commissioner.org
| Source | SolidarityInfoServices |
| Date | 06/09/10/13:25 |
| By John Case jcase@steuber.com
Submitted to portside September 9, 2006 YOU ARE FINALLY doing ok. You are a county police officer with good credit, your family has two incomes and together you are grossing over $100,000 a year as you cruise into the the 2004 election. The 90's boom has been pretty good for you, and despite the setbacks and downturn following 9-11, you have high hopes. Sure, there are rising child care costs, commuting expenses, college funds to think about; there are the electronic, cultural and entertainment "got to have" goodies you used to do without. You think: maybe the Republicans were right about "middle class" tax relief. Further, as evidence that aspirations increase exponentially with even a reasonably positive economic environment, you find yourself gazing with real interest at those magnificent Toll Brothers McMansions blossoming all over the outer limits of suburbia. Just out of curiosity, you stop into one of the Mall real estate offices. There, as if some astral entity had read your mind and leaked it onto the Internet, the friendly agent takes one look at your preliminary application. Then, she notices exactly which half- million dollar home photo you had been staring at while waiting, and says "So, when do you want to move in?" The agent is actually in pretty much the same boat as you, though you probably did not pick up on it. She too had been doubtful how she was going to move these high- priced properties--the only way you can really make a good living in the real estate business--until her boss unloaded some dark secrets of the modern real estate market to her. Now suppose, before you walked into the agents office, you had used a mortgage calculator to find out your monthly payment for a 15 year $500,000 mortgage: your payment, at a 7.0% interest rate making minimal homeowners insurance and tax assumptions, would be: $4,679.14. Assuming you had MINIMAL external debt (like a car loan) of $450.00 a month, you would have to make at least $250,000 a year to qualify for the loan. If the mortgage were a 30 year standard, your monthly payment would be $3,511,51 requiring a minimum $150,000 per year income to qualify. Even a 40 year mortgage only drops the qualifying annual income to $140,000. But then the agent lets you in on the first secret: the "interest only" loan. Under this kind of loan, you never own the house. Your equity consists only in the speculation that the home's value will rise in the housing market. A risky loan over the long term, the ordinary person might think: what if prices go down? NEVER--asserts the real estate business! Unfortunately, you are still $20,000 short in annual income. In fact you just dodged a bullet. But the "interest only" mortgage is not why the agent is smiling. It turns out she can get you in your dream house for only $1500.00 a month! Its called the "Option Adjustable Rate Mortgage", or "Option ARM". This gimmick allows you to defer a big chunk of ordinary interest payments and make minimum payments. What happens to those deferred payments? Well, they get ADDED ON TO THE MORTGAGE PRINCIPLE. BUT, she says, seeing the worried look in your eye, you don't really have to worry about this down the line because home values are rising FASTER than the amortized interest. In fact, she adds with a wicked, conspiratorial gleam in her eye: Why don't you consider buying 2 homes under the minimum interest plan, hold the second for a year, and make a killing selling it!!! You're hooked. You're in the dream house. You voted for Bush to get the tax cut too. Then, 29 months later, the bill for not reading the fine print of both decisions (the mortgage, and Bush) comes due. The interest ADDED to you mortgage principle from paying the minimum is now $50,000. The lender has exercised their right to "reset" your loan. Your new payment is $4100.00 per month. Looks like the tax cut won't cover that! Oh, and that Bush tax cut--well, if you earn between 100,000 and 200,000 a year, the Adjustable Minimum Tax rate kicks in and YOUR taxes go UP, not down. Stories like this might be lost were it not that chickens are now coming home to roost in the housing market. One might ask how your common everyday, supposedly conservative banker would make these kind of loans. There are two reasons, both of which stem from corrupt practices left untouched by the recent reforms in arising out of the Enron accounting scandals. First, there are hordes of unregulated mortgage brokers who have very limited reporting requirements. They account for 80% of mortgage originations, doubling in the past 10 years. No one is really sure what percentage of the total mortgage market are now taken by Option ARM's. But, due to rising housing market concerns, SEC investigators are finding they have risen from under 1% of deals in the 90's to AT LEAST 12.5% in 2005. Second, no matter how little I pay in Option ARM minimum interest payments, the bank may record the normal FULL interest payment as an ASSET because its been added on to the PRINCIPAL. This has of course led to fat phantom profits in the banking industry. Business Week likens Option ARM's to the Neutron Bomb: the people are blown up but the houses are still standing. Moreover, the banking industry has pretty well insulated itself from the tens of thousands of personal catastrophes about to transpire. Option ARMs are sold and repackaged as "mortgage-backed" securities. As "homeowner" mortgages get "reset" to debts they cannot pay, real losses are creatively camouflaged in a myriad of techniques that keep both the public, and many bank and security company shareholders, in the dark. This observer submits that it is largely due to the culture corruption spawned by the Bush era that economic forecasters do not have the true state of housing market affairs in their figures as they estimate the impact of the already acknowledged coming downturn. So, consider the likelihood you are only seeing the tip of the iceberg when you see the Wall Street Journal report on its survey of housing forecasters: "Economists believe cooling in the housing market to extend into next year and many forecasters in the latest WSJ.com survey predict no change -- or an outright decline -- in home prices next year." |
Copyright (c) 1998, Joongpil Cho