARMs allow owners four payment choices: to pay a 30-year or 15-year traditional loan rate, just the interest, or a minimum payment that's even less.
The minimum payment will be set to a "teaser" rate -- usually from 1 percent to 3 percent of the loan's total. This payment does not cover the interest being applied to the mortgage each month, meaning that the loan total is actually growing, despite the payments.
"I have had calls from people saying that their mortgage started at $300,000, and now it's $315,000," said Tom Cosentino, a mortgage specialist at the Greater Community Bank in Totowa.
The loans come with a cap of how much they can grow in debt, typically 125 percent of the original loan total. After this threshold is hit, the minimum payment typically goes from the low 1 percent or 2 percent to at least 7 percent.
The result is "payment shock," as it is called. If a homeowner was paying the minimum payments on a $400,000 loan, when the loan resents from 1 percent to 7 percent, their payments could go from $1,287 to $2,931, according to scenario cited by a report released last week by the federal Government Accounting Office -- a 128 percent jump.
Untraditional ARMs were originally tailored for wealthy, financially-sophisticated homeowners, according to financial industry publications.
But when housing prices skyrocketed in the early 2000s, lenders began marketing nontraditional ARMs to first-time homebuyers and others who couldn't afford traditional fixed-rate payments. The trend took off, leading companies to relentlessly advertise untraditional ARMs.
Between 2003 and 2005, the interest-only and option ARMs grew from 10 to 30 percent of U.S. mortgage originations, according to the GAO. The report found that New Jersey had one of the nation's highest concentrations of interest-only and payment-option ARMs in 2005 because of the state's high housing costs.
"They were marketed more broadly as affordability products," Orice Williams, one of the authors, said in a telephone interview Thursday.
Wendy Nastasi of Crossroads Finance Discount Mortgage, a Pompton Plains-based company, said that two out of six calls she's received within the last six months have been from untraditional adjustable-rate mortgage-holders.
"Anybody who has one of these now wants out it," Nastasi said.
Untraditional ARMs lenders have said that the mortgages provide flexibility and time for borrowers to save for the growing payments.
But the GAO report found that three-quarters of the untraditional ARMs issued between 2003 and 2005 did not sufficiently check borrowers' incomes to ensure they could afford the higher payments.
As a result, homeowners got in over their heads. Many are confused about what type of mortgage they have.
Herard said that despite working two jobs to try and keep his house, he is fighting off foreclosure. "This situation is bad," said Herard, originally from Haiti and who has thought of moving back. "All this stuff is driving me crazy."
Scrutiny is growing over untraditional ARMs. Critics say that the loans are complicated and ridden with fine print, which may elude first-time homebuyers.
"They lie to people," Nastasi said. "They don't explain the details to them."
Security Atlantic, which issued Herard's loan, has since been investigated by the New Jersey division of the Office of Inspector General. The company's loan default rate was twice the state's average as they approved loans for "potentially ineligible borrowers," according to the 2005 audit.
The GAO is recommending that the Federal Reserve include specific details about untraditional ARMs in the Truth-in-Lending Act. The Fed has promised to establish more guidance around the loans since last year, but they still have not provided a timeline for acting on this, Williams said.
But the beefed up regulations won't save current loan-holders. "You have to cut your losses like it's a bad stock," Cosentino said.
Scrutiny is growing over untraditional ARMs. Critics say that the loans are complicated and ridden with fine print, which may elude first-time homebuyers. * * * "They lie to people," Nastasi said. "They don't explain the details to them."
Interest only mortgages and option AEM loans for hyper inflated homes: Now that the national Ponzi scheme is unraveling, who do you want to blame? Some want to blame me. I think that Congress is going to be forced to investigate. "Nothing to see here. Not in my neck of the woods. Time to move on."
*Ping*!
caveat emptor.
Anybody who took out an exotic mortgage without understanding the possible implications is an idiot and deserves what they have coming.
I refinanced last year, but went from a 30yr fixed + 15yr 2nd to a 15yr fixed and only a slightly higher payment. I make more than the scheduled payment every month so I'll be paid off in 12 years, well before I plan to retire.
Or as it did for me, got me alot more house for the payment. I pray you don't invest in real estate, sounds like you'd be taken to the cleaners.
He's convinced everyone else is as flummoxed by mathematics as he is.
I call BS on the guy interviewed for this. $75K in negative amortization in 3 years? That's $2K a month on a $225K mortgage. If he was paying $1,300 a month then even with a few hundred a month with Int. and taxes he would have been paying a decent amount of his interest.
I know you love posting these articles but something like this screams BS.
Of course the spin is that these people were "tricked" into taking the loans. No one ever questions the greed and stupidity of the people taking out these loans.
I have little sympathy - it was these same people, who had no business buying, who have inflated real estate prices to the point where people who are responsible with their money have to continue renting.
LOL
I would have put it slightly differently:
I know you love posting BS articles like this.
"I have had calls from people saying that their mortgage started at $300,000, and now it's $315,000," said Tom Cosentino, a mortgage specialist at the Greater Community Bank in Totowa.
They point out that current prime is over 6%, so this is a deal. I can combine my second and up the $6,000 in other debt, too.
Too bad I only have a single, 5.25% fixed, with no other debt.
If I was only going to be here one year, I might consider that deal. Otherwise, I'd be an idiot.
And when he walks, who gets the shaft? Was this guy even in the country legally to begin with?
This is garbage news
75k neg am on that loan would require close to a 18% interest rate in a 36 month period. Margins rarely exceed 4% (normally 1 to 2%)and the index has ranged from 2.5% to a little over 4% according to bankrate.com for the last few years.
Margin + Index = The rate you pay on an adjustible- A little over 8% right now on an extremely high margin option arm and that is the highest it has been in a couple of years.
Bottom line this story is b.s.
Look at the typical mortgage payment, compare it to what the average person socks away into their 401(k) every month. Look at the typical mortgage balance, and compare that to the typical IRA balance.
I was a mortgage broker for 6.5 years, until recently...and in all that time I originated one of these Option ARMs. It's not possible for a typical borrower to understand this product.
Investment Representatives are held to a very high standard. Inevitably, mortgage brokers will be also...the mortgage industry has become the refuge for those who:
1) Have shady morals.
2) Don't like plaid suits, so therefore won't sell used cars.
Are there honest people in the business? Sure. There are some products, and Option ARMs are one of them, that should only be offered to financially savvy, well off borrowers.
Had an RR sold an investment to these people, his butt would be in a sling.
Horse manure. The people who took these adjustables were fully advised about the risks. Cripes, the word "adjustable" should have provided a clue. I have no sympathy for anybody who took an ARM in today's market of historically low fixed rates. (What are the rates now, 6% - 7% ?) The stupidity of choosing an adjustable over a fixed-rate mortgage is staggering. No sympathy from me.
And Congress also investigates the oil and gas companies for gouging and it is all about scoring cheap political points.
I would really love to know how many hits you get on your blog from posting these articles.
An adjustable gives you a cheaper rate than a fixed for a certain period of time. If you are not going to hold the property for more than a few years then why give the bank more of your money?
People do not live in their houses for 15-20 years like they used to.
I've always had 15 year loans on my houses. Our last one is on a semi-monthly payment schedule (auto payment from checking aact. to mortgagor) and the loan's effective life is 14 years. Only 11 years to go.
I don't feel bad for these people, either. They're the MSM's newest "victim" class, since sympathy for Katrina "victims" is about used up.
People making the biggest financial decision of their lives are idiots if they don't make sure they understand the paperwork and the terms they're signing onto. Most people don't have the knowledge base to understand mortgages; that's why there are real estate lawyers. When you're spending hundreds of thousands of dollars, throwing a few hundred additional bucks at a good real estate lawyer to look over the paperwork and explain things is simple common sense.
The MSM is seeking out stupid, whiny people who got in over their heads on their mortgages. Must be an election coming up.
Sad thing is, for a mere $350.00, I would have read it to them, told them what they are signing, and even shown up at the closing. But, hey, that would be $350.00 less to put down on their $400,000.00 dream home.
Ya beat me. See my #22.
First they'll complain that you red line neighborhoods and charge higher rates for mortgages that are likely to default because the loaner is being pressured to lend to the marginal earners.
Then they bitch when you make it possible to afford the unaffordable in the early years while you spend the money you should be saving for higher payments on other stuff.
Last resort, claim no one explained it to you.
I have about as much sympathy for these house-poor profligates as I do for the losers who signed up for benefits of military service thinking they'd never have to fight. Suffer,baby.
For $350, I'll hire you next time.
I would agree with you in different circumstances, like when rates are 10%+. But when fixed rates are at ~5%? Sorry, no sale. And apparently, this new "victim class" the scumbag newsrooms have discovered stayed in their houses long enough to get porked. Oh well.
It's just another result of the "instant gratification" culture that always seems to "victimize" the particularly stupid.
Absolutely no understanding of basic economics.
Lenders can't give money away any more than anyone else can give away their products.
Though I have to wonder if lenders aren't nearly as dumb as those they've done this to. No one wants to reposess a bunch of homes that can't be moved. By lenders I mean those that purchase your mortgage loan 30 days after you take it. What planet are these people on?
I bought a car recently. Fort Knox CU suggested a variable rate loan with *fixed payments*. I didn't realize I looked so dumb. No thanks. Hyundai is loaning at 2.99% to those with good credit. They fell all over themselves to loan me money.
But until now I didn't know they had added this wrinkle to car loans. Lot of people out there screwing themselves on more than home loans. Creepy.
Not so much the loans, but that so many people are that dumb. Very disheartening.
BTTT
I'm sure Orifice would have been much happier if these lenders would have avioded marketing these loans to particular "lower income" demographics. Maybe these lenders could have taken maps and drawn red lines on them to indicate which neighborhoods were "sophisticated" and which were not...
I've been trying to figure out. My best guess is that these loan brokers have figured out how to lend someone else's money in such a way that they get a cut of the action but none of the risk, whether because they're planning on a government bailout or because they've found someone dumb enough to take over their loans.
As for the borrowers, if they really find themselves surprised, that would suggest they're not too bright. On the other hand, if someone with marginal credit can move into a house with a goofy mortgage that costs less than rental, and then skate when the payments go up, who's fooling whom?
I'm not an expert in this, but don't these mortgages get bundled up in REIT's and resold to investors? The investor spreads his risk by bundling. The mortgage company hands the risk to the investor. The default hurts the investor, not the first lender.
He should be placed in protective custody.
That's just what I did several years ago. Then I really got going and paid off all my long term debts by about two years before I retired. Now I stay current on my credit cards and that's it. Debt elimination is one of the best things any potential retiree can do.
As far as ARMS are concerned, it was clear from the moment I first read about them that they were disasters waiting to happen for those who were foolish enough to agree to them.
I bought my first house, alone, at the age of 21. Even then I knew enough to know that I didn't know enough, and paid an attorney to look over the paperwork. Hubby and I have bought four more houses together over the years in four different states. We've refinanced one of those houses, so together we've signed mortgage paperwork five times. We always used an attorney, it was never more than a few hundred bucks, and it was always money well spent.
I'm fresh out of sympathy for people who get in over their heads and then say, "I didn't understand." As an adult in a free society, it's their responsibility to understand, and if they didn't, it's nobody's fault but their own.
Most mortgages get bundled up in mortgage backed securities (MBS.) A large pool of mortgages is made and then a number of security groups (called tranches) are sold off. The first tranche is the most secure and pays the lowest interest rate, the second tranche is a bit more risky and pays a higher rate and so on. The last tranche can be quite risky, but pays the highest rate. Interestingly, a lot of these final tranches have been going overseas recently to foreign investors seeking high yielding assets. Anyway, defaults can end up hurting the mortgage company or bank that sold the mortgage. H&R Block has a mortgage arm that recently set aside over $100 million because, although they sold off the loans, they guaranteed a minimum number of payments would be made to all tranches. Due to a high number of defaults, HRB was left having to make those payments. This is a bit unusual tho'. The way most originators get hurt is that they usually continue to service the mortgage (collect payments and send them on to the investors.) They get paid for this and when a mortgagee defaults, the bank no longer gets those servicing fees.
Very interesting. Thank you.
Blah, blah,blah...
We've been through this BEFORE, and it will happen AGAIN...
Everyone on EARTH tried to tell these folks that No principal loans, and 125% refi's would come back to haunt them, but they didn't listen....
Poor financial decisions on your part, should NEVER create a crisis on MY part.....
"I have no sympathy for anybody who took an ARM in today's market of historically low fixed rates."
And I'm betting not a SINGLE ONE of these people is old enough to remember THE LAST TIME this happened, either...
We went through this same BS during the Carter years...
Some people will NEVER learn from history, and will be forced to repeat the same mistakes, over, and over, and over...
It's a contract, you better be damned sure to read and UNDERSTAND EVERYTHING in it.
It's a matter of personal responsibility to do this, but that is out of style in almost every circle outside of conservatives.
Really now ? interesting ... thanks for that.
"All you naysayers, can just read the link and weep. Congress is going to investigate."
Congress is just looking for an issue to make it look like they are doing something and to divert attention from other things. We don't need Congress to be babysitters for people who are too stupid to read the fine print. I don't feel the least bit sorry for those people.
During the Carter years, and into the early '80s, fixed rates were in the 15% - 20% range. At one point (c 1982), the only option was FHA because conventional lenders were scared off. During those years adjustable-rate/graduated/negative-amortization loans MADE SENSE. You could get a house pretty cheap (BECAUSE rates were so high) and qualify for the mortgage through this kind of gimmickry.
The idea was, you get into the house, suck it up for a few years, AND THEN REFINANCE into a fixed-rate loan. As rates continued to sail down over the next two decades, many people refinanced into lower fixed rates (and for "cash out") numerous times. This usually made a lot of sense for most people.
But today? With fixed rates at 5% - 7% ???
For a typical homeowner to take out an ARM today is stupid beyond belief.
Additionally, the largest of these GSEs has been incapable of producing a credible financial statement for half a decade.
You really have it in for Fannie and Freddie, don't you? Or is it just Fannie?
If you are talking about Mortgaged Backed Securities, I think it makes sense to mention the largest owner of MBS are Government Sponsored Enterprises.
This is a central feature of the housing bubble.
Well, if Lockhart gets his way, maybe they'll get shrunk to a size that'll suit you. Not going to happen before the election tho', and getting anything controversial done during a lame duck session is usually a bit difficult. There's always next year...
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