Posted by BrendaTx on 5/16/07 6:08am
Msg #190291

Why Some Homeowners are Drowning in their Mortgages

This is an interesting article which showed up in my "EverydayCheapskate.com" newsletter. (Thanks, Christi, for turning me on to that great little newsletter!)


Why Some Homeowners are Drowning in their Mortgages

A generation ago mortgages were simple. You met with the bank manager face-to-face who decided if your down payment was sufficient and whether you could afford the monthly payment on a house. Banks were bound and determined to not end up with bad loans. And they were equally concerned that a customer avoid a financial situation that he or she could not handle.

I guess you've noticed those days are gone. Today there are many non-bank organizations making mortgage loans and because they escape the close scrutiny of federal regulators, they're able to offer all kinds of new “creative” loans with greatly relaxed, if any, qualifications. It's little wonder the U.S. is facing a big mess. About 2.2 million foreclosures on mortgage loans made in 2005-2006 may cost U.S. homeowners $164 billion, mostly from lost home equity, according to the Center for Responsible Lending, a Durham, North Carolina-based research group.

As easy as it would be to blame lenders for all of this, it's my opinion that most of the blame lies at the feet of naïve homebuyers who allow commission-hungry loan agents and real estate brokers to decide for them what monthly payment they can handle.

Possibly the biggest offender is the subprime loan—a high-interest loan offered to a homeowner with bad credit. Subprime loans have higher fees—often excessively high—and higher adjustable interest rates than traditional loans. Subprime borrowers can usually hang on for a few years, but eventually the weight of the loan with its rapidly increasing interest rate becomes unbearable.


Another of these creative loans is the zero-down or the 100% mortgage. This type of loan targets the first-time buyer with good credit who has no money in hand but big hopes of increased earnings in the future. The monthly payments start out high due to the lack of a down payment, and just keep going up from there because the loan is subject to an adjustable rate.

Interest-only loans have become a favorite in the past few years as home prices shoot skyward. The idea is that paying just the interest on the mortgage during the first five years keeps that payment affordable for a homeowner with the potential to make a lot of money in the future. At the end of five years the homeowner is told to just refinance into a fully amortized loan and live happily ever after. The obvious problem here is that the home will drop in market value, making it impossible to refinance.

All of these non-traditional home loans have at least one thing in common: They allow homebuyers to get in over their heads.

There's no doubt, given the sad state of affairs in this country with so many people on the verge of defaulting on their home mortgages, there is going to be a return to the strict traditional standards in qualifying mortgage borrowers in the future.

Considering what lies ahead for millions of homeowners buried under the weight of a mortgage they cannot afford, the idea of renting should be sounding better and better for would-be homebuyers. Start living as though you have that big house payment, diligently saving the difference between that and your rent. This way you will have saved up a nice down payment and be all ready to accept an 80% loan when home prices reach a more realistic level. EC

Reply by bigdog on 5/16/07 6:49am
Msg #190293

Hi Brenda, I'm new here. Thanks for the article. I find myself biting my tongue when I see some of these loans. It sometimes sucks that we as notaries can't tell the bo's they are getting a raw deal, but such is the life of a SA. While sometimes these loans help people who would otherwise not be able to buy a home, more often than not, it hurts them.
I personally have learned alot since I started closing loans. I know I got screwed the last time I refi'd, but I was dumb about loans and didn't know any better. The next time, I will be prepared.
Unfortunately, there will be long term consequences for these types of loans and it will affect our jobs.

Reply by PL on 5/16/07 9:54am
Msg #190322

Not so quick bigdog.

"I find myself biting my tongue when I see some of these loans. It sometimes sucks that we as notaries can't tell the bo's they are getting a raw deal, but such is the life of a SA"

You only see the finished product. Are you privy to their credit scores? Have you seen their finances and know their ins and outs? How about that bankruptcy 5 years ago? Did you have to shoo the wolf from the door when you knocked? In a free country those old enough and those deemed mentally capable are able to make their own decisions, to set their destiny.
Is life always fair? No, but that's the way the game is played. Someone on this site says "notarize not analyze" and he/she has it right. We'd all be better off taking what we learn doing this and wising ourselves up, so that the next time we have to make a mortgage decision we aren't the ones being pitied across the table.

Reply by bigdog on 5/16/07 10:25am
Msg #190328

Re: Not so quick bigdog.

PL, all I'm saying is alot of the loans we close ( and yes i've noticed the loan scores) the borrowers could have done better with some research. I know I don't know all the facts and I don't claim to know every situation. But, you can't tell me you haven't come across a loan that didn't make sense to you. I know it's none of our business. It's just hard when you see someone in need of some conseling and you can't say sh@#. That's all I'm saying.

Reply by jba/fl on 5/16/07 6:52am
Msg #190294

Excellent article, thanks for sharing.
Now, if homeowners would just read and heed. Unfortunately, people, in general, are moving towards the 'entitlement' thought processes.

Reply by MelissaCT on 5/16/07 9:41am
Msg #190315

Some of the creative mortgages are used improperly

For example, I personally know someone who was laid off after being with a company for 20 years. He was out of work for 2 years & lived on severance, unemployment, savings & finally, credit cards . He opted for an interest-only mortgage before the credit card bills got out of hand. He ended up being hired for his dream job with a company that ironically he started working for after college -- back in the day (many moons ago). He makes a comfortable living now & was able to refi into a conventional loan.

For HIM, the interest-only loan was a great program. I feel that's what it was designed for -- or for those at the end of their loan, where they're not getting much of a tax break on interest anymore who are planning to sell in a few years. THEN, that type of loan makes sense.

The trouble is, just because a loan program is out there, doesn't mean it's the best fit for all situations, nor should it be used as a band-aid on a hemmorage.

Reply by sue_pa on 5/16/07 7:23am
Msg #190297

I had a 30something age couple the other day that had 12 years left on their mortgage. 1st, 2nd and car payment left them with no extra money every month so they wanted to refi so they weren't so cash strapped. They got a 40 year, first 5 negatively amortized. And a healthy prepayment penalty should they realize the error of their ways. Seems to me if these people had done a little homework they could have found a happy medium.

Reply by Joe Ewing on 5/16/07 12:02pm
Msg #190338

Because I advertise notary services locally a lot of home sellers have use my services to notarize grant deeds. Hundreds of homeowners, many were acquaintances of mine cashed out and left this little beach town for Hawaii, Arizona and just about everywhere else but Southern California. It was always like a celebration! Wine, Champagne, even big tips to the notary on some occasions. The profits were usually in excess of $400,000 because even if you waited as late as 2000 to buy something you could still pick up a little 2 bedroom one bath for under 150K. Paint it, landscape the little yard, make it cute and Cha-Ching!

It's those buyers that I never met that are now having to come up with that $3750 in property tax every 6 months AND the mortgage on a $700,000 = 1000 square foot home that I'll be meeting soon. However I don't expect champagne.