Posted on 09/30/2006 8:04:44 AM PDT by djf
Federal banking regulators yesterday issued a strongly worded warning to lenders about the growing use of nontraditional, or "exotic," home loans, telling them they must make sure consumers have the money to repay the loans.
The warning, called a "guidance," had been opposed by many lenders, some of whom have earned record profits by aggressively promoting such loans, which include such variants as interest-only mortgages.
Many economists now believe that the surge in these new kinds of loans contributed to the real estate boom of the last few years, fueling record housing construction and higher prices. Regulators and consumer advocates say that these loans also increase the risk of foreclosure as monthly payments jump.
These loans, once marketed to the wealthy but recently expanded to the mass market, have been particularly popular in high-priced areas such as the Washington region. Here, for example, more than 40 percent of people buying or refinancing their homes in the past two years used them. They have been one way for borrowers to deal with rocketing housing costs, because they let buyers pay only the interest or even a lower "teaser" rate at the beginning of the life of the loan. But payments rise later, even doubling, causing what regulators called "payment shock."
(Excerpt) Read more at washingtonpost.com ...
Wonder if we should ping the jackals?
Nah, they'll find it soon enough. One of them has to be on shift this morning.
I think that's because this is warning shot across the lender's bow. The regulators are telling the mortgage companies not to screw their customers or else.
I wouldn't take this lightly. If there's one entity that can cause a real estate crash, it's the government.
According to the article this affects banks, not mortgage brokers.
It is crazy. People get houses they cannot afford with an ARM that is 1% or 2% now, and they just pay interest, not principle, for five years, then it goes up to market interest rates. If banks would stop loaning people money to buy a house they can't afford, then home prices would have to come back down to normal in Calif. In Texas we always had to make four times our monthly mortgage payment, P & I, property taxes, insurance, etc. So you don't get stuck there with a mortgage you can't afford.
Unless they refinance, and most people make more money after five years.
If it was just the little guy that got screwed when RE prices fall, none of the bigwigs would give a hoot.
A falling RE market doesn't affect the folks who have almost zero equity, but it hurts the big boys - the banks - and hurts them bad.
MOST PEOPLE isn't everyone. My college roommate in San Diego is in foreclosure right now. She is a teacher.
And if you read the article the monthly payment can balloon from $600 a month to $1800 a month. My friend's credit is screwed up so she is having a devil of a time getting a refi before the foreclosure is done. I told her to SELL the house. She bought it for $350K and it is worth a million $ now. If she loses it she loses all the money she has put into it all these years. Sad.
Here is the problem.
Regulators are issuing a "warning" which translates into banks cutting back on these types of loans. Since the vast majority of these loans are made in "hot markets" such as California, Arizona and Florida, the demand for housing will fall. Since the demand for housing seems to be falling anyway, the regulators are making problem worse. OF COURSE.
Plus, as ex-Texan will verify, mortgage fraud is particularly rampant in the exotic mortgage market as well. Why? Because it appeals to people who can't really afford a normal mortgage and may be desperate.
The fraud problem hits both borrowers and lenders (lenders as in major banks - the frauds are made by smaller lenders, some mortgage brokers, mortgage servicers). The default problem really causes problems for banks, Fannie and Freddie, NOT consumers.
That sounds like an extreme case to me. I got a one year ARM many years ago. I barely qualified and it's worked out very well for me.
My friend's credit is screwed up so she is having a devil of a time getting a refi before the foreclosure is done.
That sounds like the problem to me. Somehow she got bad credit.
I told her to SELL the house. She bought it for $350K and it is worth a million $ now. If she loses it she loses all the money she has put into it all these years. Sad.
If she has equity then her situation should be pretty good. Why she everybody who needs the opportunity of an introductory loan be punished because your friend is too stubborn to sell?
"I broke my ARM, and it feels good."
This will be a windfall for mortgage brokers who aren't subject to this regulation.
She said it's worth a mill... if it was me, I'd put it on the market for 850K, sell it tomorrow, and walk away a half mill richer!
Federal Reserve Excel Pdf File
Watch as housing price plummet. Hundreds of thousands of new loan and refinancing applications are going to be declined. People hoping to jump off their exotic mortgages with teaser rates may be left to the wolves. [Learn more?}
LMAO in Oregon.
It's gonna get interesting, fur shur!
Really, though, my heart goes out to those folks who have the most to lose. They're just J6P's, and young families, IMHO they don't deserve what's up. I'm sure they were told by the lenders "Oh, don't worry! Everything is hunky dory!!"
I finally agree with you on something.
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