Property Grunt

Monday, July 24, 2006

ARMagedon: The new credit cards

When I read this article, it just made me realize how screwed we really are. In a nutshell, people are getting asses kicked by their higher mortgage payments due to their crazy ass interest only or ARM mortgages. So what they do these geniuses do. THEY REFINANCE WITH THE SAME TYPE OF INTEREST ONLY OR ARM MORTGAGE! In other words they are simply rolling their debt into another mortgage. It seems they have confused mortgages for credit cards.

Can any of you tell the future? Because I can't.If I did I sure as hell wouldn't be writing this blog. BUT THESE ROCKET SCIENTISTS ARE COUNTING ON APPRECIATION! You never ever count on appreciation with real estate. There are alot of monkey wrenches that can be thrown into the real estate game. And I don't care if you have triple digit appreciation. If you have a ton of debt attached to that house you won't see a dime and hell you might even owe more money to the bank when you sell.

It is frightening that despite the cooling of the market there are still alot of people who are making the assumptions that they will not sticking around long enough for the payments to kick up higher which is why they use an ARM or interest only mortgage. They assume they won't be living there for that long and can simpy sell and pull up stakes.

Here's a problem with that logic. If there are no buyers who are willing to pay your asking price then you can't get your money. In affect your money is locked up in your house. If you throw the appreciation card at me, well guess what, it is not worth it to any buyer if rates are too high to get a good mortgage for them to buy your home.

What really made my blood curdle was this part.

But the refinancing also represents a doubling-down on a bet that housing prices will continue to rise on the West and East Coasts and in other hot markets. If the value of the home falls closer to the amount of the loan, that could curb the ability to refinance, and may prompt the homeowner to either invest more in the home or to sell it.

Still, borrowers like Mr. Perry say the loans make sense because in a few years they plan to move to another home, earn more or refinance again, often using the same assumptions they made when they took out their earlier loans.

With his new loan, his third adjustable-rate mortgage, Mr. Perry, a former technology project manager, cashed about $200,000 out of his home’s equity and is investing it into his four-year-old financial planning business. “I could have sold my house and made my family move,” said Mr. Perry, 42, who lives with his wife and a 3-year-old son in Danville, about 20 miles east of Oakland. “But I didn’t do that. I said, ‘Look, I want to start a new business,’ and this product allowed me to do that.”

He said he was taking on more risk than many of his clients would be willing to because he believes his business will continue to grow. After spending 15 years in the technology industry, which put him on the road constantly, Mr. Perry said that being self-employed allowed him to spend more time with his family, which he also expects to grow. As far as the house, he said: “I am not going to be here for 30 years. Why is it important to have a fixed mortgage?”

He better pray to god that his business does well because he is playing russian roulette with himself and his family's future. If the market REALLY takes a huge tumble and value drops, even if he does liquidate he won't have enough to cover his losses. AND REMEMBER EVERYTHING IS DUE ON SALE!