Nightmare Mortgages

[donsu]

http://news.yahoo.com/s/bw/20060901/bs_bw/b4000001


For cash-strapped homeowners, it was a pitch they couldn't refuse: Refinance your mortgage at a bargain rate and cut your payments in half. New home buyers, stretching to afford something in a super-heated market, didn't even need to produce documentation, much less a downpayment.

Those who took the bait are in for a nasty surprise. While many Americans have started to worry about falling home prices, borrowers who jumped into so-called option ARM loans have another, more urgent problem: payments that are about to skyrocket.

-snip-

The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules -- often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can't count on rising equity to bail them out. What's more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.

There was plenty more going on behind the scenes they didn't know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan's interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they'll soon be confronted with the choice of coughing up higher payments or coughing up their home. The option ARM is "like the neutron bomb," says George McCarthy, a housing economist at New York's Ford Foundation. "It's going to kill all the people but leave the houses standing."

-snip-

Yet the banking system has insulated itself reasonably well from the thousands of personal catastrophes to come. For one thing, banks can sell some of their option ARMs off to Wall Street, where they're packaged with other, better loans and re-sold in chunks to investors. Some $182 billion of the option ARMs written in 2004 and 2005 and an additional $83 billion this year have been sold, repackaged, rated by debt-rating agencies, and marketed to investors as mortgage-backed securities, says Bear, Stearns & Co. (NYSE:BSC - News)Banks also sell an unknown amount of them directly to hedge funds and other big investors with appetites for risk.
-snip-
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screwed again

this is a long article that ends with:

Analyst Frederick Cannon of Keefe Bruyette & Woods says most banks don't apologize for their option ARM businesses. "Almost without exception everyone says (the option ARM) is a great loan, it's plenty regulated, and don't bug us," he says. In an April letter to regulators, Cindy Manzettie, chief credit officer for Fifth Third Bank in Cincinnati, said it's not the "lender's responsibility to help the consumer determine the appropriate payment option each month.... Paternalistic regulations that underestimate the intelligence of the American public do not work."

[Sammy Pepys]

1. 30 year fixed....

Demand nothing less.

[moc]

2. We refinanced in 2004 into a 15 year fixed loan.

I'm really glad that our lender (USAA) didn't try and push any of these option ARMs on us. I also really disagree with the final statement that "Paternalistic regulations that underestimate the intelligence of the American public do not work." The truth is, I'm a reasonably intelligent individual. I don't have any problem with numbers (I teach statistics at the graduate level), but when it comes to financial stuff, I'm a dunce. If a mortgage officer pushed an option ARM on us as such a great deal, I might not be able to sort through the risks independently.

[Selatius]

3. Hahahaha, I love this quotation

"Paternalistic regulations that underestimate the intelligence of the American public do not work."

I guess Truth in Lending Act should be repealed, huh? Afterall, we can let consumers read the fine print to dig out the key terms of the lending arrangement and all costs. I mean, it's so paternalistic to require that be put in bold when consumers are smart enough to find it themselves, no?

[annabanana]

5. RIP those damn paternalistic seat belts outta the car!. . . n/t

[hobbit709]

4. 25 year fixed

7.5%, 7 years to go-payments $516/mo(including escrow).

[Gormy Cuss]

6. The 'mortgage bubble' is the real problem with the housing market.

The mortgage business has been allowed to throw caution to the wind in terms of lending standards and as this article make clear the companies have insulated their risk but the consumers are in for some very rude surprises if they opted for these newer, creative financing strategies.

Codifying more conservative lending practices for mortgages on primary residences should be an election issue.

[acmavm]

7. They took advantage of people.

[mcscajun]

8. ARM is right, as in "arm and a leg"

Fixed-rate mortgages, always. Never get suckered by those "flexible" arrangements. All "flexible" means is "Bend Over." I used to proofread those ARM and Home Equity Loan/Lines of Credit docs, among other tasks, and I was appalled at the number of default clauses in them. Many of the conditions that can cause default are things no borrower has any control over.

You couldn't PAY me to take anything but a fixed-rate mortgage, ever. I refi'd in October 2002 for a 15-year term at less than 6%, and I was (and am) very happy about that.