Thursday, July 26, 2007

Will poor folks be shut out of the housing market?

Ah, the American dream. Purchase as much house as you possibly can and foreclose 2 years later. Wait, what?

Subprime lenders might be getting a clue, because they've effectively dumped the 2/28 loan. What shocked me is that they claim it is the "most popular loan". Really? When I bought my house 2 years ago, the very idea that I would sign a 30 year loan contract and have no clue what the interest rate could be in a couple of years was ridiculous. Would you sign your mortgage with the interest rate blank and let the lender fill it in later whenever they wanted? No? So why would you let them do it a couple years later? Unless you have a very specific set of circumstances, this is mind-bogglingly stupid.

What's a consumer looking to refinance to do, they ask?

Mortgage brokers and loan officers say borrowers who need to refinance their subprime mortgages still have options -- just not as many. Some lenders might still offer 2/28 and 3/27 ARMs, although the rates might be high -- possibly into the double digits.
Um, how about a 30 year fixed. How about a 15 year fixed! Why, why, why, would you sign a contract without any idea what the interest rate is going to be? Here's an idea, sell your house. If you can't pay the mortgage without ridiculous terms, you obviously can't afford to live there.

One banker says its "old school again". How is a 5/25 or a 40 fixed "old school"? My grandparents would have laughed all the way out the front door if faced with a contract like that (I can't say my parents because, well, sorry mom and dad but your generation doesn't have the best record of making good financial decisions).
"Some families are going to have to make ugly decisions," a banker says, by cutting back on spending or, in the worst case, losing the home in foreclosure.
I disagree with this "poor me, my mortgage is going up and I'm going to lose my house!" because they did it to themselves.
At the end of March, almost 16 percent of subprime ARMs were at least 30 days past due, according to the Mortgage Bankers Association. That's high, and the default rate is bound to get even worse as subprime ARMs reset over the next couple of years.
No kidding. Could it just be that ARMs altogether are a stupid product? Maybe? Right up there with home equity loans, in my opinion.

Fortunately, Washington Mutual (WaMu) appears to have been hit with the "well, duh" stick:
WaMu announced other changes in the way it underwrites subprime mortgages. All subprime borrowers will have to document their income instead of merely stating it without providing proof, and taxes and insurance must be included in their monthly payments.
Not to worry though, if you have a great credit score, the bank will still give you a loan for whatever you want without any consideration of you actually paying it back, and you can do your small part to drive the housing crash. Really, is xeroxing a copy of your W2 so hard?


4 comments:

Jim said...

I know there are people who think 30 or 15 year fixed rate loans are the best in every case. They are consistent in that your rate will not change unless you refinance. What if you don't plan to live in the property that long? Would it be worth getting a, *gasp*, ARM?

Getting an ARM that would change rates every year or two would probably take an arm and leg when that happens. I use a HELOC to split things 80/20 in order to avoid PMI. It is stupid to use one to take a vacation or feel like you paid off credit cards with it.

My credit is fine and I could borrow much more than I need to, but why would I want to do that? Also some of us also have 1099 in addition to W2. There is a difference between being poor and broke. Poor people have given up and have absolutely nothing. People who are broke and buy a house they can't afford will end up being poor without a house. Broke people always know when they'll be broke too. So if they know they'll be broke on Saturday, they party it up on Friday!

Beyond the Consumer said...

Possibly, but that's too much risk, IMO. What if you plan on living there for 2 years and then move? I guess a 2/28 ARM makes sense. But...what if the end of year 2 rolls around and for some reason you can't move, or can't refinance, or the market is saturated with inventory (like now) and it takes forever to sell and you can't afford the huge new payment?

Jim said...

There is risk no matter what type of loan you take out. You're shopping for a mortgage and ARM rates can be lower but a solid fixed never changes. What I am saying if you buy a house and only plan to live there 3-5 years, what would be wrong with a 7 year ARM? Fixed rate for 7 years, but your intention is to sell prior to the adjustment. Would it make any difference? If things change and you want to keep the home long term, convert it into a 15 year fixed so you can pay it off.

By the way, markets are saturated because people borrow the entire value of the home and there is no equity to work with. If you owe more than the house is worth to sell the thing, it becomes difficult to sell. I think foreclosures are high because of these rip-off debt consolidation programs throwing their debt into a HELOC.

I think there are certain types of mortgages out there that make sense for some, and others see them as a bad idea. It is beyond me how people with bad credit or no credit can even borrow money. Owning a home is exciting but it can become a burden if the payment is half the take home pay. I wish banks would take more responsibility to stop telling people what they want to hear and give them a scenario of what would happen to them if they got them a loan. It is all about the business and young bankers look at volume of loans they can push through as personal success. Half those loans could be foreclosed on because the people can't really afford them. Integrity has been thrown out the window.

Katie Wilson said...

I dont think that there is any kind of risk no matter what type of loan you are taking out. If you're shopping for a mortgage and ARM rates can be lower in that case a solid fixed never changes. But if you buy a house and only plan to live there 3-5 years, what would be wrong with a 6 year ARM? Fixed rate for 6 years, but your intention is to sell prior to the adjustment. markets are saturated because people borrow the entire value of the home and there is no equity to work with. there are certain type of mortgages out there that make sense for some, and others see them as a bad idea. It is beyond me how people with bad credit or no credit can even borrow money. Owning a home is exciting but it can become a burden if the payment is half the take home pay. I dont think it Would make any difference? If things change and you want to keep the home long term, convert it into a 15 year fixed so you can pay it off.