CNN: Beware the mortgage time-bomb (ARM "negative amortizations")

[Human Torch]

Tick. Tick. Beware the mortgage time-bomb
That ridiculously low-rate ARM seemed like such a good idea at the time. But now, payments will be coming due in a big, big way.
By Jeanne Sahadi, CNNMoney.com senior writer
October 9 2006: 1:56 PM EDT

http://money.cnn.com/2006/10/09/real_estate/arms_nightm...

NEW YORK (CNNMoney.com) -- Mortgage rates have been trending down, but that won't do much to benefit those who signed up for low-teaser-rate adjustable-rate mortgages in the past few years. An ARM charges an initial discounted rate for a period of time, after which it adjusts to market levels. When some types of ARMs with teaser rates of 2 percent or less reset, the rates are likely to jump to more than 6 percent - and even as high as 9 percent. That can mean a doubling in monthly payments owed for those homeowners saddled with the loans.

The jump in payments could be even bigger for some people. They could have a loan balance that's larger today than it was when they got their mortgage - a situation called negative amortization. And it's common with what are called "payment option" ARMs.

That's because the initial teaser rate is a "payment rate," not an interest rate. That means the market-rate interest on the loan starts to accrue from the get-go and monthly payments aren't enough to cover it, let alone pay down any of your principal.

There may also be a trigger ceiling, meaning when the balance reaches a certain level - say 120 percent of the original balance - the introductory terms will end and the rate will reset upward, according to Christopher Cagan, director of research at First American Real Estate Solutions, a mortgage information provider. End result: A much higher interest rate on a bigger loan than the homeowner ever intended.

[Gormy Cuss]

1. While we are all responsible for the contracts we sign willingly,

this sort of "gotcha" makes me think the industry needs a bit more regulation.

[depakid]

3. Yep, but the DINO's won't allow more regulation

and you know the Republicans won't, either.

That's going to have some very negative consequences bth for the people who signed those agrreements- and for economies at large. That'll end up a lose/lose all around.

[Xipe Totec]

4. Let's get government out of the bedroom and into boardroom

This should be a theme for the Democratic Party.

[Gabi Hayes]

2. you are so so so right. my grandmother bought a condo in 2000, with

an ARM, and for the first three years, the payments went down, to the point where the initial $600+ per month was down to just above 400. then, in 05 and 06, the payment jumped, first, to 525, then to 620. you do the math, but that's almost a 50% jump in two years.

we paid it off this May, but we didn't have that large a nut to begin with.

to those who do, good luck, because those contracts allow something like a 25% per year maximum hike in interest rate.

you couldn't be more right about how hideous those payments are going to be

for those that can renegotiate, now's the time, if it isn't already too late

lock it in if you can; you're screwed if you don't

[napi21]

6. I saw this when they first unveiled those "gotcha" rates!

I was really surprised so many people thought it was GREAT! Between this problem and the number of people who have lost their jobs, only to have to take a lower paying one just to be able to earn SOMETHING, I forsee a major problem in the # of houses that get reposessed!

[Gabi Hayes]

8. yep...we didn't worry about that, because my grandmother was over 100

when she bought!

that said, see post #7, because I think this could be a hugh problem, with lots of parasites, like Neil Bush did in 88, making brazillions of bucks off the carcasses of the easily fooled

[MissB]

5. Apparently there were lots of ARMs written in recent years.

I'm sure there are some cases where ARMs make sense, but for the average homeowner they really shouldn't go there.

[Gabi Hayes]

7. I wonder if this is on such a scale as to start another deal like the S&L

fiasco: massive bank failures, government bailouts of politically connected crooks, like HENRY HIDE
http://www.zmag.org/ZMag/articles/nov99everest.htm


a new RTC, etc

and will State Street Bank have a hand in the illicit money to be made as a result

can't wait

this won't get covered any more than the S&L scandal did

[girl gone mad]

9. Recommended.

I think this is going to hit our economy hard, particularly on the coasts where these types of loans are popular. I am always surprised at how many people just don't understand what they are signing up for. It's like they only look at the monthly payment amount. Some people took these loans thinking they could easily sell their property, but now that the market has cooled they are in trouble.

[SammyWinstonJack]

11. When we refinanced in '02 the lender suggested this type of loan.

We went with a much lower rate than the 8.75 we had and also did a 15 yr mortgage paid bi-monthly, knocking 10 years off the original mortgage. So glad we did.

[ecstatic]

10. My grandma was tricked into giving up 5.2% FIXED rate for an arm

She's 73, she just wanted the credit card companies to stop calling. Now her monthly bill is hundreds of dollars higher. We all wish she would have talked to us before making such a bad decision. The credit card debt was unsecured---she technically coulda just told them to kiss her ass.

[meganmonkey]

12. I also think they make "mistakes" (changes) to the paperwork to get people

to end up with ARMs even when they don't want it.

Long story short - I just purchased my first home a couple months ago. I was very clear from the get-go that I wanted a 30-yr fixed mortgage. All the paperwork I saw previous to closing was for a 30-yr fixed. At the closing, the paperwork was for a 5-yr ARM.

Hellooo?!

The woman I was buying the home from was leaving town in a couple days, and the mortgage company said it would take them a fricking week to fix the paperwork.



Needless to say, it all worked out in the end - I signed the paperwork so we could close and immediately re-financed at no cost to myself since the mortgage company (or the broker or the other 6 middlemen or somebody) made the mistake.

But I wonder how much of a 'mistake' it really was, and how many people this happens to...do most people really inspect their paperwork at closing anyway? I don't know.

Shady, shady business