Thanks to the HP'ers who sent in this LA Times cover story about negative-am loans. I remember the first reaction I had years ago when someone told me about 'interest-only' loans - I almost wretched at the thought that these poor suckers would never own their home, that they were just renting the money hoping for appreciation that may or may not come.
Then about a year ago I heard about 'negative-am' and I went right to the chapter of Manias, Panics and Crashes that talked about how easy or out of control credit is found in every financial mania or bubble. What could be easier and more out of control than a loan that didn't require you to make the interest payment, so you owe more and more and more and more and more?
The thing about these negative-am loans is that the corrupt mortgage brokers started pushing 'em because that's where they made the biggest commission. And the issuers of these loans like WaMu found a loophole in GAAP and are reporting the extra you owe every months straight to their bottom lines as income earned. Seriously - even though the banks know darn well they'll never get repaid for that "income" and what it really is is accumulating bad debt.
Sickening, I tell ya. Just sickening. And oh, how this is gonna blow.
A loan that'll get ugly fast
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.
For the moment, this allows the 56-year-old Hertzberg to continue living in his tract home despite being only marginally employed. But his debt is swelling, and his mortgage company controls his fate.
"I am rather screwed," he said.
Hertzberg could sell now, but his lender would charge him an $11,034 prepayment penalty — money he doesn't have. Yet if he stays, the housing market may tank, vaporizing what little equity he has left.
"I made choices, and they happened to be the wrong choices," said Hertzberg.
In 2003, only about 8 of every 1,000 people buying a home or refinancing a mortgage in California got a pay option loan, according to San Francisco-based data tracking company First American LoanPerformance.Last year, 1 in 5 loan applicants got one.
COUNTRYWIDE sees little risk of widespread foreclosures.
December 13, 2006
People so stupid, they should be saved from themselves - the negative amortization crowd and "A loan that'll get ugly fast"
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11 comments:
And have you seen the celebrities they have advertising these things to the elderly? They will drain their wealth, while making lenders wealthy and end up losing their homes many years before they die!
"COUNTRYWIDE sees little risk of widespread foreclosures."
-Yeah, not widespread, just in California, Florida, Boston and New York City which represent about 1/2 the bubble wealth of the last 4 years.
kilobar,,
Id agree but think we gotta be careful how far do we protect people against themselves...
there ae plenty of legit uses for alt financing,, actually they were marketed to high net worthtypes at first
just food for thought, do we take the product away from the responsible users (and there are many) to protect the unresponsible ones?
Grrreeaattt!!! Just what we need more regulation. I know, to save morons from themselves why don't we just let the government give everyone a home. Then nobody will ever default, nobody will ever go bankrupt. While the gov is at it, how about ensuring everyone also has a job.
It'll be just like in the goodl old days of the USSR where unemployment was always 0%, nobody ever was homeless and the economy was always at 100% utilization.
kilobar,
you make a good point, but im a little leary about having govt regulate unsophistacted borrowers against themselves, not so sure about that, im more of a buyer beware guy, but its a close call...
“It'll be just like in the good old days of the USSR where unemployment was always 0%, nobody ever was homeless and the economy was always at 100% utilization.”
---------------
Sounds great, doesn’t it? Nobody had to worry about having the rug jerked out from underneath them (i.e. being laid off) because their job was outsourced overseas.
Inflation was non-existent. Prices were set by the State. You didn’t waste your time flipping through sales flyers to buy at the lowest price because prices didn’t change.
The education system was top-notch. I once met a 11-year old boy who had moved to America 3 years previously. He did not know the meaning of the word, “intermittent” because he hadn’t been taught it’s meaning in our schools. But he knew the Russian word for it, having been taught the concept in a Russian school when he was 8.
Most people received approximately the same income. Ordinary working stiffs could afford a vacation on the shore of the Black Sea (the Russian “Florida”) without breaking their budget.
* * * * * * * * * * * *
On the other hand…Because the economy was controlled, rather than a free-market system, there were often shortages of many things in the shops.
In order to get “perks,” like the use of a plot of land out in the country where you could have a garden and a place to go to escape the city on the weekends, you needed to be active in the local communist party, and/or kiss up to and bribe somebody.
The pollution was terrible, with no environmental laws preventing the flow of all sorts of lovely toxic stuff into the water and air.
If you wanted to move or purchase a car, you needed to get on a waiting list, and then accept what was finally offered to you.
* * * * * * * * * * * *
Remember, the grass is always greener on the other side.
-Mammoth
mammoth,
Everyone did not make the same amount of momey. In the "egalitarian" society so loved by tody's liberals, there was still plenty of inequality. A doctor lived a very different life than a factory worker. The factory worker didn't take vacations to the sea but the doctor sure did along with any high ranking communist party member.
There weren't shortgaes just in in the shop. There were gas shortages often as well as elecricty shortages, medicine shortage. You name something and there were shortages of it.
Inlfation was not nonexistent. The state did set prices but also increased those prices when it needed to.
Man it's only been 15 years since the collapse of that fascist reime and already the revisionsit history has started. Almost starting to sound like "Hitler was bad, sure but he did do a lot of good things for his people".
Let's not do any yearning for the communist system, that's just ridiculous. I was behind the iron curtain in east Berlin before the wall came down and it was a really depressing place. There was a reason why they had to put a wall up to keep people from moving to a vastly superior lifestyle in west germany. Seriously, get a grip.
But I think these toxic mortgages are complicated enough and dangerous enough that some more government oversight is justified.
These products were set up for those with a high income or high net worth - it shouldn't be too tough to verify your wealth nor too onerous to insist that you do so. Or maybe we just ban this style of mortgage since the only people who can use them legitimately are the rich and I think life is good enough for them as it is.
Yeah, let's just make this easy and outlaw the option arm and the i/o mortgage.
Banning these mortgages will protect the stupid from themselves and protect the rest of us from the bubble-inflating effect of giving these stupid people more mortgage than brains.
Want some revisionist history about Germany? Go to the conference in Iran! Odd that orthodox radical Rabbis attended to speak on how Israel was punished by God with the holocaust.
Till, Hitler? Was he all that bad? When I lived in Germany my neighbors (all in their 70s, 80s) would first say, "Oh, Hitler, so terrible." But then when they knew you would open up and say, "Ah, such good times for Germany. He rebuilt the nation. He put people back to work. He brought down inflation. He built the autobahn. He gave us the people's car (volk wagon), he made us strong again. He made us proud.
They only reason they say, "terrible" is because he lost the war, brought the nation to ruin and destroyed all the great things he did prior to WWII.
Always that way, isn't it? The vision of a Third Reich, spreading democracy in arab lands, globalization. All ends badly though.
Nazis were awful. Killed tens of millios of people.
Communists were awful. Killed tens of millions of people.
Is there really a debate here?
Everyone should clip this article for thier archives. It's a classic.
Take it out and read it before you shop for a Mortgage.
Renting in Seattle
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