Toxic Mortgages

[SHELLY]

Business Week Magazine this week is running some excellent articles on mortgages: Check out this cover

So if you're planning on buying a home or looking to refinance the Cover Story and related articles and a really neat Slideshow will give you lots of insight into the finanical workings of some tricky mortgages.

In the end, they always say, the consumer is ultimately responsible for the mess they find themselves in....they always say the consumer "knows" or "should have known" better--after reading this, you will.

 

[Lisa Ruby]

Thanks for sharing such a good, in depth article. Hopefully, publication of more of this type of information will prompt more homeowners and buyers to search for the real "truth in lending" before signing!

 

[bdc63]

Thanks for the post Shelly. Enlightening.

After reading something like that, it is amazing to me that the CNBC talking heads are still debating whether there will be a "hard" or "soft" landing.

It's also amazing to me that anyone would sign a contract without reading and understanding it completely. I found it difficult to sympathize with the "victims" in the article.

 

[bsmart]

Thanks for the post Shelly. Enlightening.

After reading something like that, it is amazing to me that the CNBC talking heads are still debating whether there will be a "hard" or "soft" landing.

It's also amazing to me that anyone would sign a contract without reading and understanding it completely. I found it difficult to sympathize with the "victims" in the article.

I am sure this happens more than one thinks.

In metro Atlanta, I am seeing more and more people in their late 20s and early 30s buying "McMansions" and driving Escalades and Hummers, when they do not have the cash in the bank to pay for these luxuries. A friend in the banking industry told me that what is happening is, these folks are taking out up to 3 mortgages to pay for $600,000+ homes and two luxury cars to put in the driveway. They flaunt themselves as rich, but in reality they are living "paycheck to paycheck" every month. The county I live in has one of the highest foreclosure rates in the country--and is fastly growing with McMansions, which are also what seems to be showing up in the foreclosure database.

 

[Jellyfish]

In the true American tradition, now everyone that can't make their mortgage payment is a "victim"...class action lawsuit and govt bailout to follow!

I have used ARMs and option ARMs in the past to good effect. The first time my salary income was modest but I had a substantial guaranteed large bonus due within 12 months. The second time I was on assignment and knew I would only be in the house for a few years. In both cases I was out within
18-24 months and none of my plannning anticipated (or required) my house go up in value (although they did). In 2005 I moved into a home I plan on being in for 10+ years and secured a 5% 30 yr fixed and put 75% down in cash. My mortgage lender could not understand why I wanted this loan when I qual'd for much more and could not remember the last time he did a 75% LTV. I felt the froth could not last and this was prudent. Boy, did I feel foolish at cocktail parties around the 'hood for the last 18 months while all my friends were buying and flipping RE in FLA and making big profits.


All these products have legit uses, but unfortunately a spectrum that runs thru stupidity, greed, flock mentality, igonrance and outright fraud have bastardized the product. Combine slick commission based products with greedy salespeople and speculative buyers and there you have it....
Markets do correct, and sometimes the correction is nasty and long. My folks lived in Houston thru the boom and bust in the early 80's...very deja vu to the current market. Back then you couldn't buy a house, everything was a pocket listing, all the apts went condo, builders threw up inventory like no tomorrow, etc etc. Then in 85 the bottom fell out. Lots of BKs, repos, etc. I checked Zillow.com the other day the house my parents were in maps out like this:

1983 cost new $ 67,000
2004 resale 110,000


Thats a 21 year holding period to make a 60% "return" (and lets not talk about carrying costs, reparis, taxes, etc...). I realize beach markets and Houston are not the same, but on the other hand people will probably sell a 2nd home quicker than a primary.

I feel it's going to be a bumpy ride over the next few years but we won't wind up in a ditch. Commodities, tax lien certificates, resources plays and shorting financial firms that hold the ultimate risk on OARMs (if you can ID them) will be good investments, IMO. Not doom and gloom, just reality associated with a normal cyclic economic slowdown. Everything runs in cycles. It's never as bad as it seems and never as good as it seems, except for those on the overleveraged edges.

I see some great buying opportunities in RE and in SoWal over the next few years. The area is just too darn nice. Those with some cash and decent credit in 2007-8 will do nicely. I will be making aggressive offers to some of those neighbors now holding millions in multi-property ORMS that are adjusting and can't carry. Their turn to feel foolish at the cocktail parties.

 

[SHELLY]

I see some great buying opportunities in RE and in SoWal over the next few years. The area is just too darn nice. Those with some cash and decent credit in 2007-8 will do nicely. I will be making aggressive offers to some of those neighbors now holding millions in multi-property ORMS that are adjusting and can't carry. Their turn to feel foolish at the cocktail parties.

"Real" investors who know their stuff won't be buying into anything unless they see an opportunity for positive cashflow. Something has got to give for that to happen; either carrying costs (insurance + interest + HOA fees + taxes + management fees) have got to come down considerably OR prices have got to drop considerably. We've just gotten through the real estate "high season" and now entering the "slow season." There's still a lot of unwinding to do and lots of properties up for grabs with more continuing to come on the market as condos finish and more subdivisions are carved out. AND...it's just not a Florida thing--with most every metro area in most every state involved in the RE boom, with a few exceptions, it's pretty much nationwide.

 

[Jellyfish]

Not everyone who is looking for a beach house is investing in the sense that it must produce income. In my case, not planning on renting, just want to get in at a good price point and hold long term for personal enjoyment. If it appreciates, that's icing. I would be curious to guess what pct of owners who do rent cover expenses (with 2006 ins and tax, not prior years) and how many weeks on average covers. I have heard that 10-12 weeks is about average, not counting snow bird rentals off season.

 

[SHELLY]

I would be curious to guess what pct of owners who do rent cover expenses (with 2006 ins and tax, not prior years) and how many weeks on average covers. I have heard that 10-12 weeks is about average, not counting snow bird rentals off season.

That's a function of how much equity they've got tied up in the property. With the big turnover of property we've had in the last couple of years, people getting in with little of their own money down, and the soaring carrying costs, I'd say there are a heck of a lot less now than there were before.

 

[Pirate]

I cover my expenses on my house, I paid cash. Last year I barely broke even however. This year is much better. If this market needs real investors looking for cash flowing properties to start clicking it is around 70 percent overpriced. Properties will barely cover expenses without any mortgage in many cases and I have looked at hundreds of them on paper.

 

[SHELLY]

I paid cash. Last year I barely broke even however. This year is much better.

Imagine if you had to add to that a monthly nut at these prices :shock:

If you're not risk averse, you also have the option to "go commando" and self insure.