The real reason why Americans can't pay their mortgages

I saw the satire tag, Cat.

Still, I just want to comment that I agree with this quote from WMK.

The suckers are dumb for not being wiser about steering clear of financial tar pits like adjustable rate mortgages but the guys who dangle these dangerous products before the public are also to blame. In other industries the government regulates products and practices that harm consumers but apparently that sort of good sense regulation has been absent for quite a while in the banking industry.

Some of these people simply did not realize the ramifications of easy credit.

The suckers are dumb for not being wiser about steering clear of financial tar pits like adjustable rate mortgages

What's with everyone knocking ARMs these days? My current situation calls for a fixed rate loan, but I've used ARM loans to my advantage in the past.

If you are confident that you are not going to move or refinance for 10 years, get a fixed rate. If you plan to move or refinance in the next 10 years, get an ARM.

What's with everyone knocking ARMs these days? My current situation calls for a fixed rate loan, but I've used ARM loans to my advantage in the past.

If you are confident that you are not going to move or refinance for 10 years, get a fixed rate. If you plan to move or refinance in the next 10 years, get an ARM.

Someone:

Nothing wrong with ARM loans. You definitely seem to have used them to your advantage.

The problem is that some people don't truly understand the future issues involved, and the loans were a bit too easy to get. People have to be able be secure in the knowledge that they will be making more income or will have a way to continue to pay a mortgage even if interest rates rise up to the ARM Cap.

The really dangerous issue was the "interest only" loans that were too darn easily available.

People definitely need to understand the loan they are getting. If an ARM loan reaches its cap, the home owner likely should have gotten a fixed rate instead. IMO, a properly utilized ARM loan will never reach its cap.

I think the biggest key is loans being "too easy" to get. Banks are not doing potential home owners any favors by giving them a loan they can't sustain.

IMO, it should be a crime for a bank to push interest only loans other than in very rare and specific (temporary) cases.

The problem is, they're granted without accounting for your ability (or inability) to pay them under various index scenarios.

I agree, and there are too many assumptions regarding future-ability to pay, as you mention.

I like the Enron-esque comparison, too.

the problem is, they're granted without accounting for your ability (or inability) to pay them under various index scenarios.

I agree, and there are too many assumptions regarding future-ability to pay, as you mention.

I agree the ARM loans can bite and I would prefer that banks made sure borrowers knew about the risks, but ultimately the responsibility for repaying a loan is on the borrower. Again, I don't think it's the loan that is the problem, but the limited understanding on the part of the borrower.

Your analysis makes sense in the scenario you presented. ARM loans are not a good choice if you are going to be in the home for a while and rates are likely to rise. As I see it there are 2 variables which create 4 scenarios.

Likely to move within 10 years, rates likely to rise:
Get am ARM with an initial fixed period as close as possible to your estimated length of stay. i.e. if you plan to stay in the home for 5 years, get a 5/1 ARM. You'll get a lower rate compared to a 30-year fixed and you plan to move prior to the adjustment. If you end up staying longer than anticipated, you could get burned.

Likely to move within 10 years, rates likely to fall:
Get an ARM for the same reasons. If you are confident rates will fall you can go with a shorter initial fixed period since you will likely want to refinance to the lower rate anyway.

Likely to stay for at least 10 years, rates likely to rise:
Get a fixed rate. An ARM could be very painful in this situation.

Likely to stay for at least 10 years, rates likely to fall:
It's a bit of a gamble, but if you are confident that rates will fall an ARM is your best bet. If the rates do fall you will want to refinance regardless of which type of loan you have - you might as well get the lower rate of the ARM in the mean time. At that point you have to reevaluate these scenarios to see if you want to get a fixed rate or another ARM.

In general, you get a lower rate in exchange for accepting some of the risk. If you know you will be moving or think that rates will fall the ARM might be worth the risk. If you are not comfortable with the extra risk, get a fixed rate and the security that comes with it.

Does that make sense?

At this point in time, there are only a couple reasons to take an ARM. These are in addition to someone's analysis above, but one also contradicts it. Mind you, this is at present.

IF your credit is good, do not take an ARM until rates are likely to go down. Right now, A paper and Alt-A ARMs are actually at higher rates than the fixed rate mortgages.

If your credit is not good, take an ARM to purchase a house only if you understand that you will have to work diligently on credit repair. Take an ARM to refinance only if you will be paying large amounts of debt, and working diligently, after the loan closes, to repair your credit.

Otherwise, stick to what someone said above.

As far as interest-only. It is a great way to increase cash flow. I would not recommend taking interest-only at above 80 or 85% loan-to-value. Oftentimes, the rate bump for taking out an ARM loan will make the additional $40 or so a month in savings not worth it. They do work well for some people though, and if you have equity may also be a benefit.

The really screwy loan is the negative amortization. This loan is also great for cash flow, and only good with equity in the home. Generally, I recommend a max loan-to-value of 75-80% depending on the person's liquid assets.

Currently, the marketplace factors have made subprime and ARM loans to pricey, to hard to get,

As far as interest-only. It is a great way to increase cash flow. I would not recommend taking interest-only at above 80 or 85% loan-to-value. Oftentimes, the rate bump for taking out an ARM loan will make the additional $40 or so a month in savings not worth it. They do work well for some people though, and if you have equity may also be a benefit.

I agree. This loan is for the very sophisticated investor. One who has secure employment but also one who has other sources of income that may help him/her project future profits.......annuities...trust fund.. large liquidatable land holdings. adequate savings....even some less secure investments such as a strong conservative stock portfolio.

It would be completely without risk, but some people can afford taking a CALCULATED RISK.

The really screwy loan is the negative amortization. This loan is also great for cash flow, and only good with equity in the home. Generally, I recommend a max loan-to-value of 75-80% depending on the person's liquid assets.

I would tend to agree...that this is the king of he screwy loans. :)

Currently, the marketplace factors have made subprime and ARM loans to pricey, to hard to get,

This is really good news. Although some are balking about it. It will save some people from themselves, in the long run......at least, IMO.

Lastly, an ARM with a three or four point cap is not a bad bet for SOME people, in certain cases.

Again, though, the person needs to ensure that they can afford to carry the mortgage payments at the CAP INTEREST RATE.

They should be able to carry it at the cap, unless they have enough equity, and the advance knowledge, to refinance before the adjustments come. If I got a letter from my mortgage company saying my rate would rise 2%, I would not be waiting for it to happen.

It could be possible to include disclosures to this effect in the mortgage package (not that most people read through all the paperwork). It should also be required of mortgage servicing companies holding ARM's to alert the borrowers of the change 3 months, 2 months, AND 1 month ahead of the adjustment, allowing them to prepare for the change and make necessary changes.

As for those owning houses in declining markets, it would be generally preferable for the mortgage company/bond holder (economically speaking) to bite the bullet and extend fixed rates on all these loans. They may take losses to expected profits, but at least they will be less likely to foreclose, thereby sustaining heavy losses on houses they will not be able to sell but for a fraction of the cost. Its an easy fix that would reduce uncertainty for the homeowner and mortgage holder.

I just recently move apartments and I cannot believe just how much crap I own. It's unbelievable. And I'm only a year out of college in a small apartment. My goal now is to own less crap. Mainly so when I move next I won't need to lug so many boxes.

Fortunate people have friends with trucks. Toss out a box or two during the move. Be sure to maintain a safe distance between other vehicles.

I'd missed that article, so thanks for the link. It explained the situation very well.

I am very proud to say that effective this weekend my husband and I are debt-free! We don't even have a mortgage.

There's plenty of blame to go around. The home buyers themselves for allowing themselves to be sold on a home they can't afford, the real estate agents for encouraging them, and the lenders for their clearly irresponsible practices. I know that it's nothing new with realtors, at least. Years ago fiance #2 and I were house hunting in St. Petersburg, Florida and the realtor was trying to sell us a house that was clearly out of our price range. The fact that #2 was buying into her line of crap was one of the reasons I called it off (the wedding, I mean). Yeah, theoretically we could have bought the lovely waterfront house w/ sailboat access, but we'd be eating generic boxed powdered macaroni and cheese five nights a week. They make money when the buyer is not savvy.

Ultimately, savvy or not, nobody held a gun to these buyers heads and demanded that they sign.

cartooncat,
You're article is great at highlighting some of the absurdities of American consumerism. I used to be that way and it got me in trouble. Now, with my husband, if we don't have the cash, we don't get it. Very simple. The added benefit of being on a cash basis is one tends to be rather more choosy about what one buys. I think the act of handing over cash is more concrete, or more visceral, somehow.

I am impressed and happy that you are debt-free. I do, however, wonder why you are not leveraging at least 50% of the equity in your home to earn money elsewhere. Interest rates are still very low, and financial planners will generally earn 8-12% on low to medium risk investments for their clients. That is 1.5 - 5.5% higher than the average fixed rate mortgage at present. You could be setting yourself up for an earlier, more comfortable retirement.

SplitTooth,

I understand why leveraging 1/2 our equity may be a good idea, but we are entirely too conservative to consider it. It may be costing us in the long run, but we feel safer this way.

Safety is good, I suppose. Of course money is paper and retirement is forever (in this life anyway :)) To each her own, I like risk:)

I am very proud to say that effective this weekend my husband and I are debt-free! We don't even have a mortgage.

Congratulations - I hope to say that I get to that point someday. Personally I'm just proud none of my debt is credit card debt.

I agree with a certain percent of what you are saying, but disagree on the whole. American job growth is still good. We are sending some manual labor positions overseas, but creating jobs and industries in other areas.

Most Americans with credit card debt did not get it from medical expenses. Many do, I agree. Many more don't pay it with credit cards but instead allow it to go to collections. Medical collection agencies generally just slap it onto the credit report and don't do anything about it, unless its a big one. A lot of medical bills can also be paid for a portion of the balance. I offered to pay a $1500 bill (two bills actually, one for the doctor and one for the hospital where the doctor worked) right away if they could reduce it. Both bills were dropped to 30% of the balance.

Our healthcare system is in dire need of repair, but switching to Universal Healthcare overnight is not the answer. How is our government doing running schools, maintaining infrastructure, handling foreign policy, running the war in Iraq, handling our tax dollars efficiently, etc? In my opinion, not good. So do we really want them handling our healthcare as well? I agree that allowing insurance companies to do it is not the best way either, but that leaves us at a loss.

The inverse savings rate we had last year is not due to medical (as a majority of blame) by any shake of the stick.