More Mortgage Angst

Caution, the following post is boring. There is nothing a retired guy hates more than a declining stock market, at least this retired guy. At the moment I am not relying on the stock market to provide any of my income, so it is not as bad as it could be, but it still makes me crazy. The current angst in the financial markets is being caused by a single factor. Stupid and greedy jackasses made ridiculous home loans to people that they knew could afford to repay them . Now that unqualified borrowers are defaulting on the loans in record numbers, everyone is in a panic. Here in our fair city, like many cities across the nation, speculators used a technique called the Stated Income Loan (SIL) to buy up properties that they hoped to resell for a quick profit, properties that they otherwise couldn't qualify for. This was in addition to the regular home buyers who also used this and other high-risk loan types. The SIL work like this. For agreeing to pay a slightly higher interest rate, the borrower gets to state his or her income and the lender agrees not to verify it. This is handy for someone with a decent FICO score but low income. In recent years one-third of all mortgage loans were SILs. Mortgage loan officers, who are basically commissioned sales people, have a huge incentive to cook the books in order to make a loan. So we have buyers and lenders both with an incentive to cheat. That is a recipe for disaster. The problem, of course, is that underwriting guidelines exist for a reason. To put it plainly, as much as we would all like to see every family have a home of their own, many just can't afford homeownership and bending the guidelines to help them qualify, hurts everyone. The Federal Reserve Board (read here)reviewed a sampling of SILs, checking stated income against the IRS tax records and found that 90% of overstated the borrower's real income by 5% or more and a shocking 60% overstated the borrower's income by 50%. The SIL is the biggest offender in the current turmoil, but people who took out ARM loans and Interest Only loans, also adjustable, are finding that as the interest rates adjust upward, they can no longer make their payments. With the slow down in the market for houses, they also cannot sell their homes. For many people foreclosure it the only way out. This leaves all of us on the hook in one way or another. The couple across the street from us bought what they thought was a good deal at the height of the real estate boom. They paid $240,000 for their home and have poured at least another $30,000 into fixing it up. That is a $270,000 investment. The house behind them, an identical model, just sold for something below $229,000. It was listed for $229,000 and I assume the buyers didn't pay full price. My neighbors are financially comfortable and not selling soon, so they are fine, but imagine a couple who bought that house with an ARM and now can't afford the adjusted payments. They are screwed because they are thousands of dollars upside down in the house. From the same report, the Federal Reserve estimated that 97& of homeowners with an ARM faced a 25% increase in their house payment in 2006. That is a huge one year jump. Most people with ARMs were already pushed to their financial limits, before the payment went up by a quarter. Anyway, it was a horrid week in the market and I am pissed over it. I hate the mortgage industry. Crooks and liars. Things in this blog represented to be fact, may or may not actually be true. The writer is frequently wrong, sometimes just full of it, but always judgmental and cranky Tag: Daily Life Personal Finance Humor