Mortgage loans

[barbara L]

I just read on CNN/Money/Real Estate that defaults have increased quite a bit.

I know some people that got some of that creative financing and their interest only period is ending soon. Another has one where he doesn't even pay all the interest. He has three loan payments to choose and he said that as soon as it hits a certain value his loan will automatically convert to a principal and interest loan with one payment. He is worried that he won't be able to afford the payment because he is expecting the interest alone to be something like 2 points more than what he has now. They are all hoping to refi into a conventional mortgage.

Being a thinker like I am, I wonder how they are going to qualify for a conventional 30 year mortgage when they couldn't originally qualify. Is it because their equity has increased? I can tell you for a fact that their income has not increased. We all have pretty much the same jobs for local government.

I mean - we all hope that our home values remain stable, but we pray that they don't go down in value. Here is So Ca. houses just aren't selling for what they did a year or two ago.

We all bought at about the same time, August 05. They bought great big houses in new tracs. I bought a new mobile home on its own land. I have a conventional mortgage. I downsized and moved to a better school district in a decent part of town. At first I was jealous because they had such beautiful houses. (My examples both have an HOA too, with pools and in gated communities). Our kids go to the same school district, I am just on the other side of town. Now I kind of feel sorry for them.

I just wonder what is going to happen to them. Why do banks allow these kind of mortgages? One girl told me that she wished she would have moved to my side of town. She is scared that the interest rate even when she refinances is going to be more than she can afford. She already said that she can't afford the payment if she remains with the same mortgage that she has now when it converts to principal and interest. She says she has to refinance for 30 years.

Just my two cents I guess. I have enough to worry about when I'm only worrying about me.

[Coleroo]

I feel sorry for people like that too. My husband and i purchased our home last March - we spent 4 months reasearching the area, studying what was available in terms of loans, what everything meant, etc. We knew better than to get an ARM even though rates were the lowest they'd been in years! Right before we closed on our home, i was talking with a friend about her home she had purchased with her fiance 2 years earlier - she didnt know any of the terms or conditions or what anything meant! I was (sadly) shocked. She had this nice 2 story house in an exclusive ritzy subdivision. Unfortunately, one month later her 2 year ARM (which she had actually thought was a 3 year arm) adjusted..majorly... and her payment went up by $200! whew...

Oh.. She was also pregnant.. about to quit work..and then they bought a new avalanche.

??? I wonder how people can float in life like that?

[disneysteve]

I find it hard to feel sorry for those folks. They knew exactly what they were getting into and the huge gamble they were taking. If it backfires, maybe it will teach them not to speculate so wildly in the future. I know of a few people in this area who "invested' in pre-construction deals on luxury condos hoping to flip them before they were finished. I honestly don't know what became of those deals as they aren't people I'm close with, but I wouldn't be surprised to learn that they lost a lot of money.

In addition to more defaults, I think we will also see a rise in the new 40 and 50 year mortgages that came into being in the last year or so, as there will be many people who won't be able to keep their homes with a traditional 30 year loan but can't afford to sell because they owe more than the house is worth.

[project15]

Originally Posted by disneysteve

They knew exactly what they were getting into and the huge gamble they were taking.

They may not have known that there was a huge gamble. They just decided they wanted a nice big luxury house and the bank provided a way for them to afford it at this point in time. I don't feel sorry for them at all, they should have done their research and saved money like the rest of us financial savvy people on this site.

To the original poster. Good job keeping a level head and not buying more than you can afford.

[disneysteve]

Originally Posted by project15

They may not have known that there was a huge gamble.

True. I should have said they SHOULD have known it was a huge gamble. If you take a huge mortgage without understanding the terms, that's nobody's fault but your own. You can't depend on the bank to explain the downside.

[Ima saver]

I have never understood how anyone can take on these big mortgages?? We have built houses for people older than me, and they are taking a mortgage out on the house. One couple was 72 years old and they took out a mortgage for about $180,000. We bought a plain, but new house, paid it off and have moved up three times since then with no mortgage.

[barbara L]

Okay granted, the consumer should have explored all the variables; however, doesn't the finanical institutions that lend money have a certain responsibility to the consumer that goes beyond just explaining what the interest rate is when the loans reset?

I mean (this may go beyond my scope of knowledge) but shouldn't they tell the consumer what the mortgage payment will be ($$$)? Shouldn't they explore how the loan will be paid back? Shouldn't more loans be denied for lack of ability to pay in the future? Wouldn't everyone have been better off if everyone bought houses that they can afford to own?

Now I guess HSBC has posted its Mortgage losses which may cause interest rates to go up so banks (??) can recoup their losses.

I know could've should've would've. I just thought that there was more stringent critera involved in buying a house. Like the ability to repay the loan.

I only took business classes in college, never any real estate classes so maybe I don't really know what I'm talking about. I have some knowledge in recessions vs depressions.

I do know that real estate is a huge business and an increase in defaults is a big deal. I've a feeling that we are going to see the 80's all over again.

[disneysteve]

Originally Posted by barbara L

I mean (this may go beyond my scope of knowledge) but shouldn't they tell the consumer what the mortgage payment will be ($$$)? Shouldn't they explore how the loan will be paid back? Shouldn't more loans be denied for lack of ability to pay in the future.

You would think, but apparently Congress doesn't agree. When the government deregulated the banking and credit industries, all hell broke loose. Years ago, there were fairly strict laws and guidelines governing the industry. Once those limits were eliminated, lenders were free to be much more lenient in who they lent to and what rates they charged. That's when we really started seeing the growth of payday loans, tax refund anticipation loans, interest-only mortgages and a lot more sub-prime lending. They also greatly relaxed the amounts they let people borrow. Previously, 2-3 times income was the limit for a mortgage. Now people are frequently borrowing 4-5 times income or more. Before, your housing costs couldn't exceed 28% of income. Now, it is often 50% or more. I have no clue how these people can possibly afford the payments.

The bottom line is absolutely buyer beware. It is up to you, the customer, to run the numbers and be sure you understand exactly what you are getting into and exactly what it is going to cost you. The lenders have no requirement, and certainly no desire, to make sure you understand or can afford the loan you are taking.

[jIM_Ohio]

I am one of those which "maxed out" loan to value on a mortgage in ohio. My wife and I are young, no kids, and we decided it was best to move into the school district of choice when we had the means.

We bought a house with an 80-15-5. 80% first, 15% second, 5% down. The 5% down was a 401k loan at that.

The important thing to us is the house established our budget before kids came. The 401k loan was paid off in 14 months ($1100/month payments). We then applied this $1100/month to the 2nd mortgage (15 yr ARM). We are now refinancing out of this and almost have 80% LTV on whole house.

When people go into this without knowing their terms, shame on them. The banks are out to make money. When people have 95% LTV, interest rates on first and second are higher (banks make more money), so it's to their benefit to make these loans.

Laws require loans like this to escrow taxes and insurance... paying more mortgage interest gets the larger year end tax deduction (we claimed 7 federal exemptions and still got north of 2k back).

To me it's about getting the house we want and eliminating the frequent costs associated with moving (closing costs+moving costs). It might not be the most fundamentally sound move, but other than not having the money for a down payment, the other numbers looked good to me.

[disneysteve]

Originally Posted by jIM_Ohio

we decided it was best to move into the school district of choice when we had the means.

We bought a house with an 80-15-5. 80% first, 15% second, 5% down. The 5% down was a 401k loan at that.

There are those who would argue that you did not have the means, since you had to borrow 100% of the purchase price. It sounds like it worked out well for you, but it was certainly not a method I'd recommend for most people. I'm old school. If you can't put down a 20% downpayment, you probably can't afford the house.

[jIM_Ohio]

Originally Posted by disneysteve

There are those who would argue that you did not have the means, since you had to borrow 100% of the purchase price. It sounds like it worked out well for you, but it was certainly not a method I'd recommend for most people. I'm old school. If you can't put down a 20% downpayment, you probably can't afford the house.

It's OK for anyone to think we "can't afford" the house. A few family members also questioned this decision. Posession is 9/10 of the law... we have the house and did not go on a vacation the first year we moved in... there was some sacrafice involved. We easily made the payments based on our income (we had $220/mo in wife's student loans as only other debt when we moved in).

I choose to put as much in my 401k as possible... so to borrow from it makes sense (to me) provided I pay it back within a year. We reduced a couple of expenses to allow an $1100/mo extra payment.

We owned close to 10% of the house within 14 months of moving in (5% payoff and 5% appreciation). This gets much more favorable loan terms. Being closer to 80% LTV is even better and is where we are when refinancing now.

I wouldn't suggest this route to anyone else... but this is what we did, it could work (we are not fullly at 80% LTV and we are working on that).

[disneysteve]

Originally Posted by jIM_Ohio

we have the house and did not go on a vacation the first year we moved in... there was some sacrafice involved.

I think this is the key to your success. Far too many people want all the stuff but aren't willing to make the sacrifices necessary to get it. So they end up overextended in debt up to their eyeballs.

You ran the numbers and made sure you could afford the deal you were getting involved in. I think that's great. If everyone did that, we'd see far fewer stories about the mountain of debt Americans are buried under.

[Elgin526]

Originally Posted by disneysteve

There are those who would argue that you did not have the means, since you had to borrow 100% of the purchase price. It sounds like it worked out well for you, but it was certainly not a method I'd recommend for most people. I'm old school. If you can't put down a 20% downpayment, you probably can't afford the house.

Weeelllll.....I agree with you to a point. A young single person or a young couple can afford to take a higher risk than older people or those with children. I bought my first home, a condo, with only 3% down and that was borrowed from my parents! The payments (mortgage, interst, taxes, and assoc. dues) were almost half my take home pay. But since I was young and single, with only a low car loan as debt, I could live cheap until I could refinance to a lower interest rate, eliminate the mortgage insurance, and lower my payment. By that time my car was paid in full and I had more breathing room. 4 years later I sold it for a $50,000 profit, which then gave me the 20% down payment for my second home, a single family that I bought with my new husband. I was able to handle the risk, and it paid off huge, but a couple in their 40's with two young kids would have been hard pressed to do what I did!

Had I waited to save the 20%, I would have been priced out of the market as housing was HOT in my area from 2000 to 2006. Even now prices haven't decreased at all, they just aren't really going up, either.

[Scanner]

I don't feel sorry for people like this.

At all.

Stop being a bleeding heart - I know you live in California and it's full of bleeding hearts out there but the best thing you can do is capitalize on people like this in the foreclosure/tax lien department.

I never feel sorry for the Jonzez when they take their fall. It's America - they can start over again.

[Scanner]

Sorry if that's sounds cruel but you know. . .my family doesn't go to Disney every year, we own a $75 grill instead of a $500 stainless steel grill, we haven't built that beautiful Trex deck our neighbors have, hell. . . I'm a doctor and I drive a Ford Taurus and my wife a Toyota Matrix.

Why am I supposed to feel sorry for these chuckleheads? I'd rather grow a twisty black mustache and repossess their home.

I suppose it's a business thing too, and maybe DisneySteve can relate, they come into our practices and now boo-hoo they don't have health insurance and your copay is too high, it should be $10, not $30.

Sure, they needed a beautiful stainless steel grill for that nice deck to go with their beautiful house.

Live and learn, baby.

[DebbieL]

I'm with you Scanner - boo hoo hoo for them. They should have known better. I haven't trusted this crazy housing market for years now (why on Earth is a house that cost $200K five or six years ago worth $550K now?). Many people jumped into houses they (obviously) couldn't afford - alot of them thinking that housing just goes up, up, up and they will get rich off it. Guess what - it also goes down. I have never understood how the average household income where I live could be about $60K and the average house selling price is about $540K now. Something's gotta give baby. I have NO SYMPATHY whatsoever for anyone being so irresponsible to be signing a half million (or more) dollar loan then saying they didn't understand it. WTF??? I couldn't sleep at night if it were me. I'm waiting this stupid bubble out. Hopefully before long things will be a little more sane here (I'm in Victoria, BC).

[disneysteve]

Originally Posted by Elgin526

A young single person or a young couple can afford to take a higher risk than older people or those with children... The payments (mortgage, interst, taxes, and assoc. dues) were almost half my take home pay. But since I was young and single, with only a low car loan as debt, I could live cheap until I could refinance to a lower interest rate, eliminate the mortgage insurance, and lower my payment.

True. Another factor is that folks just starting out can generally look forward to their income rising over time, so if you have a fixed rate loan, the payment gradually becomes a smaller and smaller portion of income. When we bought our house, I was in my first year of employment. I knew (by contract) that my income would increase by 30% in year 2 and then increase another 35% the following year. By then, the payments were no problem at all. Though we did put down 20% when we bought.

[34saving]

The hard part is that these lending practices and the foreclosures that ensue will affect ALL OF US whether we were responsible or not. More REO houses on the market = the price of all of the houses goes down. More REO houses means more vacancies, more as-is fixer-uppers, and more potential for neighborhoods to slide. More REO homes means more banks making less money and/or getting into trouble and we all know who bails out banks when they fail. Etc . . .

[DebbieL]

I personally want the price of houses to come down - a lot. There is no way a house should be over $500k where I live (unless it's a mansion/estate/etc). The incomes ($60k household) don't correlate with those ridiculous prices. I knew there was a problem when I had to really start asking myself where the hell all the money was coming from? Either everybody else except me suddenly got rich (doubtful) or something wasn't adding up. It cannot continue, and common sense tells me that it has to take a dive. The sooner the better as far as I'm concerned.

[jIM_Ohio]

Originally Posted by DebbieL

I'm with you Scanner - boo hoo hoo for them. They should have known better. I haven't trusted this crazy housing market for years now (why on Earth is a house that cost $200K five or six years ago worth $550K now?). Many people jumped into houses they (obviously) couldn't afford - alot of them thinking that housing just goes up, up, up and they will get rich off it. Guess what - it also goes down. I have never understood how the average household income where I live could be about $60K and the average house selling price is about $540K now. Something's gotta give baby. I have NO SYMPATHY whatsoever for anyone being so irresponsible to be signing a half million (or more) dollar loan then saying they didn't understand it. WTF??? I couldn't sleep at night if it were me. I'm waiting this stupid bubble out. Hopefully before long things will be a little more sane here (I'm in Victoria, BC).

the mistake not being discussed is that the HOME you live in is NOT an investment. At least not a good one.