‘Taking Equity Out Of Your Home Slowly, Over Time’
One reader wants to discuss the mortgage sector. “How about an update on the mortgage business. With emphasis on what is happening at the smaller shops.”
Kenneth Harney at the Washington Post wrote about a challenge facing the industry. “An important debate is raging inside the home mortgage market, though well beyond the earshot of most consumers. The issue: Popular ‘payment-option,’ interest-only and piggyback loans; and the financial risks they pose to home buyers and lenders alike.”
“On the one hand, federal financial regulators say the risks are too significant to ignore, so lenders need to take special care in evaluating and approving customers who apply for these mortgages. The regulators want to impose new creditworthiness restrictions and disclosure requirements.”
“Banks and mortgage companies, on the other hand, aren’t happy about the regulators’ plans. Between January and the end of March, lenders bombarded federal banking regulators with demands to back off or soften the proposed new rules.”
“Why all the fuss? And what might it mean for you as a home buyer or refinancer? The fuss derives from the fact that payment-option, piggyback, interest-only and other creative loans types can prove toxic for applicants who don’t understand them.”
“The question is whether most lenders are taking pains to educate borrowers about how the loans work or whether they have been mass-marketing dangerous mortgages to people with borderline credit profiles, low down payments and minimal knowledge.”
“Nick Nickerson, a mortgage consultant in Durham, N.C., said ‘100 percent’ of his clients ‘invest their savings..and end up financially ahead. I insist that each client have a financial planner involved and the mortgage payment savings are direct-deposited to their investment account.’”
“Lenders ‘don’t want borrowers to default,’ said Nickerson. ‘Negative amortization is simply a way of taking equity out of your home slowly over time rather than all at once.’”
“A Rocky Mountain News columnist thinks the loans are causing problems in Colorado. “Colorado ranked eighth among states in per-capita income growth last year, recent figures show. But it’s also at the personal finance level that the rosy outlook is roiled. I’m talking about first-quarter home foreclosures in the Denver area and their disturbing 31.5 percent rate of growth over the same period in 2005. This past quarter, 4,764 of your neighbors had their homes seized.”
“‘I’m very concerned at how much they did go up,’ said Patty Silverstein. ‘Given this stage of economic recovery in Colorado, I would think we wouldn’t have this many. There’s something else going on.”
‘”I have to think some of the mortgage products people are making use of are a big contributing factor, the interest-only loans, the variable-rate loans. When interest rates increase a bit, people can’t make the payments. I think they’re the ones who are driving the foreclosure numbers upward,’ Silverstein said.”
“A quick look around reveals eye-catching variable loan rates of 0.9 percent, 1.75 percent, 1 percent. ‘No payments for six months,’ one ad screams. But what happens then?”
A related article. ‘A home-equity line of credit charging 4 percent two years ago is now over 7.5 percent and is expected to hit 8 percent by the summer, said Greg McBride..That’s because a line of credit, the most popular way to borrow against home equity, is a variable-rate loan and rates have gone up as the Federal Reserve has increased its benchmark rate. ‘It’s decidedly less attractive now,’ McBride said of home-equity borrowing.’
Here’s a new movie for the bubbleheads!
http://30kmillionaires.com/
I hope they make it!
Over at TPMCafe they are talking the same story.
There is no doubt about it…mortgage lending is a totally UNREGULATED industry, and they have f*cked millions of gullible borrowers.
Washington’s too late.
Barn’s burned down and the horses are all gone.
Mortgage lending unregulated? Doesn’t the Fed have regulatory power over the national banks? Couldn’t Greenspan have ordered banks to stop making suicide loans? Seems to me that he had the clear authority to do so and every reason to follow through. His failure to do so is the single most significant cause of the bubble in my opinion.
Mortgage origintors are allowed to coerce and extort appraisers, who are in essence the “auditors” of the real estate sales industry”, to give them the valuations numbers they want to do their deals. There is virtually no autonomy in the profession anymore. You do as they say, or you go out business.
Can’t be anymore unregulated than that.
Mortgage lending is regulated at the state level. E.g., in Arizona it’s regulated by the Arizona State Banking Commission.
True conservatives don’t expect anyone in Washington to be watching out for them. We’ll watch out for ourselves, thank you very much.
Oh, that’s great stuff. I’m telling ya, the GOP is going to be swept out of office, not by Iraq or bs about CIA operatives, but by the housing bubble and bankruputcy laws.
Hey, they got Al Capone on tax evasion, didn’t they?
This really sums it up nicely
http://tinyurl.com/fn5u3
Ann Richards?
And good riddance to them. I’ve never seen such wholesale failure of public policy in my entire life. These guys will destroy something, turn around and say “hey, that thing is screwed, you need to fix it”.
Txchick57; Arn’t you a bushy ??
Heavens, no! I”m totally agnostic toward the whole political scene - just an interested and cynical observer.
time for the fb quote of the week from the sd investors board
“i know prices are coming down in north county but is there any current data on how much % wise so far..
not sure if i should continue to drop price (100k so far) or wait a little for the spring market to get going.. house is underpriced for the neighborhood already.. but where is it going???
rancho dorado, san marcos 3600sf, granite, travertine, view, cul de sac, mint condition…
57 days on market… 825k..
any info, good or bad would be appriciated..”
First of all you had better get a GRASP on what is happening in the economic picture( If you don’t know I suggest you get a coach) and not just in the real estate market. The broader market is telling us inflation is probabley going to be a problem and the federal reserve and foreign countries who purchase our treasuries are going to adjust accordingly. That means higher interest rates and a problem for the R.E. market for some time to come. My suggestion is to get out at any reasonable offer and be thankful you are out. Who knows maybe you can buy that same property back in a few years for under 600K and have a lower tax base to boot.
I doubt the person quoted above will ever read your advice.
You are absolutely right! Hell last week I had one of my counter part associates purchase a home in Temecula after I have been telling him about the R.E. market and even sent him the link to this site. Guess what, it was pressure from his wife that made min do it… UGLY!
temecula has very steep mello roos. the commute to dtsd is over 1 hr each way.
When I lived in San Diego in the late 1980s, people used to joke about living in Temecula. In those days, it was bad enough to have to commute from Poway or Rancho Penasquitos. Now people are really doing it. Hard to imagine.
Yeah Temecula sucks. It takes 20 minutes to exit the freeway onto Winchester Road, and now the traffic north into Moreno Valley/Riverside interchange is ass every time of the day, as well as south to San Diego. Have fun in your “between” badlands.
Can you link to the site? I’ve got some advice for him, hehehehehehehe…..
another fb quote ‘o the week could be an exchange between Mike and Jeff, as Mike tries to explain to Jeff the dangers of negative cash flow investing. Jeff is clearly self-delusional:
MIKE: To me negative cashflow is another way of saying bad investment.
JEFF: Please define “bad investment.” I had a friend who purchased a house for around 200k two years ago. It sat vacant for months before he could rent it out. When he finally got it rented, he was STILL losing $600 a month. He HATED writing the check for negative cashflow every month and his girlfriend made fun of him and his “bad investment.” Was this a “bad investment”? Of course it was right? Did I mention it was in Phoenix? He sold it last month for a 200k profit, dumped his girlfriend and went to Rio… My friend’s only regret was that he didn’t make enough at his “real” job to have bought TEN such “bad investments.”
MIKE: Right now I would avoid all negative cashflow situations until the data starts showing a recovery (which it is not).
JEFF: Recovery?… RECOVERY!?
Whoa…you sound like you are driving the hearse home from the funeral. The “crash” hasn’t happened yet and, if you choose right, won’t happen for another two (four?) years–if ever!
Gather hay while the sun shines!
“Past results are no guarantee of future returns”
From the update:
‘A Rocky Mountain News columnist thinks the loans are causing problems in Colorado. “Colorado ranked eighth among states in per-capita income growth last year, recent figures show. But it’s also at the personal finance level that the rosy outlook is roiled. I’m talking about first-quarter home foreclosures in the Denver area and their disturbing 31.5 percent rate of growth over the same period in 2005. This past quarter, 4,764 of your neighbors had their homes seized.”
“‘I’m very concerned at how much they did go up,’ said Patty Silverstein. ‘Given this stage of economic recovery in Colorado, I would think we wouldn’t have this many. There’s something else going on.”
‘”I have to think some of the mortgage products people are making use of are a big contributing factor, the interest-only loans, the variable-rate loans. When interest rates increase a bit, people can’t make the payments. I think they’re the ones who are driving the foreclosure numbers upward,’ Silverstein said.”
“A quick look around reveals eye-catching variable loan rates of 0.9 percent, 1.75 percent, 1 percent. ‘No payments for six months,’ one ad screams. But what happens then?”
From the RMN article:
‘there is perhaps some lack of responsibility on the part of lenders, some lenders anyway. And some lack on the part of the buyer who makes a rush to judgment to take advantage of terms that may not be advantageous to them in the long run. It’s not enough to simply hear (home loan) terms that result in a ‘yes’ to the borrower. More counseling is required. An element of education is very clearly important for the public going forward.’
‘Colorado is one of only two states with no licensing or registration requirements for mortgage brokers. The FBI named Colorado as one of the top 10 states for mortgage fraud in 2004.’
‘A Rocky Mountain News columnist thinks the loans are causing problems in Colorado.
That’s like saying the trees waving make the wind blow. The problem is stupid, greedy people who live beyond their means and take on far more debt than they can afford to “keep up with the Jones’s.” The bankers and their creative financing are the enablers, true enough, but they aren’t the main culprits.
Hi very new here. Found this blog by accident. I have no house, I am a renter. Due to poor personal choices I have a large amount of debt that I am halfway to clearing. Honestly I am very thankful that I had that debt during this bubble or I would have been one of those sorry FB’s.
As uneducated as I am about real estate and financing one thing really caught my eye. The line about Neg Amortization being a slow draw on equity rather than taking a line of credit all at once. Um, isnt that more of a poison for homeowners? If you cant pay a fixed rate 30 year loan how will you ever pay off a loan like that? Was he serious? Does he believe it? Or is he smoking some illegal substance?
Welcome to the premier bubble blog, Renee.
The line you refer to is classic. The person saying it has a huge incentive to keep those types of loans going. Banks are counting unpaid interest and capitalized interest as income–even though they haven’t gotten paid for it yet–and pushing their profits to Wall St. It’s a scam.
Being a mathematician and economist I can appreciate his argument. If it was true that over the course of living in the house that (1) house value goes up and (2) it is more than the rate of capitalization of the unpaid interest then his argument about slowly taking out equity over the course of the loan is correct. But those are two VERY dubious assumptions, and VERY risky!
Good luck with your personal debt. Most people have some, but changing your habits for the long term can fix that situation.
Thank you for the explanation and the welcome.
Oh I have learned and changed. No new debt. Pay as much as i can whenever I can. Perhaps when this bubble has reached its end I will be ready.
stick with us buddy. we’re all fighting one thing or another.
“Nick Nickerson, a mortgage consultant in Durham, N.C., said ‘100 percent’ of his clients ‘invest their savings..and end up financially ahead. I insist that each client have a financial planner involved and the mortgage payment savings are direct-deposited to their investment account.’”
Lottsa hot air in the mortgage O biz, but that’s just about the biggest
crock ‘o shite line I’ve ever(!) heard.
Do these guys leave a slime trail?
I was appalled to read this too. What qualifications has a “mortage consultant”? Any claim such as “100%” is amateurish, next time, try “82.7%”, it looks more real.
Perhaps the lender should invest in “their investment account” that is
giving better yield instead of lending the mortgages.
Better yet, borrow in Japan at 0% and lend it in US at 5%, pocketing
the difference.
82.7% LMAO if you want reality in that scenario try 0.5% and that’ll be overshooting it
This is what is going through his mind: “I told each of my clients (100%) that if they pick this fantastic negative amortization product, they can put the difference in payment into savings.” I’m sure he convinced his clients they will “come out ahead.” We must wonder if he’ll be accountable for that statement.
This reminds me of an ex-coworker when I use to be in retail. A customer comes into the store who has problems with their computer. The employee solicited his own computer consulting service without the employer knowing or supporting any such thing. The employee inadvertly destroyed the computer, and the customer sues the retailer. There was a settlement, and the employee at least lost his old position. I’m unsure if there was continued action.
“Why all the fuss? And what might it mean for you as a home buyer or refinancer? The fuss derives from the fact that payment-option, piggyback, interest-only and other creative loans types can prove toxic for applicants who don’t understand them. The question is whether most lenders are taking pains to educate borrowers about how the loans work or whether they have been mass-marketing dangerous mortgages to people with borderline credit profiles, low down payments and minimal knowledge”.
I just has a flash of the old Saturday Night Live dangerous toy salesman played by Dan Ackyroyd selling these exotic loans to the naiive masses.
just has a flash of the old Saturday Night Live dangerous toy salesman played by Dan Ackyroyd selling these exotic loans to the naiive masses.
Those skits were hilarious. I especially liked Dan’s defense of the “invisible pedestrian” halloween custume (it looked like a black garbage bag with eye-holes).
This is a small study about how people feel about a ‘happy cooperative society’; rights vs. responsibility; freedom vs. obligation. Without some kind of agreed regulation in the community, things start to fall apart.
People get angry, they walk away and then the hammer comes down. I couldn’t help but think of the corollary with housing and our economy in general.
http://tinyurl.com/g5zmf
All I can ask is where was everybody that could do something to avert this mess about 2 yesrs ago. Everyone is focused on it now, but now is a little to little, a lot too late, methinks.
Simmsays…
http://www.AmericanInventorSpot.com
AmericanInventorSpot.com
I’ve got a question for those familiar with the California situation. I bought in Irvine in ‘96 (at the bottom) and have accumulated quite a bit of equity (when I re-financed a couple of years ago, my bank was bewildered that I didn’t want to extract any cash).
Prices have peaked in the OC, and are starting their descent. I’d love to sell, sit it out for a 2-3 years, and move up in my next purchase. However, my property tax base is very low (250k), and goes up only 2%/year (prop 13). Selling now and getting back in (move up, w/ cash purchase) would mean that my property taxes would be 8-10k/year instead of my current 2.5k. That would be an additional $100k over 20 years in property taxes.
Is there anyway around this?
Thanks for your thoughts/advice
Other then it being commercial and owned by a LLC so you can transfer the ownership of the LLC without effecting title. I don’t know if you could do this.
get the phuck out of OC…. it is O’verated
“Other then [sic] it being commercial and owned…”
Many people use than when they mean then, and vice versa.
Than, a conjunction, is used to compare things.
Then, an adverb, is used with descriptions of time.
You are assuming that moving up would mean paying up to $1M after the crash. There’s a good chance you could get what you want for less than half that.
The crash is coming, but it’s not going to lop off 50% of value in the close-in coastal zone. I think it will be closer to 20% in real terms over the next 5 years. Problem with property taxes is that they’re like some diseases (4 ever).
Let’s see about that tag…
You’re assuming 20% is a lot. Think about how much prices have risen based on lax lending standards/exotic loans and the resultant speculation.
**IF** lending standards revert to traditional standards (20% down, approx 30% DTI on verified income), the drop will be much, much more than 20%, IMHO.
Some California counties allow home owners to transfer their property taxes from one property to another once per household. I’m not sure of all the participating counties, but if OC isn’t one of them, you can help lobby for that right.
Getting out is not a bad idea. I’m pretty flexible, but would really like to stay in the CA coastal zone, say between Monterery and Capo Beach. I’ll also look into the LLC opportunity.
Read up on Proposition 60
Prop 60 was a constitutional amendment approved by the voters of California in 1986. It is codified in Section 69.5 of the Revenue & Taxation Code, and allows the transfer of an existing Proposition 13 base year value from a former residence to a replacement residence, if certain conditions are met. This benefit is open to homeowners who are at least 55-years old and meet the requirements outlined in the conditions below.
For example: http://www.oc.ca.gov/assessor/FAQprop60.asp
Thanks for the facts.
RMS, I live in CA and I don’t know of any counties that allow you to transfer your base outside of your existing purchase. In 1997 and prior some counties who wanted growth (SJV) did allow southern CA sellers to move into their county and transfer their base. County governments now need (spend oops) every dollar they can get their hands on.
It’s starting to unravel…UK in deeper shite than US
http://business.timesonline.co.uk/article/0,,13130-2124232,00.html