Wednesday, November 23, 2005

Exotic Loans 'Too Good To Be True'

The Associated Press reports on some tough lessons about exotic loans. "Homeowners nationwide who obtained nontraditional mortgages when rates hit historical lows are facing similar challenges as monthly mortgage payments begin to rise. At the same time, the market is softening in some areas, preventing houses from growing in value as quickly as expected."

"'It all leads to questions about how well-prepared consumers are, not only for the payment shock that might be lurking out there but for their monthly payment,' said Barbara Ryan, of the FDIC."

"As soon as Lorie Limbaugh heard about a 1.25 percent interest rate on a mortgage loan, she figured it was too good to be true. Things progressed smoothly with their $275,000 adjustable rate mortgage until the rate began to climb, it's now 6.25 percent, despite what they had been told. Today, they are facing a refinancing penalty and are unable to financially help a son who wants to attend a trade school."

"'We can't believe it,' said Limbaugh, who lives in tiny Larkspur about 35 miles south of Denver. 'We were at 5.7 (percent). We should have stayed where we were at.'"

"About 53 percent of Colorado households cannot afford to buy one of the state's median-priced homes, a rate second only to Hawaii's high-priced housing market, according to a recent FDIC study. In addition, 53 percent of mortgages issued in Colorado in the second quarter were ARMs, second only to California."

"On a recent Saturday morning, Enie and Tony Brooks joined a small group at a foreclosure prevention workshop, hoping to hear a way to save their home of 17 years. The couple obtained an ARM for $146,000 in 2003 and the rate has climbed from 7 percent to 9.5 percent, and could increase up to 11 percent. Today, their payment is about $1,200 a month. 'It's already astronomical what we have to pay,' Enie Brooks said. 'We're not in foreclosure but, you know, paycheck-to-paycheck living. Things are getting rough. We're just trying to hold onto it,' she said."


At 9:29 AM, Blogger Chip said...

For all the Truth-in-Lending laws and regulations that exist, I'm surprised no one has come up with a simplified half-page form that discloses to variable-rate buyers the minimum and maximum payments, the earliest dates that the payments can re-set (including for late-pay), and the resulting amount/payment -- all in really large print.

At 12:10 PM, Blogger SLO renter said...

About 53 percent of Colorado households cannot afford to buy one of the state's median-priced homes, a rate second only to Hawaii's high-priced housing market.

This must be a typo? If 53 percent cannot afford to buy, 47 percent CAN afford to buy the median-priced home. This sounds pretty good, really, and better than in many bubble states (not just Hawaii).

At 12:13 PM, Blogger SLO renter said...

More on topic, I was visiting a relative in Denver this summer, and the televison news was full of warnings about IO and other exotic loans (along with a lot of ads for these same loans, of course). A bit like watching the barn after the horse has been stolen, as large numbers of people in Colorado started using these things several years ago . . . .

At 10:53 AM, Blogger Ben Jones said...

slo renter,
I don't know why the press clammed up about Colorado. I used to post several items about the state, then the reports quit coming out. I'll keep my eyes out; thanks for your insight.

At 11:59 AM, Blogger SLO renter said...


My impression from talking with friends in Denver is that most people there still see the housing market as quite strong. It is seen as a good idea to take out a loan on equity for rennovation projects, with the expectation (of course) of getting the money back (or more) via appreciation. My impression of the market there is quite different, but nobody really wants to hear this, so I have stopped trying to provide alternative viewpoints.

I'd be interested in seeing any information you do find on Colorado. Strange that the information seems to have dried up.

At 4:49 PM, Blogger Chip said...

Slo Renter said "... but nobody really wants to hear this..."

I think that is the operative phrase in all of this. During the dot-com bubble, a relative of mine crowed at every opportunity about how much money he "made today" in the stock market. When I dared to bring up the humble suggestion that he consider using (and sticking with) stop-losses, he dismissed my comment as if it had come from a kindergartener. There is just something about the "herd mentality" that cannot be overcome. Better to remain quiet and humble and profit from it if you can, IMO.


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