Monday, September 14, 2009

"Exotic" mortages

I wish someone would explain why this sort of loan is even legal -- interest only, or worse, an option that lets you pay LESS than the interest payment, so the principal of the loan actually goes up every month.

I know that this sort of thing was popular to allow people who normally couldn't afford the payments to get much more house than they could normally buy. If you only have to pay the interest payments (or less!) then you can get a much more expensive house! You don't need to be "limited" to the houses you can actually pay for, but you can move up a notch and get a bigger McMansion for the same price! (Well, not really, but a lot of people didn't really anticipate this).

Of course, this sort of things works fine when the housing market is booming - your house will increase in value, so you will always be "ahead". But a slump in housing? You might owe substantially more than your house is worth, if you weren't making a dent in the actual loan amount.

That people were encouraged to get loans like this -- and sought them out because of greed or ignorance-- means that these homeowners are now behind the eight ball. They owe more than the house is worth, they are looking at payments that are going to reset and go up dramatically, and they can't afford to actually pay for the house they have already bought. I feel some sympathy for them, but it's tempered with the thought that they should have been more conservative and planned ahead. It's like all the poeple who got adjustable rate mortgages and were "surprised" by the huge increase in their payments as the rates went up 2 or 3 or even 5 percent at a time. How did they not know that was going to happen?

During the worst of the mortgage idiocy, people with no income, no savings, no jobs (I think they were calling them NINJA loans) were getting loans to buy houses. Now, I'm all for home ownership...but if you don't actually have income, you should never qualify, period. Irrational exuberance isn't going to pay the mortage payment when it comes due.

The housing market has improved some - it seems to be on the road to recovery here in Denver, anyway. But still, the house next to us - a new, custom-built home, is still sitting empty after nine months and the asking price has fallen from 740 to 620K. And still, people are just not nibbling. (Well, it is the most expensive house on the culdesac and while it's a nice house, it doesn't look like that much more house than the rest of us.

All the people who are now 'upside down' on their houses are in more desperate straits - many of them are going to just walk away from the deal. I wonder if we're going to see another wave of foreclosures even as the housing market improves, as these loans are adjusted.

And I still see ads on television for loans with no credit check. Aargh.


Fru C said...

If I had a lot of money I buy the house because of the neighbours ;)
/carolina Sweden

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