Adjustable Rate Mortgages (ARM’s)….trouble, trouble, trouble
I was watching CNN last night. Foreclosures in California are up 41%! What’s happening? It’s those darn ARM’s.
Everyone has been wondering how people with middle level incomes have been able to afford starter homes in the half a million dollar and up range. Three things seemed to have happened:
1) Relaxed Lending Standards
2) No down payments required
3) Interest only payments
From the website “Another F@cked Borrower”: (link is on the right of this blog)- This is how he explains what was happening in the mortgage business. I have posted his remarks verbatim.
No down payment & relaxed lending standards:
“I know we have done it before, but let’s at look how MOST people are/were ‘affording’ these 400k starter homes. First off, most are not putting any money down. The lenders I used to work for had 80/20 combo loan programs, but they also had 100% 1-loan programs, that could be interest only as well. Take a 400k loan at 5% Interest Only (a typical rate of 2 years ago), and you get a payment of only $1666,67 per month!!…..Throw in some takes and you are about $2000-2100 per month. With the ‘relaxed’ lending standards, the lenders I worked for would take a ‘full doc’ debt ratio of 55%…and a stated income debt ratio of 45-50% depending on the loan. Take the $2100 payment at a 55% debt ratio you only need to gross about $3850 per month ($42,600 per year) to ‘afford’ a 400k loan”.
Reporting False Incomes:
“The scary part comes with the ’stated income’ loans. Go to this website www.mbarl.org and click the ‘facts’ on the left hand side. When a recent sample of stated income loans were compared to IRS records, it was found that 60% of the loans had income exaggerated by 50% or more! Now I know that the study was only a pool of 100 stated loans, and many of you won’t believe it, but from what I saw on a daily basis I don’t doubt this stat one bit. There were broker offices that only did stated loans. Some brokers would laugh when I asked if the borrower was going full doc or not”.
“It will only be a matter of time until the fundamentals return. Making a low teaser payment for 2, 3 or 5 years only works when prices go up. Many people are going to have that sick feeling in the pit of their stomachs when their teaser ARM adjusts and their property is worth 100k less than they ‘paid’ for it….and there is nothing that the great econoMISSED Leslie Appleton-Young can say to take that feeling away. Why save for 6, 7, or 8 years (to get a downpayment) and get a fixed rate loan when you can just (falsely) ’state’ your income, not put any money down, and make 6-figures in appreciation a year??? Eventually you come to a point where the dollar can’t be stretched anymore. You come to a point where the massive ‘guaranteed’ appreciation isn’t there. You come to a point where the mentality shifts. Actually…we are just getting there now”.
I look forward to the comments and feedback. I’d also be very interested in getting information on how the mortgage lending business in Kenya works.