VitalAccurateThinking

Nightmare Mortgages - Yahoo! News

Mara Der Hovanesian writes an article regarding a doomsday scenario in the adjustable rate mortgage market. While it has its strong points, it follows the pattern of premising a predatory business that preys on unknowing, innocent people who will face devastation. Take these two opening paragraphs:

For cash-strapped homeowners, it was a pitch they couldn't refuse: Refinance your mortgage at a bargain rate and cut your payments in half. New home buyers, stretching to afford something in a super-heated market, didn't even need to produce documentation, much less a downpayment.

Those who took the bait are in for a nasty surprise. While many Americans have started to worry about falling home prices, borrowers who jumped into so-called option ARM loans have another, more urgent problem: payments that are about to skyrocket.

Suddenly, almost anyone could afford a home -- or so they thought.

She fails to explain why the homeowners are "cash-strapped" and how they fail to recognize that purchasing a home that is too expensive for their income to support is the true root cause of the problem. Here she gives a hint at financial personal responsibility:

The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.

More victimization and blame:

They [ARM's] also betray such a lack of due diligence on the part of lenders and borrowers that it raises questions of what other problems may be lurking. And most of the pain will be borne by ordinary people, not the lenders, brokers, or financiers who created the problem.

And following the trend of such articles, we have to find and name a specific "victim":

Gordon Burger is among the first wave of option ARM casualties. The 42-year-old police officer from a suburb of Sacramento, Calif., is stuck in a new mortgage that's making him poorer by the month. Burger, a solid earner with clean credit, has bought and sold several houses in the past. In February he got a flyer from a broker advertising an interest rate of 2.2%. It was an unbeatable opportunity, he thought. If he refinanced the mortgage on his $500,000 home into an option ARM, he could save $14,000 in interest payments over three years. Burger quickly pulled the trigger, switching out of his 5.1% fixed-rate loan. "The payment schedule looked like what we talked about, so I just started signing away," says Burger. He didn't read the fine print.

After two months Burger noticed that the minimum payment of $1,697 was actually adding $1,000 to his balance every month. "I'm not making any ground on this house; it's a loss every month," he says. He says he was told by his lender, Minneapolis-based Homecoming Financial, a unit of Residential Capital, the nation's fifth-largest mortgage shop, that he'd have to pay more than $10,000 in prepayment penalties to refinance out of the loan. If he's unhappy, he should take it up with his broker, the bank said. "They know they're selling crap, and they're doing it in a way that's very deceiving," he says. "Unfortunately, I got sucked into it." In a written statement, Residential said it couldn't comment on Burger's loan but that "each mortgage is designed to meet the specific financial needs of a consumer."

The loans certainly meet the needs of banks.

There's no way to camouflage what Harold, a former computer technician who asked BusinessWeek not to publish his last name, is about to face. He's disabled and has one source of income: the $1,600 per month he receives in Social Security disability payments. In September, 2005, Harold refinanced out of a fixed-rate mortgage and into an option ARM for his $150,000 home in Chicago. The minimum monthly payment for the first year is $899, which he can afford. The interest-only payment is $1,329, which he can't. The fully amortized payment is $1,454.

There is no way in hell that Harold should have even been able to afford $899 on $1600 income. No way.

Look folks. The victimism and blame game is just not going to work. Life is all about financial responsibility and doing your own due diligence. If you are not willing to read the fine print, do the math and make your own financial decisions, then I have a very hard time feeling sorry for you. ARM's are not that hard to understand if you take the time and can do basic math.

It is all about understanding and managing risk. No one is going to do that for you. Not your employer, not your bank and not your government. Period. End of Story.

posted by Jim VAT @ 7:45 AM