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News and discussion about real estate & the housing bubble, specifically as it pertains to the Seattle area.
The problem is that we don't receive loan documents until the very last minute, so it's almost impossible to turn down the business and have someone else close the deal.While we are neutral in any transaction, we do have the ability to turn down the work. That seems to be the only neutral way to deal with the problem--just don't be a party to what we deem is contrary to ethical business practices.
Can't sleep, clowns will eat me.So I have this good friend of mine who purchased a home at peak market a few months ago in Colorado for around $200K.He has a young kid, a sick wife, and makes about 100K before taxes. His employment has been on and off too in recent years.He got a 100% financing type loan and says his payment isn't that difficult to make, about $1400 before property taxes I think.My advice for him was to wait but he felt he was going to miss the 'equity train'.Anyway, I'm really concerned. How does this type of loan work? My assumption is that he pays interest only for a fixed period at a fixed interest rate. When we spoke about it, he was confident that the value of his home would go up so much that any additional interest tacked on to the principle wouldn't even factor in to the equation.He's wrong right? The likely scenario is that while he can pay the mortgage for the next X years (maybe 10?), the principle balance will be SO incredibly high that he'll go BK. He wont' be able to sell at a price that gets him "even" because it'll be nearly impossible by that time?What about 3 years? I think he thinks the principle amount stays the same and he just pays the interest, which is fixed and never changes. Is that possible? Is there such a product?
So if there IS such a product, AND he is able to make the interest only payments, he could theoretically wait until his home is worth more than 200K; say, in 7 years, and sell it then?Or maybe he thinks he'll be able to refinance? That isn't a likely option either... if all he could afford was an interest only at historically low int. rates, how could he move into a conventional loan in the future?I going to have to conclude that his assumption was that his home would see dramatic increases in equity (can't see that happening).
Anyway, I'm really concerned. How does this type of loan work? My assumption is that he pays interest only for a fixed period at a fixed interest rate. ... I think he thinks the principle amount stays the same and he just pays the interest, which is fixed and never changes. Is that possible? Is there such a product? I'm no mortgage product expert, but I'm pretty sure there are products out there where you could put no money down, and get a fixed-rate primary mortgage (for 80% of the purchase price) and an adjustable-rate, interest-only secondary mortgage for the remaining 20%. The ARM might be fixed for a period of five or even ten years, which would mean that until the first adjustment, the rate wouldn't change. As far as the principle goes, the only kind of loan in which the principle becomes larger is negative-amortization loans (as far as I'm aware). Even an adjustable-rate, interest-only loan pays down all the interest every month. With regard to your friend, worst case, he could have a neg-am loan, and his principle would indeed be going up every month. I doubt that's the case, because $1,400 is about what I would expect on a $200,000 loan at around 7%. Possible case, he's got two interest-only ARMs, and his principle is staying the same while he treads water on the interest. Most likely case, he's got the 80%-fixed, 20% IO-ARM, and he's paying down some small amount of principle on the 80% while the 20% stays unchanged.
I got some clarification this morning, he said:"I am in a 10/20 IO loan at 6% for the Base 80. That means that it goes 10 years as an interest only and then re-amortizes into a 20 year loan. The principal does not change during the first year. The other 20% is a 30 year HELOC a 6% with a 15 year Balloon. This means that it will need to be paid off in 15 years no matter what. However, it is a P&I loan. So I am gaining a small amount of principal off of the 2nd."But what scares me even more is this quote from him:"I do not see a substantial national “housing bubble” bursting in the next few years. There are many markets already today loosing housing value, that will continue this trend for a couple of more months."He doesn't believe in any kind of global warming either. I hope he's right!
Yes, many of my friends put 0 down and did the 80% fixed and 20% ARM. Needless to say I heard from all of them as to how surprised they were when the ARM readjusted by a few hundred dollars. Synthetik, I believe you are thinking of a negative amoritization loan like Tim says. Basically on those you don't pay the interest due each month and whatever interest you don't pay gets tacked onto the principle.
Another question to ponder is the other details that are tacked onto these loans--pre payment penalties.The original post I made dealt with my fury over seeing a client get just clobbered when they just refinanced their property just months ago into a , yes, negative am. loan WITH a prepayment penalty that cost several GRAND. Plus, the client's existing negative am loan payoff (we pay off the existing loan for those learning about escrow)was several GRAND higher than the their original loan amount---thus that's why they are exceptionally dangerous loans. Fast forward: the client was sold a new loan that cost them major loan fees. Product: 100% LTV I/O 1st at an interest rate MUCH higher than prevailing rates for a 30 yr fixed. The 2nd loan was I/O fixed at damn near approaching the Usury rate for Washington. If you don't know what Usury rates are, look it up.
if he was close to 12% interest he must have had POOP for a FICO score. I don't understand how someone would sign something like that.
the highest everage FICO i've seen.This elderly person was being taken advantage of. And this is where the slippery slope comes in for us escrow folks. Knowing that someone is being obscenely screwed (there is no other word to describe it) and you can't offer any advice. I can just tell them the facts and that's it.Sometimes it really really sucks to watch this happen. It's almost like seeing someone getting the hell kicked out of them and just stand there watching it. The only recourse we have is to turn down the job of closing the transaction. I don't know what else to do.
S-crow: Fast forward: the client was sold a new loan that cost them major loan fees...What's the trend on the rapid refinancing of one risky loan into another? Did this peak udring the last re-fi boom or is it growing now?
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