".25%, interest only mortgage.  Only $105/month on $500,000".

Get real people!

The whole mortgage "crisis" upsets me to no end.  People are upset because they were taken advantage of, lenders are going under because people can't afford their loans any more, the media is in a frenzy and of course, the government wants to bail everyone out.  Well, not everyone.  Let me explain. 

My wife and I bought our house in August of 2006, just as the market started to decline in Orange County, California.  We sold our previous house and put every penny of equity in to the new house to keep our loan reasonable.  Both houses were mortgaged with a 30-year fixed loan.  When we signed the loan docs for our current house the escrow lady actually had to do a double-take that we had a fixed rate loan.  She said she hadn't seen one in ages.  Well, we signed the docs and didn't look back.  Our first house was at 5.875% and the new one was at 6.375% - ouch!  We knew we could afford it for the next 30 years and didn't have any risk that it would go higher.  While we were signing the loan docs for our second home with over 30% down, the people that bought our first house were signing a 0% down, interest only loan.  We were paying under $2000 a month for the first house that the new owners were paying over $4000 a month in an ARM!  The market was already coming down and with only paying interest on the loan they had to be delusional to think this was a good idea.

Less than 18 months later, the housing market has turned upside down. The people that have our house are trying to sell it at a loss of almost 30%!  When I say "the people" I actually mean "the bank".  Foreclosures are up all around the country where people just got in over their heads.  Our current house is worth about 10% less than what we bought it  for.  We are currently trying to refinance at a lower rate while keeping our 30 year fixed.  We can keep affording to pay what we have been for the last 18 months for the next 28 years but, if we can get a smart, lower rate then it would be criminal to not look.

Today Hillary Clinton proposed that we use $30 billion of tax payers money to help fend off foreclosures.  That means they will be helping the people who can't afford what they bought and the lenders that allowed them to borrow the money.  Why should my money go to help either of them?  I've already lost $70,000 in my house, how much more do I have to bleed for these people?  Has anyone else noticed that no one will put any blame on the people that accepted the loans?  It is always the lenders fault.  In my experience, it takes two to tango!  Just because a lender's marketing team slapped lipstick on a pig and called a negative ammoritization loan an "option ARM" doesn't mean that it isn't a pig!  These "option ARMs" actually gave the option to the borrow on how much they wanted to pay each month.  They could pay the full interest or just partial.  If they picked partial, the next month cost more because they tacked the unpaid interest on to the principal.   Remember, the people that took these loans were pretty dim bulbs, so if they get a mortgage bill that says "you can pay us $4000, $2500 or $1000 this month" which do you think they picked?  The next month the $1000 turned in to $1100 or more and eventually they get to the point that they can't even afford to pay only partial interest.  They then whine and complain that they were taken advantage of; that the lenders didn't disclose that they would pay more each month or that a 3 year ARM loan would turn in to a variable rate after... wait for it... yup, 3 years!

Banks are tired of foreclosing and are now working with people to give them better rates on the mortgages and to write off the lost value of the house.  Let's assume that someone  "bought" a house for $700,000 and, after paying an option ARM for 2 years owe $720,000 on the house that is currently worth $600,000.  They can't afford to make the payments and instead of foreclosing on them, the banks gives them a new mortgage for only $600,000 at a fixed rate that they can hopefully afford.  The bank takes a $100,000 loss on the property and the "owners" lose absolutely nothing!  Since I have a fixed rate loan, I'm the only one that lost money on my house.  The bank hasn't lost a penny!  We pay in full every month a week early.  Here's the part that angers me the most: the banks will deal with the people that signed these "exotic" loans to give them a better rate but, they won't drop my rate at all.  They don't even see that keeping us at a lower rate instead of making us go elsewhere will help their portfolio.  This is a case where the banks have not given enough power to the people on the phone to see the same vision of producing a better portfolio for the share holders.  Lowering the cost of the loan above only buys them a little time until they foreclose (and waste my tax dollars).  Lowering our interest rate gives them a guaranteed 30 year paycheck.  Instead, they would like me to go elsewhere with my loan!

Let's go back to the quote at the top: ".25%, interest only mortgage.  Only $105/month on $500,000".   I just can't make this stuff up people.  I wish I had my camera on me because this was an actual sign on the back of a truck that I followed a bit on the way home... today!  With everything going on, people are still selling these loans and people are still buying them!

Who's to blame?  The banks (and marketing departments) that allowed these loans, the people that signed the loan docs or the schooling systems for failing both of these people and letting them out in to the real world without any common sense or morals?  I think it's all of them.

This is a touchy blog because a lot of my friends are going to be hurt by this crisis soon.  For the last 2 years I've been telling all my friends and family that didn't own a house to go rent something and wait until Dec. 2009 to start looking for a house.  For the ones that did own something, I've been telling them to decide where they want to live for the next 10 years and either sell their place to get there or stay put; they were going to lose money no matter where they live so get somewhere they you want (and can afford) for a long time.  I really hope my friends don't get burned in this mortgage meltdown!

Here are my suggestions if the government starts to bail people out:

1. Don't help out anyone that has signed loan papers since August, 2007.  If they put themselves in a bad position after that date, they don't deserve my tax dollars.
2. If someone signed an "option ARM" and choose to pay any option other than the maximum payment for more than 50% of the time, don't help them.
3. Don't allow the lenders to put a foreclosed house up for sale for less than 2% of the last sold comparable house.  This punishes their horrible tatics and it protects the value of the houses around the foreclosed house.  If they break this rule, they lose any help the government offers and the difference between the 2% and what they sale for should be levied as a fine to be used to subsidize my property tax.
4. Fine any company that offers an interest only, no money down loan or any other "exotic" loan.  The fine should subsidize the tax payers money to bail everyone out.