Aug. 10, 2006 - Mortgage Pains

Starting in July 2005, I wrote a number of posts about the problems facing families with "creative" or "exotic" mortgages (see Playing with Mortgage Fire, Exotic Mortgages and Hot Real Estate, Catching Up, and When Housing Booms Go Bust).  I also took on the mortgage companies that have encouraged and benefited from consumers' penchants for more house than they could afford.  The result is best described by what happened to Lender's Slave.

Here's an update.

Today's Wall Street Journal (subscription only) provides insights on the current situation.  The story is by Ruth Simon on pages D1 and D3, "Homeowners Start to Feel The Pain of Rising Rates."

The article highlights several individuals and what has happened to them over the past few years.  The stories are all similar and go something like this:

Interest rates were low a few years ago and we could afford the payments.  Now that rates have increased substantially we can't afford the payments.  So we're behind on paying the bills.  To make matters worse, we can't sell our house for a decent price because everyone else is trying to sell too and there aren't many buyers.  Nobody explained that this could happen when we signed the loan papers.  Woe to us!

It's always someone else's fault.

The reality is that most of these folks knew they were getting into an unconventional loan arrangement (option ARMs, interest-only, piggyback, etc.) but they didn't want anyone to spoil their dream of a newer/bigger/better home.  All they cared about was whether they could afford the payment right now.  Forget about 3 years down the road.  That's eternity.

I can just imagine the trial lawyers gearing up for a field day in court.

I'm not excusing the lenders.  They probably didn't go too far out of their way to warn their clients about the downside risks of these exotic loan arrangements.  (Can't  jeopardize the closing with any negative talk!)

Mortgage mills don't care about the future.  They only care about the immediate transaction.  Their idea of a long-term relationship is flipping you in and out of mortgages as often as possible, especially when interest rates move.

The key is you.

The moral of the story is that we all must take responsibility for our financial decisions.  No one made the folks in this article sign on the dotted line.  They willingly entered into a transaction and most likely understood the risks, even if they're unwilling to admit it now.  (Who wants to admit they took a gamble and lost or acted foolishly?)  If they didn't understand what they were getting into, then they should have asked more questions or done their homework.  It's not like there isn't any information out there about this stuff.

Take responsibility for your financial decisions.  Don't pass the buck off to someone else or you'll find someone else passing your bucks around!

Aug. 11, 2006 - The difference between amortization periods