DFIGTREE wrote:
- quote -

I don't see the distinction between my 'caveat emptor' and 'do your
homework'. 'Due diligence' is another equal expression.
But you raise a good point. I don't know that people ask or get this
type of advice from their attorney. My last 3 refinances had no attorney
present. I read the docs myself, and given the nature of the
transaction, no points no closing cost, term pulled in, rate dropped, no
prepayment fee, etc, I was satisfied. That people walk away from a
closing not knowing their rate is a 'teaser rate', nor what the payments
after adjustments would be, or finally, if it's a negative amortization
mortgage, is a huge problem.

I've come to accept people's shortcomings, that a brain surgeon may very
well border on innumeracy. I've watched many otherwise successful adults
struggle with concepts that I otherwise mastered in high school. And
when my daughter asks why the hair dryer says 'do not use while
bathing', I explain that in fact some people so stupid as to need such a
warning. I am between wanting the government out of the business of
protecting people from their own stupidity and wanting the government's
involvement so I'm not picking up the tab when the masses make decisions
that are so economically tragic, the rest of us have to pony up.

I don't know how popular Scott Burns is among the group here, but I'll
close by saying he recently authored a story titled "Lenders are not
your friends". I'll second that remark.
JOE

joetaxpayer wrote:
- quote -

IMHO if you have the wherewithall to sign the dotted line for a loan of
several hundred thousand dollars, you should have the wherewithall to
ask your attorney who is doing the closing, or any CPA, about the
wisdom of taking out such a loan. It's not a case of caveat emptor,
it's a case of doing your homework.

"Douglas Johnson" <johnson[at]classtech.NOTPARTOFADDRESS.comwrote
snip though Douglas's comments were read and seem reasonable
and thoughtful
- quote -

That's all true, but I think that more transparency in how
the rate is computed and what mortgage options are truly
available would go towards ensuring more fairness and less
predatory practices. The latter do seem to be leading to a
small economic disaster for the country as a whole.

The way S&L's were regulated has changed, after all, since
the disasters of the 1980s.

"Elle" <honda.lioness[at]nospam.earthlink.net> wrote:


- quote -

One of the traps here is that the broker works for the lender, not the borrower.
- quote -

Many of the commentators that I read are saying that there is a lending bubble,
not a real estate bubble. Part of the issue is that banks are not taking much
of the risk. They make the loan, then turn around and sell it on the secondary
market. So banks and brokers have very incentive to make marginal loans and
little incentive not to.

As long as real estate prices continue to climb, fueled by easy money, everyone
is happy. If the borrower gets in trouble, they can sell at a profit. Even in a
foreclosure, the lender will come out OK.

This house of cards comes down when real estate stops increasing.

There was a similar situation with the Savings and Loan crisis in the 80's. S&Ls
would get brokered CD deposits at relatively high rates. Since the CDs were
federally insured, the CD holders (lenders) didn't care what happened next.
What happened next is that the S&Ls made loans to developers at high rates (to
cover the CD rates and pay dividends to the owners) and high risk (because the
low risk borrowers could go elsewhere and get low rates).

The house of cards came down when real estate stopped increasing. It also
exposed a lot of outright fraud including cooked appraisals, non-arms-length
transactions, shoddy construction....

- quote -

The problem is, I'm not sure there is any objective calculation that could
define what a "fair" rate would be. Even if there was, I'm not sure it would be
a good idea to regulate it.

-- Doug

"Sgt.Sausage" <nobody[at]nowhere.com> wrote
- quote -

You seem to be ignoring several points made in the Sept.
2006 Business Week article. Namely:
---
[The borrower's] broker was paid more to sell option ARMs
than other mortgages; that their lender is allowed to claim
the full monthly payment as revenue on its books even when
borrowers choose to pay much less; that the loan's interest
rates and up-front fees might not have been set by their
bank but rather by a hedge fund; and that they'll soon be
confronted with the choice of coughing up higher payments or
coughing up their home.

As home prices soared, banks pushed adjustable-rate loans
with lower initial payments. When those got too pricey,
banks hawked loans that required only interest payments for
the first few years. And then they flogged option ARMs --
not as financial-planning tools for the wealthy but as
affordability tools for the masses. Banks tapped an army of
unregulated mortgage brokers to do what needed to be done to
keep the money flowing, even if it meant putting dangerous
loans in the hands of people who couldn't handle or didn't
understand the risk.
---

I understand you're arguing people were stupid and, with
careful study, could avoid some of these pitfalls. OTOH, if
the law does not step in and, say, better regulate broker
practices, as is being argued in the media this has an
effect on much more than the borrowers. The whole economy
can tank ("hard landing" is the popular colloquialism in the
media). So I think there is an argument for asking lenders
to disclose more and do so more emphatically, for the sake
of all of us.

There is also the simple reality that regardless of how
educated a borrower is, and how religious s/he is in paying
off debts, if s/he does not have the proper income etc.
history, s/he will pay a higher mortgage interest rate (ARM
or conventional). This of course is commensurate with the
higher risk the bank is said to be taking on such borrowers.
The problem is it's easy to manipulate the numbers that
constitute the risk calculation and prey on the poor, so
they're paying an interest rate that reems them. It's the
principle of "progressive taxation" in reverse. Banks profit
mightily from the poor, and it's not necessarily good for
the "free" markets or our society. If people do not
understand their choices (for whatever reason), then the
market is not actually "free."

Disclosure: Banking stocks do in fact comprise just about a
plurality of my portfolio.

"Sgt.Sausage" <nobody[at]nowhere.com> wrote:

- quote -

Today, for sure. But when the yield curve is really steep, ARMs can make sense.

- quote -

I had one of those.

- quote -

Of course, inflation was devaluing the money almost as fast. Actually, by 1984,
inflation was coming down, but long term rates were still high. It was a great
time to be holding long bonds.

-- Doug

"Sgt.Sausage" <nobody[at]nowhere.com> writes:

- quote -

In sept and oct 1981, a 30yr fixed mortgage was > 18%.
That was the peak, though. Nevertheless, it was never
below 14% in 1981 and just barely below 14% only in the
last two months of 1982.

Yessirree, 30 year fixed mortgages are still pretty cheap now.
In general, I'm pretty comfortable saying that if one
cannot afford a house with a 30yr fixed mortgage, one
cannot afford that house at all and needs to look not into
other mortgages, but into other houses. In general.

Actually, I'm inclined to say that if one cannot afford a
house with a 15 yr mortgage - even if one intends to get
a 30yr fixed anyway (which has lower payments) - one cannot
afford that house.

But folks have been very much brainwashed to believe that
they ought to buy as much house as (the bank tells them)
they can "afford".

Part of the problem is that very very few people realize
how little houses appreciate over time (as we discussed
the other day, historically only 1-2% above inflation).
But that's not the only driver - there are other pressures
(social, etc) - but it's a common justification even if
it has led many folks to take substantial risks.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote in message
news:P_GdnQuYM4soqmLZnZ2dnUVZ_vydnZ2d[at]comcast.com...
- quote -

Well I'll go ahead and say it then. For the vast majority of American
homeowners, the ARM *is* an evil abomination.

There.

I said it.

However, that does not make the bank evil. The ARM is simply another
product in their offereings. The average American is illiterate when it
comes
to reading contracts and mortgage agreements, and *extremely* innumerate
when calculating payments on said mortgage agreements. There is no excuse
for signing one of these and later coming back and claiming "I didn't know",
which is what most of the folks highlighted in the popular press are
effectively
saying.

What I read when I see the "I didn't know" line is instead: "I was too
illiterate to read, and too innumerate to calculate -- or I was simply
to lazy to do either". In all three cases, this is *not* the bank's fault.

- quote -

I'm too young to have had a mortgage in the insane 80's but my
Dad's always telling me what a deal I've currently got. Back in the
day, in those insane 80s, he was paying 13% on his mortgage and
darned glad to be doing it! Wow!

Set the WayBackMachine to 1984, Mr. Peabody. I've got a
pile of money I want to get back to 1984 and loan out!

Actually, that is not actually what is going on here.

The banks are recording the financial value of negative amortization
(deferred interest that accrues when one habitually makes the min.
payment) on their books.

The deferred interest will be converted to a formal liability in the
way of an additional mortgage burden when the loan recasts.

In terms of SAP (standard accounting procedures) a liability (deferred
interest) is offset by an equal amount of assets (equity), making this
acceptable general ledger transaction.

Regards,

H. Scott Miller

National Commercial and Residential Lender/Broker
Carteret Mortgage
TOLL FREE PHONE#: 1.877.716.6495, ext. 5
TOLL FREE FAX#: 1.877.578.2041

EMAIL: hugh.miller[at]carteretmortgage.com or EZMortgageLoanz[at]aol.com

Real Estate Help Desk (www.RealEstate-IQ.com)
Automated Loan Assistant (www.EZMortgageLoanz.com)



rick++ wrote:
- quote -

Mark Bole wrote:
- quote -

To be clear I never stated "ARM=Evil" and I don't think you took my post
that way. Anyone who can remember these details 22 years later has a
knack for numbers, I'd say. And you were well informed at the outset.
The ARM choice back then was good for you for multiple reasons. The
rates were alreading on a downward trend. The capped payments let you
ease into any adjustment, no shock. At any point the negative
amortization was minimal. Coincidently, '84 was when I graduated school,
and grabed a similar ARM, annual adjustments, 2% cap on the rate each
year. Your post backs me up pretty well, that disclosure and
understanding are important.
JOE

joetaxpayer wrote:

- quote -

To add some balance, the ARM makes plenty of sense in a time of high
interest rates. In 1984 I obtained an ARM with a "temptingly low"
introductory rate of 10.6% for six months, then it bumped up to 13.2%.
The rate was adjusted monthly, but the PAYMENT I was required to make
could not increase more than 7.5% annually, so there was little chance I
would have a problem making the payments. This was a unique feature at
the time, not sure how common it is today.

Exactly ten years to the month later, in 1994, the loan rate was 5.9%
and for that benefit I never paid one penny in refinancing charges
(appraisal, credit report, title insurance, points, junk fees, etc).

Sure, there was some negative amortization, treated like any other
additional borrowing on my part for financial planning purposes. Heck,
one time the bank offered a promotion to skip three payments and add the
interest to my balance, I took the deal with hardly a second thought.

-Mark Bole

Any scary part of the article is the banks that lend ARMS
are allowed to record revenues at what the normal payments
should have been rather than the actual payments.
This is allowed by some quirk in general accounting rules. So some
large
lenders say they have hundreds of millions more than they
actually have, reporting profits when they may be having loses.
Some day soon the little boy will see the emperor has no
clothes and there could be another serious banking crisis to
bail out.

Ironically there are several ads on the BW web page from
ARM mortgage lenders. These ads are everywhere.

A snippet from
http://www.businessweek.com/print/ma...01.htm?chan=gl

"The option adjustable rate mortgage (ARM) might be the riskiest and
most complicated home loan product ever created. With its temptingly low
minimum payments, the option ARM brought a whole new group of buyers
into the housing market, extending the boom longer than it could have
otherwise lasted, especially in the hottest markets. Suddenly, almost
anyone could afford a home -- or so they thought. The option ARM's low
payments are only temporary. And the less a borrower chooses to pay now,
the more is tacked onto the balance.

The bill is coming due. Many of the option ARMs taken out in 2004 and
2005 are resetting at much higher payment schedules -- often to the
astonishment of people who thought the low installments were fixed for
at least five years. And because home prices have leveled off, borrowers
can't count on rising equity to bail them out. What's more, steep
penalties prevent them from refinancing."

This reflects the story of the poster, a while back who when asking if
she should invest in real estate, and after a series of our questions,
found that her own mortgage was a negative amortization ARM. Further
down in the story, is an annecdote of a couple who refied out of a 5.25%
30yr loan in June 2005. Their ARM is now at 7.68%.
I understand "caveat emptor", but the disclosure laws are for #$%^. The
same people who forced the hairdrier manufacturers to put "do not use
while showering" should force a one page, 24 pt font disclosure stating
the current base rate, neg amortization, if any, the rates/payments
after adjustments if the index remains the same in the next 5 yrs, and
the rate/payment worst case. If there is a bubble, this is its source.
JOE