As I was driving home yesterday, I was listening to the Randi Rhodes Show on Air America and she was talking about the economy and interest rates and how many people are starting to have difficulty meeting their adjustable rate mortgage payments as interest rates rise. Now intellectually, I've known this was happening for some time, but hearing the people that were calling in to her show really made it much more concrete for me. People were calling in from all over the country - Florida, Michigan, Washington. All were telling similar tales - they got an adjustable rate mortgage or an interest only mortgage and over the past couple months, their payments have risen steadily, in some cases more than doubling, leaving them with payments they can't meet. And most stories had another common thread. Real estate agents had encouraged them to buy as much house as they could afford. Mortgage brokers had pushed interest only mortgages or, worse, negative amortization mortgages to get them the lowest monthly payment. Very little, if any, time was spent explaining what would happen if interest rates went up and it was just assumed that the value of their houses would continue to follow the recent trend of exponential growth, leaving them free to refinance any time in the future.
With declining property values, they are now trapped in a mortgage they can't afford to keep and can't get rid of. Add rising medical and medical insurance costs to the mix, and you've got people who are in serious financial straights.
Most disturbing was the fact that these weren't all financially stupid people. I mean, there were some who you could tell didn't have a basic grasp of economics, but there were a surprising number of self-employed people, white collar workers, and educated, middle class people facing these problems.
Randi suggested that interest only and negative amortization loans should be outlawed. I don't believe that interest only mortgages should be outlawed; as a real estate investor, I know they have their usefulness. But I can't really think of a good reason why negative amortization mortgages shouldn't be, apart from the generic opposition to having more government invention in our lives.
I don't have all or even some of the answers for how to fix this, but I do know that, as a real estate investor, I can help these people. As the real estate market drops, now is the time investors can make money but at the same time, I don't think we should be so concerned about profit that we hurt these people even more. We have the ability to create a win-win situation that helps these people and lets us make a fair profit at the same time.
Tuesday, October 31, 2006
Hitting Home
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13 comments:
I think a lot of financial smart people just get a mental picture of how something should work and don't realize that how it really works may deviate, so when the two worlds collide they're stuck in a bad place. Take for example my friend who is now refinancing her 3/1 ARM, she's a smart girl who saw the allure of the low payments and probably was convinced by a lender to take an ARM - you pay less and you pay less in interest, which doesn't even go towards the house anyway, and your house is appreciating... so it's a win win! So she just took it at face value (it's entirely true), thought it sounded right and left it at that. Had she investigated it further, I bet she would've, at the very least, gotten a longer ARM (the rates between a 5 and a 3 don't differ tremendously, at least when she was looking) or even gone fixed. Now she's refinancing to get her rate back down because she's looking at a 8.75% in the face and has to pay another round of closing costs (which no one mentioned to her the first time around).
People lie to realtors and don't tell
the the whole financial situation they are in. They are embarrased about the credit cards and the heavy car payments. They want to upgrade the home they are in they get approved they go for it... a year later they blame the bank and the realtor... nice... As far as neg am loans... the bank call them differed interest, comfort payments, flex payment plan loans.... very sneaky!
Good point about lying to agents. There are two sides to every story...
Sounds like things have changed. When I purchased my first home in Arizona in 1993, the sales people were all pretty good about educating me about debt ratios and such. I ultimately took out a 7/23 Jumbo at the time knowing that it would be unlikely that I would live in my first home for more than 7 years. I did sell after 4 years and moved up to Oregon (company paid all relo and closing costs), but made sure that as I upgraded to a bigger house, that I did not fall into the trap of buying "all the house I could afford." Now that I own my primary residence outright and have zero debt, I can feel good about the real estate market tanking since I will have a lot of resources at my disposal to potentially pick up real estate at a more reasonable price in the future.
Neg Am loans are just another tool for investors, those who want to outlaw them don't understand them or aren't taking the time to really see their time and place. They are good 1-3 year max use time frame after that you will start eating your equity quickly. As an example there is a house $150000 its at 80% LTV current mortgage is $1500 hard money loan so that is $40k+ sitting in equity; The investor bought as a fix-and-flip made the money on equity but housing market slowed down and doesn't want to keep paying that high mortgage. They choices are sell at cost give up 30K profit and make little if any profit or rent it out for a year or 2 you will still have an equity cushion maybe even get more through appreciation(just because the market slow doesn't mean it won't sell later) and try again. The investor isn't it in it for the long term why would they get a conventional loan to pay down the balance a couple thousand over 2 years at P&I $1050+taxes/ins @7.5%, btw the house will rent for min $900 but we will say $1000 avg so you are down say $200 per month. At the end of 1 year if the investor sells at the current attempted sale price their breakdown is 40k equity-2400(cover mortgage)-4k closing costs + 1k mortgage payback= $34.6k which isn't bad still profit except that you have to cover that $200 per month out of YOUR pocket. What about an interest only option @ 7.5% length doesn't matter you are selling in 3 years max, P&I $938+taxes/ins you are down $100 per month so breakdown is 40k-1200-4k closing costs= $34.8k you made $200 choosing this one and you reduced you out of pocket to $100. Those are a toss up but if it came down I would rather have less out of pocket. Now for the neg-am loan we will even take the interest up because it will be higher to 8% total you pay 3.5% in payments your P&I is $581+taxes/ins and the balance $500 gets added to your mortgage balance every month but you are also making $300 per month. Breakdown for this is 40k-6k(mort add back)-4k=30k+3000 rent=33k. So if I choose the neg am for 1 year it will cost me $1800 in equity but no stress of covering the mortgage every month and it cash flows some of the equity back to me that I would not have access to with out a HELOC or second mort. that to me and many investors is worth $1800. Just a thought flame away.
"Win-win"? Is that what you and your speculator friends call driving up the price of housing to such ridiculous levels that no normal family can afford them without having to resort to these phoney-baloney loans?
As a "real estate investor" (speculator), your pump-and-dump moves have destroyed neighborhoods and communities. Oh, now you feel bad. Boohoo.
haha, sounds like someone is a sore loser. ;-)
Yep, a real sore loser. You know what I call a real win-win? The last deal I did. I bought the house from a woman whose husband was a drug dealer. She had two little girls and she testified in court against her husband to protect the kids and send him to jail. She had to sell her house fast so she and her kids could move across the country to live with her parents without being constantly in fear of retaliation by her husband's "friends." As an investor, I was able to offer her the money she needed (she named the price) in cash and an ultra-fast close so she could get out of town ASAP and start a new life. So no, I don't feel bad. I have no moral qualms about how I do business.
In reply to the anon.
No one is holding a gun to anyones head and forcing them to buy or sell.
The investor buys the house because the owner is selling it. Seller decides to sell because it is beneficial for him to do so
And when the investor sells it he sells it at a price that buyers are willing to buy it for. If a buyer thinks the price is to high the house wont get sold.
People took out loans they could not afford because you and your flipper friends were playing fun games with the price of housing, bidding it up into the stratosphere. Spare us your phony concern.
That was an inspiring story about the drug dealer although I hope you crunched the numbers to maximize the cash flow. Seriously, I cried. Are you going to make a 200% profit or just 100% on it? Should I watch for you on "Flip This House"? You're a regular Mother Theresa.
People took out loans they couldn't afford because banks relaxed their lending standards so much, anyone could get a loan. Why aren't you blaming the banks that approved them for loans they obviously couldn't afford?
As for the drug dealer's house, yes, I did crunch the numbers, just like I do with every property I evaluate. I made a 4% return, 8.06% annualized. You can see all the details about it at http://shaunsre.blogspot.com/2006/08/house-3-final-results.html.
If you doubt my story, I wrote about her plight back when I purchased the house in February: http://shaunsre.blogspot.com/2006/02/house-purchased.html
Don't bother posting any more comments. You obviously have an ax to grind and are not interested in facts.
oh snap! anonymous should be eating humble pie now, shaun. i wouldn't waste my time with any further rebuttals if he/she continues to post comments. clearly an ax to grind like you said.
I worry about those who got in loans because they put stated income. I work in the mortgage industry and have seen many people not being able to qualify under full doc, so they use stated income. The DTI is artificially low, but of course in reality they will have to cut back on so many things to afford their mortgage. Another tricky thing is ARMs. You can educate someone so much about loan products, but most people are very emotional with their payment factor and not logical. Neg-am has the potential to be very dangerous. I'm being told to push this but I don't know enough to choose a side right now.
I think investors do a great job. They help out people in desperate times and while some may be unethical, the rest do a great job making sure both parties come out as winners.
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