|By John Case firstname.lastname@example.org
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."