American Dream Rant.....

[BobRip]

Greenspan is retired, but he still has way to much say so. People believed him for many years and they still believe what he says.

 

[Bob_Skurka]

Well here is some of the LARGE PRINT for one of the loans I found, the small print might look worse, but this looks plenty bad. Any buyer with common sense will look at this loan and realize that by choosing some of the payment options they are actually losing equity! Further, some of these options may work for people to get into a place that they intend on moving out of in a couple years, but if the market declines, or their plans change due to whatever circumstances, there may be no way to recover financially.

I highlighted some of the financial traps in red, but remember this is a nationally advertized loan that is sold over the TV and the internet so many people probably take advantage of it?

Payment Options

Each month, you can select one of four mortgage payment options that best fits your needs - the minimum payment, the interest-only payment, the 30-year fully amortizing payment or the 15-year fully amortizing payment. You pay the amount you want, as long as your payment is at least your minimum payment amount. Plus, your interest rate is fixed for the first five years or seven years.
Minimum Payment

• The minimum payment is designed to provide you with up to 50 percent lower than a standard principal and interest mortgage payment.
• Your minimum payment is calculated based on your interest rate minus three percent for the first five or seven years.
• This option is available for the first five or seven years, or until the loan reaches the maximum limit of 115% (New York is 110%), whichever occurs first.
• If you reach your maximum limit, your minimum payment automatically converts to an interest-only payment.

Interest-Only Payment

• The interest-only payment is the minimum amount required to repay the full interest that is due each month based on the current rate and current loan balance.
• Interest-only payments can be made anytime during the first 10 years of the loan.
• After the tenth year, the loan becomes a fully-amortizing six-month adjustable rate mortgage with a 20-year amortizing period.

30-Year Amortization Payment

• The 30-year amortizing payment is the amount needed to payoff your loan in 30 years, based on the initial fixed interest rate and current loan balance.

15-Year Amortization Payment

• The 15-year amortizing payment is the amount needed to payoff your loan in 15 years based on the initial fixed interest rate and current loan balance.

About the Minimum Payment

Why is the minimum payment so low?

The minimum payment is the lowest of the four payment choices available. When you choose to pay the minimum payment, you're paying less than the full interest that is due for that month. By deferring your interest, the unpaid interest is added each month to your outstanding principal loan balance.
If you defer payment of interest, your outstanding loan amount could exceed the value of your home. This may affect your ability to refinance your loan or sell your home since you will owe more than what your home is worth. A higher loan amount may also result in larger payments down the road.
​

 

[ultrarunner]

I've seen a number of people I work with in total shock the moment they realize they owe their lender more than they borrowed... even after several years of payments... the wonders of negative amortization!

Thanks Bob, keep the info coming...

 

[IH3444]

Not only they owe more than they borrowed. There was a piece on the financial news that people who default on their loans, are then in hot water also with the IRS for taxes. Seems that the IRS look upon the subprime loan as income, so the defaulters then are charged income tax accordingly for the amount of unpaid loan. That should make you think twice before entering into such a contractual agreement. The only time I could se doing this is for just an investment, and then selling the property. It's like the sword which is heald by a thread hanging over your head. Yes, eek again.....

 

[Bob_Skurka]

The only time I could se doing this is for just an investment, and then selling the property.

For real estate investors who "flip" houses in reasonably short order probably have the best reason to utilize these loans. I would never recommend paying the minimum payment, but "flippers" would certainly benefit taking out a short term interest only loan which would allow them to pay off the principle at the time they resold it.

 

[Bob_Skurka]

I happended to be reading the news today and saw a headline that made me think of this thread.

Here is a link to the entire article: Print Story: Subprime bust forces families from homes on Yahoo! News

But here are some snippets from the article that I found interesting:

Subprime bust forces families from homes

By ADAM GELLER, AP National Writer 29 minutes ago

The lights are still on inside Foreclosure No. A200642668 — so while there's time, have a look around.
Here's the living room, still covered in the worn blue shag Angela Sneary always intended to replace with the sheen of hardwood. And downstairs, through a curtain of plastic beads, is the basement where husband Tim was going to knock out a wall and put in a foosball table.
Step this way and the Snearys point out the places where they never could find the cash to hang a ceiling fan, install a hot tub, replace the siding ... a long list of abandoned ambitions that seem almost too big to squeeze into the modest four-bedroom tri-level.

They ran out of money first. Then, they ran out of time. Soon, they'll almost certainly be out of a home.

The new family grew fast — a year after Amanda was born, Timmy Jr. followed and three years later came Steven. Tim found work doing landscaping in Denver's mushrooming subdivisions. Angela got a job working for an insurance company. Eventually, they combined to make around $55,000 a year.

The couple set out to look at homes . . .They loved the second house the agent showed them. . .

It cost $204,000. "We thought we were getting a deal," Tim says.

The agent said he'd find them a mortgage, no money down. The Snearys say they never thought to shop around.

The Snearys say they expected to borrow at a fixed rate of 6.5 percent. That would put monthly payments at about $1,290, a little more than rent.
But at the closing in August, all the numbers were higher. The Snearys were offered two loans, both from a Texas subprime lender, Sebring Capital Partners. The first, for 90 percent of the purchase price, was at 8.31 percent, set to adjust after two years. The second, for the remainder, was at 13.69 percent.

The house would cost $1,623.80 a month to start — and it was almost certain to rise.

Looking back, Tim wishes they'd asked more questions or considered walking out. But everything was in boxes, and they'd given notice. So they eyed each other nervously, and agreed to work more hours. Then, they signed the papers.
___

For a few months, anyway, they kept pace with the costs. But as 2004 ended, Tim's employer — who had already laid him off and called him back — sent him home for good . . .
the Snearys immediately fell behind, missing two payments . . .

The Snearys' monthly bill jumped to $1,920. . .

The couple fell further behind. The lender set up a new payment plan. Monthly costs jumped to $2,100. Angela began draining her small 401(k).
If the Snearys could make it through 2006, maybe they could refinance and dig out.
Now, though, there was another problem.
They still owed nearly all of their loan. But their home was worth much less in a real estate market slowed by economic uncertainty and bloated by new construction. The couple, convinced they'd overpaid, couldn't refinance or sell.
Instead, they neared the two-year mark, when their interest rate would jump.
___

But the next time will be different, Tim and Angela say. They'll stay within their means. They'll borrow more intelligently.
​

Ok, look at the numbers here, they wre looking at a house that was 4 times their total income.

The combined GROSS income was $55,000. Presume a 25% tax bracket (state & federal combined), their take home income would be roughly $41,250 or almost $3440 per month. They have 3 kids. A starting mortgage payment of $1624 per month means that almost 50% of their income is going to the mortgage. But then as the loan matured, the payments went up to $2100 which is 61% of their income.

They overpaid. They didn't shop for a mortgage. They went into closing not knowing their payments. They planned for payments under $1300 per month but got payments at closing over $1600 per month which they could not afford without overtime. The knew that and didn't walk away. They didn't plan ahead to budget for the upcoming rate increases. I'm not trying to pick on these folks, but their story illustrates the points that have been made several times in this thread.

All through the article it states how easy it is to get a loan. The family's sad story shows what happens when people don't take the time to do their own homework.

 

[mjarrels]

I'm one lucky SOB.

"A working party isn't what you think"

mark

 

[BillyP]

Bob, good story and so true but shouldn't Sebring Capital Partners share the blame? Sometimes I wonder if these mortgage companies are betting on the borrower going south. Then they have whatever interest paid and start all over again. That works out great if real estate

I still say they both have to share the blame.

 

[DUMBDOG]

You cannot protect people against their own stupidity.

 

[Bob_Skurka]

Bob, good story and so true but shouldn't Sebring Capital Partners share the blame? Sometimes I wonder if these mortgage companies are betting on the borrower going south. Then they have whatever interest paid and start all over again. That works out great if real estate

I still say they both have to share the blame.

Suppose you buy a new tractor. You expect the tractor to go up in value, but it does not. You get laid off, sick, or were barely hanging on financially when you took out the loan to buy the tractor. You fall behind on your payments and you end up owing more than the tractor is worth. Ultimately the tractor is repossessed.

Is the lending company that lent you the money to buy the tractor responsible for the fact that you didn't make your payments?

 

[BillyP]

You cannot protect people against their own stupidity.

I wouldn't say stupidity. It's more like ignorance. That's where the big guys step up to bat. Sure you can afford this. ...

 

[BillyP]

Suppose you buy a new tractor. You expect the tractor to go up in value, but it does not. You get laid off, sick, or were barely hanging on financially when you took out the loan to buy the tractor. You fall behind on your payments and you end up owing more than the tractor is worth. Ultimately the tractor is repossessed.

Is the lending company that lent you the money to buy the tractor responsible for the fact that you didn't make your payments?

Let me put it this way. In your earlier post #66 and you were the lender, would you?

 

[Bob_Skurka]

I wouldn't say stupidity. It's more like ignorance. That's where the big guys step up to bat. Sure you can afford this. ...

BillyP, who are these "big guys" you want to step up to bat? Most of the mortgage brokers are sleazy used-car salesman politician types of people who have no problem sleeping at night. But they are not generally big companies. Go back and read the whole article that I linked to, you can see that the loan was sold from one small company to another to another, each time it was bundled with other loans to spread the risks over a bigger pool. But it started out with some small mortgage broker.

Let me put it this way. In your earlier post #66 and you were the lender, would you?

First I am not a lender, second, if I were to invest in the sub-prime market, I would only do it on a speculative basis and both spread & moderate the risk by combining it with some better quality loans. All loans carry some sort of risk for the lender, smart lenders mitigate their risks.

But it still goes back to the person borrowing the money, they could have shopped for a better deal. They did not do that.

They could have said no when the payments were higher than they could afford. They did not do that.

They could have negotiated the price down on the house to something more managable. They did not do that and admitted they overpaid.

The could have looked for a smaller house, perhaps a 3 bedroom instead of 4? They did not do that.

As the story goes, they ran out of money right from the very start, even before they could finish painting it. They walked into the deal so far in the hole that they just got deeper and deeper as they went along. It is a sad story for sure, but had made mistake after mistake and they are ultimately to blame. In the end, they have a good outlook on things and see that they need to take more responsibilty. I think that is a good sign.

 

[BillyP]

BillyP, who are these "big guys" you want to step up to bat? Most of the mortgage brokers are sleazy used-car salesman politician types of people who have no problem sleeping at night. But they are not generally big companies. Go back and read the whole article that I linked to, you can see that the loan was sold from one small company to another to another, each time it was bundled with other loans to spread the risks over a bigger pool. But it started out with some small mortgage broker.


First I am not a lender, second, if I were to invest in the sub-prime market, I would only do it on a speculative basis and both spread & moderate the risk by combining it with some better quality loans. All loans carry some sort of risk for the lender, smart lenders mitigate their risks.

But it still goes back to the person borrowing the money, they could have shopped for a better deal. They did not do that.

They could have said no when the payments were higher than they could afford. They did not do that.

They could have negotiated the price down on the house to something more managable. They did not do that and admitted they overpaid.

The could have looked for a smaller house, perhaps a 3 bedroom instead of 4? They did not do that.

As the story goes, they ran out of money right from the very start, even before they could finish painting it. They walked into the deal so far in the hole that they just got deeper and deeper as they went along. It is a sad story for sure, but had made mistake after mistake and they are ultimately to blame. In the end, they have a good outlook on things and see that they need to take more responsibilty. I think that is a good sign.

My point is who approved the loan? Just because Joe Shmoe can sign his name and promise the world doesn't me squat. Blame the mortgage company or blame Joe? I say they both have equal blame (I still lean towards the lender). The lender was willing to take a gamble and Joe was out to buy a house he wasn't sure he could afford.

I see your point but evidently you don't see mine.

 

[cp1969]

The old rule(s) of thumb used to be:

House can't cost more than 2x your annual gross income.

House payment can't be more than 28% of gross monthly income; and ALL monthly payments can't exceed 36% of gross monthly income.

These rules didn't come into being out of thin air. It was apparently discovered through years of experience that if you go beyond those values, people tend to not make their payments.

What ever happened to "Just say No" to loan applicants who don't meet those criteria?

 

[MossRoad]

They made a bet. They had three kids, bet on both of them keeping their jobs, spent up to the max of what they could afford in a best case scenario, then they lost that bet. That sucks, but it is their fault for signing those papers. People can plan for their future. They can start small, get themselves situated, THEN have kids. What's so hard to grasp in that concept that so many people get into this same situation??? It's not fair to society and it's not fair to their kids for them to do such a bad job of planning.

 

[Bob_Skurka]

What ever happened to "Just say No" to loan applicants who don't meet those criteria?

Do gooder groups sued and said that it was racist, sexist and anything-else-you-call-it-ist to deny people loans. Heck did you know that it is now ILLEGAL to deny loans in some states to ILLEGAL ALIENS?

But that is just the start of the problem. Now let's all get real and ask it differently.

• What ever happened to "Just say No" to buying things before you could afford them?"
• What ever happened to savings accounts?
• What ever happened to putting something away for a rainy day?
• What ever happened to self restraint?
• What ever happened to living within our means?
• What ever happened to planning for the future?

What ever happened to thinking logically?

 

[BobRip]

I think some people try and save for a house and find it frustrating. You save $10,000 and the house goes up $40,000. The only chance you have is to buy something at great financial stress and hope you can make the payments, that or rent forever.

 

[tallyho8]

I think some people try and save for a house and find it frustrating. You save $10,000 and the house goes up $40,000. The only chance you have is to buy something at great financial stress and hope you can make the payments, that or rent forever.

I think if the house increases by $40,000 by the time the people save up $10,000, then this house is way too expensive for them. They need to look for a cheaper home. Everyone may want to live in a McMansion, but not everyone is financially able to. Better to have a secure future in a modest home than to live on the brink of disaster in a McMansion trying to keep up with the Joneses.

 

[alan40]

Not to change the subject much but what ever did happen to savings accounts. Both my boy's have savings accounts. My oldest use's his to put in the money that he makes from selling pumpkins. The interest rate on the account is .76%. He has a decent amount of money in the account. We've done a CD but really why put your money in a bank that get's to use it basically for free? Even he complains about the interest and he's 10. Going to be interesting next week. He's going to see the President of the bank to ask him this same question. I gradutated with the President and he told Warren to come see him anytime he had a question. Boy is he in for a surprise!! My son takes his business serious. Got to love kids who aren't afraid to ask questions. Just hope this old geezer can keep up with the answers.
Have a great day!!