Friday, July 28, 2006

Maxed Out Mama Talks Funny Money Loans

She worries that the adjustable loans will end up causing problems because people will owe nearly 100% more than their original loan amount when it is all said and done.

See what I mean about funny money loans? The borrower's payments in the first example go:
Year 1: $824 - 76 (second paid by Beazer) = $748
Year 2: $886 + $529 = $1,415
Year 3: $953 + $529 = $1,482
Year 4: $1,024 + $529 = $1,553
Plus, to achieve the low initial down payment the borrower is signing up for negative amortization, which means that their loan balance rises for a while instead of dropping. The first mortgage is adjustable too, so the payments could go even higher. Very few people who take this deal would be able to keep the house, because unless they brought money to the table they would almost certainly be unable to refi out of it (without double digit price inflation, which is no longer in the cards). The second example is no better.
So big whup, right? You have a good job, your health and the mortgage is fine. Or, you plan to move and the market is fine. Not so fast, there professor.

When you look at new home sales figures and prices keep the above example in mind, because it is certainly not unique. I hope this helps you to understand why the downside to this market is so huge. In many cases, "homeowners" will never be able to make even their first reset payment. There are cases of people unable to make their very first mortgage payment.

If you think this is funny, consider the impact on your home value. Sure, you may have signed up for a 30 year fixed-rate last year when you bought. But your home's value will be depressed when the forced sales from this type of maneuver start rolling back onto the market en masse. When you find your home worth less four years from now in nominal dollars than it is today, you'll understand what a brutal racket this has been. [emphasis added, ed.]

I never thought I would become a wild-eyed consumer activist, but at this point all I want to do is find some public interest law firm and give them the ammo to sue the britches right off these and similar people. You see, I calculate loans and consumer disclosures, and I can usually find some sort of error in about 50% of RESPA loan document packages (although that isn't true for my banks). And Hillary? Hillary with her proposal to offer downpayment assistance? Hillary is looking after the Beazers of the world, and not the people she claims to want to help. Watch her campaign finance contributions - you'll see. Because a $5,000 taxpayer-funded downpayment gives a lot of room to roam for crooked outfits like this, and only abuses the "buyer".
Mama has been beating the drum of doom about the housing market. I'm not sure how this applies in a fairly valued market, versus a wildly over-valued market like in Florida. I'm guessing that over-valued areas are worse. People can't get out from under a mortgage they can't handle and even putting it up for foreclosure doesn't work--because values stink so bad no one can even pay that.


Gary said...

The last oil price plunge caused 20-60% drops in values of homes as thousands of foreclosed homes were dumped on the market.

I disagree with most all other opinions you express on this site however.

For example, the ACLU defends everybody, especially the people they most disagree with.

Dr. Melissa said...

The ACLU doesn't defend gun owners. They don't defend posting the 10 Commandments. They don't defend people who believe that God-believing is legitimate American history deserving to be preserved.