A loan that’ll get ugly fast

[PerryChase]

A loan that’ll get ugly fast

Option mortgages allow payments so low that borrowers go deeper into debt.
By David Streitfeld, Times Staff Writer
9:57 PM PST, December 10, 2006

Every day, Will Hertzberg owns a little less of his three-bedroom house in Corona.

Like hundreds of thousands of other homeowners around the state, Hertzberg has a mortgage that lets him choose how much he pays each month.

Like many of them, he always chooses to pay as little as possible.

LA Times Full Article
———

“I’m rather screwed,” Hertzberg said.

powayseller, this is an example of what you’ve been writing about. The options ARMs are beginning to affect the market. Only time will tell how many of them will caused distressed sales.

[lindismith]

I read that article, Perry. There are some frightening stats in there. And that guy profiled makes me so sick. What a complete lack of personal responsiblity.

[PerryChase]

Hertzberg always looks at these fliers, hopeful in spite of himself. “I’m waiting for a 100-year loan,” he said. “My heirs can worry about paying it off.”
———
An interest only loan is a loan in perpetuity. An option ARM is a growing debt that never gets paid off.

Since this guy is not paying down any principal but adding on to it, he’s already way beyond the 100-year loan!!!

[ibjames]

Ugh, how can reading that make me sick to my stomach?

If he didn’t let his own greed get the best of him he would be just fine.. I can’t believe that! That is so horrible, I wonder why he would let himself be in the paper with that story, I would be too embarassed. Maybe he wants people to not end up like he did?

[blahblahblah]

Great article — did everyone catch the bit that in California in 2005, 1 in 5 (20%) mortgage loans were pay option while in 2003 the ratio was 8 in 1000 (.8%)? It’s classic late-stage bubble behavior where all of the weak hands rush in. Hold on tight, this is going to be a doozy…

[tangouniform]

“I’m waiting for a 100-year loan,” he said. “My heirs can worry about paying it off.”

— But, wait! Earlier in the article it is mentioned that he has no kids. What heirs is he talking about?!?

Another poster child for NAR.

[sdrealtor]

One of the major reasons that there were so many option arms is that they generate HUGE HUGE paydays for the mortgage broker. From my understanding the mortgage brokers make 2 to 3 times as much on an Option ARM than on other products. I know of people that could easily have afforded more conventional loans that were put in them. There was a lot of greed on both sides of the loans.

[bob007]

people who have 30 yr fixed mortgages and who can afford their mortgage payments will do fine. Just look at your home as a social investment not a financial one.

[PerryChase]

Why would people who can afford conventional 30-year mortgages sign on to Option ARMs especially if the fees are higher with prepayment penalties?

Like the example in the LA Times article, people start out with the best intentions, but they then find themselves getting seduced by the “instant wealth.”

I’m guessing that the fallout will be much worse than industry analysts have expected.

bob007, I don’t think that it’s fine to buy overpriced houses. If you overpay for a house, you’re giving up on many other things; and in the end you’re worse off than you would’ve otherwise been. Think about it. It’s not OK.

[sdrealtor]

“Why would people who can afford conventional 30-year mortgages sign on to Option ARMs especially if the fees are higher with prepayment penalties?”

Because they were mislead or even worse deceived.

[powayseller]

I still wonder how many people with Option ARMs put any money down. Why would you put down 5% or 10%, and then reverse all that equity downpayment by increasing your debt every month? (Option ARMs allow you to pay only some of the interest, so the part that you don’t pay is added to your mortgage balance, and your mortgage balance gets bigger every month. So any downpayment made is eventually wiped out. Once the loan gets 15% – 20% bigger than the original loan, the payment schedule goes up, and the borrower has to start repaying the entire loan, including the past interest and the principal.)

Anyone who cares enough about building equity and paying down principal to make a deposit, wouldn’t blow it by going negative-am, would they?

[no_such_reality]

Because they were mislead or even worse deceived.

I really doubt it. I think most of them know exactly what they were doing. They were putting it on easy credit just like everything else.

I believe they were told and blissfully chose to ignore the negative side of the equation thinking like many, that in two or three years they’d just refi into a new loan and continue.

It’s the perfect little consumer fantasy. They get the big house, they get the free spending cash, they get a nice low payment and they just keep churning the wheel.

[sdrealtor]

Many are sold on the 2 conservative payment options of the Option ARM. I know people who were told it’s just like a 5/1ARM or a 30 year fixed payment. You can do whatever you like pay the fully amortized payment, the interest only payment etc.

My landscaper told me he refinanced into this great loan that reduced his payment in half. He had no idea what he was getting into until he realized it was a neg am payment. Sure he thought the lower payment was great but he had no clue what the loan really was. Now he’s stuck in it for another 18 months. He was in a 30 year fixed rate at about 6% before he got this great loan that cut his payment in half. He pulled out no equity. He was done in by an unscrupulous broker.

I have another client that got laid off by Qualcomm. He had an assembly/testing job and isnt the brightest bulb in the box. He could have easily pulled out a 25K HELOC for no cost and solved all his short term problems. Instead an unscrupulous broker refied him into an Option ARM knowing full well that he was looking for work out of the area. When he sold his house 3 months later he had a $15K prepayment penalty on a loan amount under $300K.

[blahblahblah]

sdrealtor, you just hit on what’s going to really drive these prices down. There are a lot of folks out there that aren’t “the brightest bulb in the box”. So many of us on this board are successful, high-earning, highly-educated types that we tend to think everyone else in the world is just like us. People who make poor financial decisions end up getting into trouble more frequently than those who don’t, and they’ll be forced to sell, declare bankruptcy, give the keys back to the bank, what have you in large numbers once the fuzes light on these thermonuclear loans. Those properties will set low watermarks in the comps and competing sellers will be forced to lower their asking prices, if they can afford it. If they can’t, well then they’ll join the ranks of those turning their keys over to the bank. 2007 is just going to be a warm up for the real action in 2008 and 2009. Just my $0.02…

[North County Jim]

I’m a little surprised powayseller didn’t jump on the fact that he’s not a recent buyer of his home. He should have a nice equity cushion but has hit the house ATM a little too hard.

How many others are there like this guy? We all know many no-money-down recent purchasers are in trouble and they’re somewhat quantifiable.

Are there any figures out there that provide insight into the number of non-recent homeowners who have pissed away their equity?

[Author]

Posts