The coming foreclosure crisis

, originally uploaded by Box of Light.

Thousands of Americans who refinanced their homes with adjustable rate mortgages (ARM) may lose their homes to skyrocketing payments:

The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created. With its temptingly low minimum payments, the option ARM brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted, especially in the hottest markets. Suddenly, almost anyone could afford a home -- or so they thought. The option ARM's low payments are only temporary. And the less a borrower chooses to pay now, the more is tacked onto the balance.

The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules -- often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can't count on rising equity to bail them out. What's more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk. [Yahoo]

Lenders pushed these sketchy mortgages on consumers to increase their own profits. Brokers got paid more to pimp ARMs than ordinary mortgages. Dodgy accounting rules allow lenders to count the nominal monthly payment as income, even if the client pays less.

Who adjusts these adjustable rate mortgages? Consumers may have assumed that their trusted bank or broker was in charge, but in many cases, the interest rates and fees are set by hedge funds that can jack up fees and interest rates at will.

How big is the problem?

Because banks don't have to report how many option ARMs they underwrite, few choose to do so. But the best available estimates show that option ARMs have soared in popularity. They accounted for as little as 0.5% of all mortgages written in 2003, but that shot up to at least 12.3% through the first five months of this year, according to FirstAmerican LoanPerformance, an industry tracker. And while they made up at least 40% of mortgages in Salinas, Calif., and 26% in Naples, Fla., they're not just found in overheated coastal markets: Through Mar. 31 of this year, at least 51% of mortgages in West Virginia and 26% in Wyoming were option ARMs. Stock and bond analysts estimate that as many as 1.3 million borrowers took out as much as $389 billion in option ARMs in 2004 and 2005. And it's not letting up. Despite the housing slump, option ARMs totaling $77.2 billion were written in the second quarter of this year, according to investment bank Keefe, Bruyette & Woods Inc. [Yahoo]

The ARM racket is going to be the next Savings and Loan scandal. The writing is on the wall--I hope the Democrats see it and draft policies to deal with the impending crisis. For starters, Democrats should emphasize that, should they regain power, the federal government would work with the States to punish lenders who violate existing due diligence standards for lending. The Democrats should also pledge to establish a fund to assist mortgage owners who were victimized by unethical lending practices.

"Save your home, vote Democrat" is a lot more powerful than "Together we can do better."

Comments

[Cass]

"'Save your home, vote Democratic' is a lot more powerful than 'Together we can do better'"

Amen.

[ericnh]

When we bought our first home two years ago, I was so tempted to get the ARM because the house was at the limit of our budget (but it was a great first house, so what the heck). Thankfully I didn't take the ARM and stayed with the low fixed rate I got. Sure enough, the very next week the Fed raised the rates by .25% and they've been raising them ever since. Didn't seem prudent to take an ARM when rates were at their lowest in years and would surely go up once inflation reared its ugly head again. Best move I've ever made, because with rising fuel costs I'm struggling as it is. I really feel for those poor folks facing foreclosure.

[bob koepp]

Like everyone else, I've received a lot of junk mail offering these junk mortgage loans over the past few years. And I have nothing but contempt for the people who package and market these loans. But I find it hard to muster a great deal of sympathy for people who assumed the huge risks option ARM loans represent. They behaved stupidly and greedily. Along with the slogan Lindsay suggests at the end of her post, I'll suggest another old saw: If it looks to good to be true, it probably isn't.

[R. Mildred]

I love how it's been painted so that the people who get screwed over by this are at fault - so what if these exorbinant rates are the product of the bipartisan supported Bankruptcy Bill and the inequitous bankers who saw all these lovely recipts for mortgages and ARMs and are going to get a remarkable surprise when they realise that the people they lent to won't be able to repay even half the money the banks gave them in the first place.

I'm personally going to join the rest of Magrathea in the cold storage units until the medium sized depression is over with.

[togolosh]

I get a solicitation to refinance about once a day on average, either by phone or mail. The phone solicitations are particularly annoying, since they tend to leave messages that are crafted to sound like they are coming from the company holding my mortgage or from my bank. The first few times I called the number they left and got the hard sell, again well crafted to leave the impression that nearly nothing would change except that my payments would go down. They really pitch it hard like you're a sucker for not taking the offer. Fortunately I'm financially savvy enough to know that there's no such thing as free money, but I could easily see how someone might get suckered by these assholes.

[mudkitty]

Now isn't that the whole point of those loans in the first place?

[Charles]

The shady practices these lenders engage in are astonishing.

When I refinanced last year to get rid of my wife's credit card and car debt I had a company offer me a five-year lock on an ARM at 5.0% with a total closing cost of $2,000. This was all promised and agreed to with paperwork.

When I arrived at closing I found, to my horror, that the rate was 6.0% locked 1 year and closing of $7,000. They said that things had changed. Needless to say, I walked out of the deal and turned that company over to the state authorities here (nothing happened - it is Missouri).

In the end patience did pay off - I got a fixed rate loan at 6.5% with 1,200 closing. The monthly cost is higher than it would have been at 6.0%... but then my lock would be ending about now, too. As I now recall - the rate after the lock period would be prime + 0.5 with a cap at 10.5..... Which now would be 10.0%.

[ballgame]

Excellent post. When looked at in conjunction with this housing value graph (h/t Shakespeare's Sister), it's hard not to see the storm clouds on the horizon.

[hackticus]

Wasn't Alan Greenspan recommending these ARMs to homebuyers just a couple years ago?

[Madison Guy]

The Democrats haven't done much so far, but then, they don't have much power. Repealing the bankruptcy "reform" law would be a great start when they regain some power in Congress. Without bankruptcy relief, victims of the predatory option ARM lenders won't be able to just walk away from their "underwater" mortgages -- they'll just have to keep paying, and paying and paying. As some Katrina victims (with a different kind of underwater mortgage) already are.

This 1981 photo illustrating the two Americas seems more relevant than ever, in a country even more economically divided than it was back then, during the Reagan recession. Labor Day: Thinking about the two Americas. What's new is how widely accepted the new class divisions are. The media sure aren’t helping.

[Trystero]

Pandagon has a fairly extensive thread on this topic. As I described over there, speculative bubbles are incredibly seductive and hard for even sensible people to resist. And even without the bubble, societal pressure to own a home is huge.

[Amanda Marcotte]

They tried to push me into an ARM when I had a mortgage and I do believe I've never laughed so evilly in my life. I told the broker, "I used to work in banking. I'm not a fool." And that was the end of that discussion.

[ahem]

Americans are going to start to learn about 'negative equity' pretty damn fast. They can ask Brits who bought houses in the early 90s about that.

[Justin]

This may be a good political issue for dems, but the "victims" really do bear a lot of blame with this in that they took a risk to be able to buy a home they otherwise may not have been able to afford--did homebuyers think that interest rates would stay at historic lows forever? If the banks did not disclose the true terms of the loan, that's one thing, but if people just rushed into ARMs without thinking through the consequences, I don't think that the banks are entirely to blame.

[Quisp]

Well, the banks are to blame in that special way that, for instance, Enron is to blame for black-outs in California. It's not just the duped homebuyer (with his zero downpayment option ARM) who gets screwed by the artificial juicing of the housing market. It's intimately tied to the health of the economy. And for every forclosure there will be hundreds of folks wringing their credit cards for every penny to make house payments, maybe en route to foreclosure themselves, maybe just dangling there. The banks own the credit cards. The banks own the loans. I think the banking industry's fundamental insight was that it was better to get people to buy into the fantasy of equity without actually possessing or building any of that pesky equity. Pesky in the sense that the equity itself is not owned directly by the bank. They found a way to turn a house into just another maxed out credit card.

It's going to be SOME buyer's market, come 2008, 2009, for anyone who has the ability to buy.

[Justin]

Quisp--how did banks "dupe" the buyer? Middle school math, or a mortgage calculator avaliable on a lot realtor websites, would clue people into what they were buying.

[Josh]

I just wanted to say I love the posts. I happen to work with a company that is on a crusade to "right the wrongs" of the lending industry. People are out there getting screwed by not only adjustable rate mortgages but interest only, balloon, 40 yr, and 50 yr mortgages and it's leading them to nowhere but bankruptcy and foreclosure.

[cfrost]

Remember a few years back how astonished we were that the Albanians could be so stupid as to rush into a nation-wide Ponzi scheme? Decades of Enver Hoxa’s Stalinist madness had left them hopelessly ill-informed and naïve regarding any kind of financial transaction more complicated than simple barter. The minute Hoxa was gone the sharks moved in and devoured the lot. A housing market predicated on value accruing faster than inflation for the rest of eternity strikes me as just another Ponzi scheme adjusted to match the relative “sophistication” of Americans.

We’re fooling ourselves if we think American buyers, the same ones that have the lowest rate of savings in the industrialized world, understand what they’re getting themselves into. Americans are willing to believe virtually any happytalk. They’ve been sold the notion that they’re the wealthiest nation on earth for so long that they actually believe they’re invulnerable. That the folks in charge now are the same pack of wolves that engineered the savings and loan scam is hardly comfort.

[ToThoseShowoffs]

Option ARM is actually created for greedy pretenders - those who bought expensive homes they cannot afford, those who refinance to cash out huge mortgages they cannot afford. Others just simply thought they can get something for nothing! Greed + Vanity + Ignorance + Stupidity = Doomsday. People who want so much ends up with nothing. Time is up! Show-off time is over - it's payback time!

[Jim Zak]

Pay the Banks Less and Pay Yourself More:

I totally feel for the home owners that were blindly led to Option Arm Loans. If they went into these loans knowing the details then shame on them. The Mortgage Lending industry was acting with greed in not disclosing the full details to the borrowers.

Note: Please read to the end as it may change your views on Option Arm Loans if used properly and effectively.

The Option Arm loans are not bad loans. They were created for a purpose. Just like money, money in itself is not bad but what people do with the money can be bad.

A properly used arm is very powerful and gives the smart borrower options to use the saved money to create additional wealth. If properly placed, that money can actually work in their favor. The banks use this philosophy on a daily basis as well as the wealthy.

Banks will borrow money at a very low interest rate from the federal reserve and then turn around and lend that money to borrowers willing to pay a higher interest rate. So the banks will make money off the difference between the interest rate borrowed at and the interest rate loaned out at. This is called arbitrage and is how the banks and the wealthy get even wealthier or should I say the rich get richer. There is nothing wrong with this technique and we could learn a lot from this strategy.

The banks also use your money that you get paid a very low interest rate for just keeping your money sitting in the bank. They turn around and loan that money back out at a higher interest rate and again taking advantage of the arbitrage and making money off your money.

Why can't we take advantage of the bank and use that money from a low interest home loan and put the banks money to work for ourselves. Instead of paying 2500 for the mortgage payment with a traditional mortgage loan, why not get the low interest rate Option Arm Loan for 1250 a month and use the other 1250 per month that should be the banks and turn around and invest it safely and smartly in a conservative no risk retirement strategy that will build your retirement fund but still have it liquid if needed.

With this method you can pay the minimum payment to the bank and use the balance to create a significant retirement fund that can be used to pay off the loan and leave you with a considerable retirement fund to retire on in your golden years. You can do this without spending a dime more than you are currently spending but own your home outright,have your bills paid off and have a significant retirement fund setup.

There are a lot of people who can be helped out of their current dismal situations with their mortgages where if we act fast we can still possibly help them prevent foreclosure and losing their precious home. If you know someone in this situation or want to help me spread the word and help others then please email me by clicking on my name. We can't help everyone but I feel kind of like Schindler as in Schindler's List that I want to, and have to, help as many as I can before it's too late.

Thanks for reading to the end and hope to hear back from you.

My email can be found by clicking on my name and should be in my profile.

Jim Zak

[Jim Zak]

Pay the Banks Less and Pay Yourself More:

I totally feel for the home owners that were blindly led to Option Arm Loans. If they went into these loans knowing the details then shame on them. The Mortgage Lending industry was acting with greed in not disclosing the full details to the borrowers.

Note: Please read to the end as it may change your views on Option Arm Loans if used properly and effectively.

The Option Arm loans are not bad loans. They were created for a purpose. Just like money, money in itself is not bad but what people do with the money can be bad.

A properly used arm is very powerful and gives the smart borrower options to use the saved money to create additional wealth. If properly placed, that money can actually work in their favor. The banks use this philosophy on a daily basis as well as the wealthy.

Banks will borrow money at a very low interest rate from the federal reserve and then turn around and lend that money to borrowers willing to pay a higher interest rate. So the banks will make money off the difference between the interest rate borrowed at and the interest rate loaned out at. This is called arbitrage and is how the banks and the wealthy get even wealthier or should I say the rich get richer. There is nothing wrong with this technique and we could learn a lot from this strategy.

The banks also use your money that you get paid a very low interest rate for just keeping your money sitting in the bank. They turn around and loan that money back out at a higher interest rate and again taking advantage of the arbitrage and making money off your money.

Why can't we take advantage of the bank and use that money from a low interest home loan and put the banks money to work for ourselves. Instead of paying 2500 for the mortgage payment with a traditional mortgage loan, why not get the low interest rate Option Arm Loan for 1250 a month and use the other 1250 per month that should be the banks and turn around and invest it safely and smartly in a conservative no risk retirement strategy that will build your retirement fund but still have it liquid if needed.

With this method you can pay the minimum payment to the bank and use the balance to create a significant retirement fund that can be used to pay off the loan and leave you with a considerable retirement fund to retire on in your golden years. You can do this without spending a dime more than you are currently spending but own your home outright,have your bills paid off and have a significant retirement fund setup.

There are a lot of people who can be helped out of their current dismal situations with their mortgages where if we act fast we can still possibly help them prevent foreclosure and losing their precious home. If you know someone in this situation or want to help me spread the word and help others then please email me by clicking on my name. We can't help everyone but I feel kind of like Schindler as in Schindler's List that I want to, and have to, help as many as I can before it's too late.

Thanks for reading to the end and hope to hear back from you.

My email can be found by clicking on my name and should be in my profile.

Jim Zak
jimzak_la@hotmail.com
www.paymyselfmore.com

[Yusef Asabiyah]

Although I haven't done a completely thorough search, there seems to be remarkably little information or commentary on this situation anywhere on the web. I was interested to come across this post - from autumn of last year...Now, D-day is upon us. It is here.

[Adam]

The option adjustable rate mortgage (ARM) is the riskiest and most complicated home loan product, so it is better to not go for it in order to get rid of foreclosure.