Forclosure

[nathanm]

quote:Originally posted by cannon_fodder

Nathan, by and large we agree.  I still assert that even an unsophisticated borrower should be able to have SOME notion of affordability on a loan.  They tell you flat our what the payment will be.  $500,000 mortgage plus taxes =~ $3,800 a month on a 30 year note.  Tack on $200 a month for insurance and 10% of your payment for maintenance and you're near $4,500 a month.

For your standard 30 year fixed, I agree that you'd have to be an idiot not to figure out that a mortgage was wildly unaffordable.

That's not true for the products that are causing most of the grief, though. When you get an ARM with a low teaser or an IO or a negative amortization loan, the payment they make clear is the one you start with, and there's little or no discussion about future increases.

The same thing happens a lot for people who buy new homes from a homebuilder, but 1 year in when the property tax comes due and they don't have enough in escrow to pay for it because the escrow was calculated on the previous year's tax when there was no house there.

All this stuff is discoverable, but it's not really presented to the buyer until closing, when they're already expected to read, sign, and understand a whole bunch of stuff they're not prepared for while a bunch of people look on twiddling their thumbs. And then if they do see something wrong they're so far along in the process that they don't want to back out..if nothing else for fear of losing their earnest money.

When we bought, the underwriter didn't come back with a final approval until literally the day before closing. Even if we had wanted copies of the closing documents, they weren't to be had. Perhaps we need some sort of a regulated timeline about when people get mortgage related documents, including one that clearly spells out the basic terms of the loan without descending into the legalese. The truth-in-lending statement sort of does that, but is broken for anything other than a 30 year fixed and has a bunch of stuff on it that just ends up confusing people.

[Conan71]

quote:Originally posted by nathanm

quote:Originally posted by cannon_fodder

Nathan, by and large we agree.  I still assert that even an unsophisticated borrower should be able to have SOME notion of affordability on a loan.  They tell you flat our what the payment will be.  $500,000 mortgage plus taxes =~ $3,800 a month on a 30 year note.  Tack on $200 a month for insurance and 10% of your payment for maintenance and you're near $4,500 a month.

For your standard 30 year fixed, I agree that you'd have to be an idiot not to figure out that a mortgage was wildly unaffordable.

That's not true for the products that are causing most of the grief, though. When you get an ARM with a low teaser or an IO or a negative amortization loan, the payment they make clear is the one you start with, and there's little or no discussion about future increases.

The same thing happens a lot for people who buy new homes from a homebuilder, but 1 year in when the property tax comes due and they don't have enough in escrow to pay for it because the escrow was calculated on the previous year's tax when there was no house there.

All this stuff is discoverable, but it's not really presented to the buyer until closing, when they're already expected to read, sign, and understand a whole bunch of stuff they're not prepared for while a bunch of people look on twiddling their thumbs. And then if they do see something wrong they're so far along in the process that they don't want to back out..if nothing else for fear of losing their earnest money.

When we bought, the underwriter didn't come back with a final approval until literally the day before closing. Even if we had wanted copies of the closing documents, they weren't to be had. Perhaps we need some sort of a regulated timeline about when people get mortgage related documents, including one that clearly spells out the basic terms of the loan without descending into the legalese. The truth-in-lending statement sort of does that, but is broken for anything other than a 30 year fixed and has a bunch of stuff on it that just ends up confusing people.

I have to agree with you, 90% of the people who got an ARM didn't really have a clue what they were getting into.  I can also see the escrow scenario you spelled out as well.

I had an ARM on my second house.  I'd worked in consumer lending and assumed I knew everything there was to know about it.  Turns out, it was tied to some vague British bond index or something.  I was led to believe it was a prime+, or at least I assumed that, and I worked in the industry.  That may have been my biggest problem- arrogance in thinking I knew it all and didn't pay closer attention.

It did not wind up cramping my life, but it did run up a couple of years, then we locked it.  It had a convertable clause.  For us, it did what an ARM was designed to do (but has been so often abused because a lot of originators only care about making the loan):  We needed a little more house when it was bought, but if we'd have gone fixed rate at that time (1993) it would not have budgeted out.  As expected, our income went up and we could pay for the increases the next two years as the rate went up (it may have adjusted bi-annually, can't remember now).  So, essentially we were the type of buyer ARM's were designed for.  We weren't trying to buy way over our head, but at the time NDI requirements were a lot tighter than later in the decade.  If you were 1% to 2% over, they wouldn't make the loan.

Lenders can tell you anything in a closing, all that matters when it goes legal is what you signed, disclosures be damned.  I honestly believe a lot of closers don't have a great understanding of the indexes the loan they are closing (or selling) is tied to.

[cannon_fodder]

My response to the more creative mortgages is essentially the same - you should have known.  Most of those people knew they could not afford that home in the long run.  If they would have spent any time looking into it or consulted with anyone, they would have known for sure.  Most people making an average wage know they can not afford a $500,000 house by common sense.

If they failed to look into it or convinced themselves otherwise, they were greedy.  

And my second prong of that argument would be:  so do we only help people that were greedy enough to sign up for bad mortgage deals?  If I was smart and signed a 30 year fixed, I get nothing.  If I was stupid and signed an interest only ARM, I get government money.

Again, probably not the message we want to send.

[nathanm]

quote:Originally posted by cannon_fodder


If they failed to look into it or convinced themselves otherwise, they were greedy.  

And my second prong of that argument would be:  so do we only help people that were greedy enough to sign up for bad mortgage deals?  If I was smart and signed a 30 year fixed, I get nothing.  If I was stupid and signed an interest only ARM, I get government money.

Again, probably not the message we want to send.

When you have a realtor and a mortgage broker saying "oh, it's not a problem, you can refi or sell in a couple of years, guaranteed," it's harder to say "well, duh, but this seems stupid." They are the experts after all.

And then they go glossing over the terms, like that your payment will skyrocket in 3/5/10 years when the payment is reset to a fully amortizing amount. You have to remember that you're using a pretty extreme example. More common is the $100,000 household buying what was a $400k or $500k house that also has around $20,000 in credit card debt and one or two car loans. Like it or not, that's where a large part of our population is right now. (and has been for years, really)

With what seemed like a reasonable expectation of salary increases a few short years ago, it would have been comfortably doable. Now..not so much. The sad thing is that in most of the country, foreclosure rates aren't especially high compared to other recessions, but the news media and some banks are acting as if armageddon is upon us. (And it may be, given how leveraged many of the MBS holders are)

It didn't help that we had a culture in the banking industry that there was absolutely no reason to have more than the bare minimum regulatory capital on hand, which is stupidly low for big banks, IMO, or that certain people were really pushing the fear button late last year so they could swoop in and scoop up the carcasses of seized banks.

And the assistance program doesn't discriminate based on the type of loan you have. Of course, in a 30 year fixed you're less likely to have a problem unless it's due to job loss or other income reduction.

[DolfanBob]

Thank's guy's
I knew I asked the right people.