Mortgage Borrowers Voted Off Fantasy Island

Three million Americans’ losing their homes is only the beginning of the “mortgage apocalypse” created by dreamers with an instant gratification habit and lenders greedy to “hook them up.”

Lin Ennis, co-author of Let Your Mortgage Make You Rich!, is irate over the suggestion of a national rescue fund to bail out homebuyers in over their heads. Subprime borrowers are feeling the first wave of disintegration in the American dream of home ownership, a chicken in every pot and a pie in their dreamy sky. (Interest-only borrowers, especially those with Option Adjustible Rate Mortages are right behind the sub-primers.)

The bailout call for legislation was issued by John Taylor, president of the National Community Reinvestment Coalition, which champions investing in lower-income neighborhoods, according to Jonathan Peterson of the LA Times.

When I first heard about Hispanics and African Americans being solicited for subprime loans,” offers Joan Blackburn, a Boston homeowner, “I was furious! Why should they be sought out and targeted for lending rates below prime?” It didn’t take long for Blackburn to learn the “sub” part of subprime refers to qualifications for the loan, not to the rate. Rates are often 2-3% higher than a “prime” borrower with good credit and income documentation would pay.

Not all subprime borrowers have bad credit. Some are self-employed or for one reason or another prefer not to fork over full income and expense records when borrowing, especially for an investment property. However, “no-doc” availability did not limit lenders to writing subprime loans heavily since 1998 to people they “knew were good for it.” No. They stretched for profits…or maybe they believed they were “helping people” with bad credit. In any case, Hope sat on both sides of the desk. Sub-prime ran amuck.

Teaser rates, that start low, then escalate rapidly, were the Wild West Madame of lending. “You’ll get yourself together and be better than new. You just need a break, a little ‘special treatment,’ a ‘massage’ if you will.” But there is a day of reckoning, when what was negotiated under the elixir of “I deserve it” meets a reality harsher than on Reality TV.

Rates already too high—or unrealistically low—are adjusted. It sounds as innocent as repositioning ones derriere in a stuffed chair, but blinding lights come on, revealing every blemish, each hair out of place, and the fantasy fizzles. Hope fails, then dies. Those who fell for the come-on can’t pay. It could be deadly—for their homeownership dream.

Were Ben Bernanke, Federal Reserve Chairman, as conservative as Alan Greenspan, were he someone who lived through the Great Depression, teaser rates would have risen more by now. But Bernanke is a Baby Boomer, like most of us wanting to play now and pay later. (He is, and this may distinguish him, brilliant!) He hasn’t raised rates.

One in five subprime borrowers is going to give the house back to the bank—for whatever the bank has collected so far—and move to affordable housing (rentals, apartments and mobile homes).

The next wave of collapse, however, may be even worse! These are people, often “savvy” investors, who purchased multiple properties on interest-only payback. With a twist—shaken or stirred it will come out the same, given enough time.

Option,” another word as cool and potentially diabolical as “sub.” Simply, an Option ARM means that on your adjustable rate mortgage, you have the option to pay principal and interest monthly (the American standard method for buying a house), or pay interest only (a new-fang-dangled thing for people who want to quickly turn in one property for another of greater value, or cash), or, and this is where the nasties move in, less than the monthly interest. It’s called a minimum payment. Here’s another term you should try to learn: “upside down mortgage.” Can you say, “inverted amortization”?

Eighty percent of people who own Option ARMs make only the minimum payment monthly. That means that most of the buyers owe more each passing month than when they bought the house. Perhaps OK if the market continued to rise at the last 3-5 years’ rates. But it isn’t; it rarely does. Home prices cycle. Like the stock market, and the amount of water your garden really needs. More, less, up, down—it’s nature; it’s reality.

After the real estate bubble of the last 2-3 years, many “adjusted” borrowers will have a hard time selling their houses for the huge profit they anticipated (in their Wild, Wild West Dreamland). Finally, after vacancies, and advertising and maintenance costs, ravage them, they’ll just want to dump the thing, contributing to a gluttonous gouging of the people who paid their bills and kept their noses clean.

Come back to reality. And it hurts a little more than that seen on TV. People who are not paying all their monthly interest, or cannot continue doing so as rates adjust in the next 2-3 years, are getting further behind every day. Actually paying for your home—following your grandparents’ dream of ‘owning your home free and clear’—might be a worthier goal. It doesn’t have to be painful, as Let Your Mortgage Make You Rich! outlines. It may not even require paying extra.

Just get ahead of the curve. Or someone else will be eating your house for lunch and getting fat buying up foreclosures!