Tuesday, December 12, 2006

Too Little...Too Late

This is what you call 'TOO LITTLE TOO LATE". While I'm somewhat glad that the media is talking about this now, why weren't they doing this 2 years ago?? Come on, it doesn't take an MBA (it only takes a clear head and a calculator) to figure out that this was a recipe for disaster, not success.

What I am talking about, is this article from the LA Times titled: A Loan That'll Get Ugly Fast. I REALLY suggest you read the whole thing. It is a great article on soooo many levels.

Before we get started, lets take a little test...don't worry, it is only one question!

"Like hundreds of thousands of other homeowners around the state, Hertzberg has a mortgage that lets him choose how much he pays each month."

Question 1. Do you think Hertzberg will chose the little amount, or the big amount to pay each month?? (Take your time...clear your head...take a deep breath...raise your hand if you need another pencil or an eraser. This is a question so tough that it didn't even make the California High School Exit Exam...)

And the answer is........

"Like many of them, he always chooses to pay as little as possible."

DING DING DING....if you said the 'little payment' you won!!

It isn't really any secret that when people are faced with spending a little money or a lot of money for the same 'item', they choose to spend the little amount. The problem is that you get 'behind' on that item if you pay the little amount. I saw an article many months ago in the OC Register that said something like over 70% of the people that were trading in cars in California now days are 'upside down'. That is because people are getting these low payments for 6-8 years on assets that are depreciating faster than they can be paid down.

A similar thing is starting to happen now with real estate, except the difference is that the real estate is not appreciating at a rate to accomodate the 'negative amortization' these borrows are adding to the principal every month.

I have gone over the pitfalls of these loans, how they are sold by brokers so they can make a fat commission at your expense, and what to look out for here.

I suggest you read the entire article...but here is a nice little statistic to think about:

In 2003, only about 8 of every 1,000 people buying a home or refinancing a mortgage in California got a pay option loan, according to San Francisco-based data tracking company First American LoanPerformance.

Last year, 1 in 5 loan applicants got one.

In the first eight months of 2006, even as the real estate market began to weaken amid fears of a downturn, the appeal increased again. Nearly 1 in 3 California loan applicants are now choosing them. The state boasts about 580,000 active pay option mortgages, about half the U.S. total.

Lets pretend this was a 'game' in Vegas and you could place a bet on how you thought things would turn out. Would you bet that most of the 580,000 people with these mortgages are going to be earning the extra money needed to swing the full mortgage when the time comes? Are you willing to bet that appreciation saves them? Or do you think there are a LOT of over extended people out there who are going to be enrolling at FB University in the coming semesters?

Its your money...where would you put it?

Stay tuned...



Anonymous Anonymous said...

Musical chairs err xxxxxx-that houses

The nation started singing "Doh for mee" years ago.
...but the music really started rockin when Ronnie was Preznit and continued on a different instrument with Bill-from-Hope. and now with the W-orst ever Mr. Chapter 11.

all the while chairs were being removed but as the music didn't stop nobody was "out".

What, Me Worry?

We had a scare with the stock bubble and some folks WERE out but our Friend Alan Greenie pumped up the band and the music continues.

the chairs keep disappearing but the music keeps playing...

when it stops many, many will be on the floor.

Thanks for your post.

12/12/2006 6:03 PM  
Anonymous Anonymous said...

Soooo, are some still fighting the effects of the "can't happen to me" syndrome or is it whistling in the dark desperately hoping things get better? I still see some signs of certain "finance" sites pushing the trend to a "bottom" with some recovery next year, others still stating "It ain't even gotten started good yet".

I'm thinking I'm on the sidelines at least until early '08.


12/21/2006 4:54 PM  
Anonymous Anonymous said...

Stupid me, tinyurl to the rescue.


12/21/2006 4:57 PM  
Anonymous Anonymous said...

good article by Peter Schiff on 321gold.com

12/23/2006 5:00 AM  
Blogger The Black Mamba said...

The US housing market is worrisome for everyone who owns a house. Home owner's with fixed-rate mortgages are not immune to a bubble catastrophy.

I bought my home in Dec 2003 with a 3.75%, 5 yr ARM and 20% down. I am not worried about the mortgage rates but God-forbid if I lose my job and have to relocate. I would be faced with loss of my cash equity that I paid for my home. Add the 6% sales commission and I'm left with less money than I put in my home.

It's likely that I will rent out my home rather than sell if faced with such a possibility.

12/23/2006 9:37 PM  
Anonymous Anonymous said...

I almost got caught up in the feeding frenzy back in 2004 when rates where very, very hot. I decided to buy my dream car (used) and postpone the house thing until I was much more secure about my finances. My decision may have saved me, as right now, my business is slow, and I'm not at all certain when things will pick up again.

2/12/2007 9:08 PM  
Anonymous Anonymous said...

Yep, it's just like credit card debt: pay the minimum amount due and it'll end up costing you plenty in the long term.

2/12/2007 10:00 PM  

Everybody thinks money comes from ATM'S.

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6/14/2017 12:42 AM  

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